Tax leeway, the other way for stimulus

Budget 2009-10 has spent Rs 59,843 crore as stimulus package. This works to just less than 6% of the total expenditure planned by finance minister Pranab Mukherjee. In terms of the stimulus spend made by economies like China, it is quite small. But Mukherjee has also built in tax givewaways that add to the stimulus package.

The minister has said this is the fourth such package, continuing from the earlier three stimulus packages which the government had announced last year. The big increase in spending focuses primarily on infrastructure and rural sectors, especially National Rural Employment Guarantee Scheme, with the mantra being inclusive growth. The new tax measures are focused to boost demand by reducing income taxes, the fringe benefit tax, and incentives for investment.

The stimulus to revive the country's economy comes through outlined plans to speed up infrastructure development and introduction of host of schemes for the revival of export sector which has been hard hit due to the global economic slowdown.

The focus on infrastructure and the rural sector was as expected. Total expenditures are slated to increase by 13% year on year, with capital expenditures rising 27% year on year. On direct taxes, the surcharge on the personal income tax was eliminated, resulting in a net reduction of 3% in the tax rate. The minimum threshold was also marginally increased. Overall, the direct tax measures are supposed to be tax neutral. On indirect taxes, there was a firm commitment to introduce the GST by April 2010.

Kaushal Sampath, chief operating officer, Dun and Bradstreet India, says the stimulus related proposals in the Budget are above what was expected. "The high allocation on the infrastructure related proposals will need to be implemented in a timely fashion for optimal impact and growth enhancement. Quite predictably, the fiscal deficit is set to increase, and no specific roadmap has been proposed for its management.

However, given the special economic conditions, there may be no way out for the time being," he says.

Tushar Poddar, vice-president and chief economist, Goldman Sachs India, says the fiscal proposals will boost the economy, and the short-term increase in the deficit is warranted. "Although the deficit is higher than expected, we do not think the financing of it will be difficult, even as we wait for more clarity on disinvestment and 3G auction proceeds. There were expectations of structural reforms insurance, subsidies, divestment, foreign direct investment, among others, most of them unreasonable, which were not met," he says. He adds that the short-term policy objective of stimulating demand will likely be achieved by thisBudget.

Giving a big push to infrastructure spending, and according high priority to infrastructure development, the Budget proposed that IIFCL and banks are equipped to support projects involving investment to the tune of Rs 1,00,000 crore in infrastructure. "The investment in infrastructure for the growth of economy is critical. The IIFCL and banks are now in a position to support projects involving a total investment of Rs 1,00,000 crore in infrastructure. Combined with the steps we are taking to increase public investment in infrastructure, this will provide a big boost to such investment," the finance minister said.

The government raised allocation for National Highways Authority of India by 23% over 2008-09 and for Railways, it has gone up to Rs 15,800 crore in FY 2010 from Rs 10,800 crore.

For the export sector, the government has extended the time period for 2% interest subsidy and insurance cover up to March 2010, besides raising the market development assistance allocation by a whopping 148%. The interest subvention on pre-shipment credit for seven sectors, including handlooms, handicrafts, carpets, leather, gems and jewellery, marine products as also the small and medium exporters will now be available till March 31, 2010 which was to end in September this year.

With a view to insulate the employment-oriented sectors like handlooms, handicrafts, carpets, leather gems and jewellery and marine products, the government in its interim Budget for 2009-10 had extended the period for concessional finance to exporters till September.

The adjustment assistance scheme of the Export Credit Guarantee Corporation (ECGC) which covers 95% of the badly hit sectors was extended till March 2010 as US and several countries in the Europe are in the grip of recession and exporters are facing payment defaults. The government had earlier announced Rs 350-crore scheme for the ECGC.

In fact, ECGC provides a range of credit risk insurance covers to exporters against loss in export of goods and services. It also guarantees to banks and financial institutions to enable exporters to obtain better facilities from them.

Though the proposals have been hailed by the apex body of the sector, Federation of Indian Export Organisations, experts believe that fiscal incentives alone will not alone boost exports. "Fiscal incentives to exporters alone during the time of recession are not sufficient to improve export performance. It depends on how exporters are utilising the incentives to improve their 'real' productivity, competence to expand market and ability to differentiate their products," says Biswajit Nag, Associate Professor, Indian Institute of Foreign Trade.