Dipen Shah, Kotak Securities

The Finance Minister will present the FY2011-12 budget at a time when inflation is at high levels and is raising concerns on future growth rates. The FM’s priority will be inflation control and sustaining growth rates, we believe, though fiscal rectitude will also invite his attention. We believe that, significant stress will be laid on more effective implementation of the outlays rather than any increasing outlays significantly.

With WPI inflation ruling at more than 8% and food inflation at more than 13% levels, we expect several proposals to address supply side issues. Measures / investments to increase agricultural output, reduce wastage of perishables and improving supply chain may be announced. However, we understand that, most supply side constraints can be addressed only in the long term by focused investments / implementation in agriculture and irrigation. Reduction of duties on select imports does help reduce import costs and contain inflation. Significant changes in duties and taxes may not happen though, pending the introduction of GST and direct tax code WEF FY12.

While GDP growth remains high as of now, we believe that, the focus of Mr. Mukherjee will be on sustaining and improving the rate of GDP growth and that too, equitable (inclusive) growth. Towards this end, infrastructure, social initiatives and agriculture investments are expected to continue. However, speedier implementation of allocated budgets will make these spends more effective. We expect measures towards this to be included in the budget.

Adherence to fiscal discipline will continue, we feel. FY2010-11 had the benefit of telecom license revenues and buoyant tax receipts. Also, the expenditure may not match up to the budgeted levels (including supplementary demand), we believe. The revised estimate (RE) for FY2010-11 fiscal deficit could be set at 4.85% v/s budget estimate (BE) of 5.5%.

For FY2011-12, we expect the FM to take credit for higher tax revenues due to the buoyancy in the economy. Control on non-plan expenditure is also expected. However, reduction of subsidy burden may prove difficult especially keeping in mind the high inflation rate. The target for fiscal deficit is expected to be set at 4.8%, in line with the road map laid down earlier. We expect the divestment target to be set at around the FY2010-11 levels.

On reforms, we expect a road-map for entry of new private sector banks. Relaxation in FDI limits, if any, in sectors like retail, defence, etc may bring in additional revenues. DTC and GST are expected to be implemented WEF FY13 and to that extent, some enabling measures may be announced. We believe that, with inflation being at high levels, the Government may not tinker much with the subsidy structure.

On direct taxes, the exemption limit for individuals is expected to increase. SAD may be removed with a view to reduce import costs. Excise duties are likely to remain largely stable as inflation is high. Service tax coverage is expected to go up.

We do not expect any major initiatives for the stock markets. We believe that, the focus of the markets will be more on effective implementation of investments, fiscal discipline and on sectors which are impacted by the budget proposals.