>INDIA VIEWS (GOLDMAN SACHS)

Union Budget—restocking the punch bowl

India’s Union Budget continued from where the last stimulus packages left off, with a big increase in spending and tax cuts to continue the impetus to growth. The spending measures focused primarily on infrastructure and rural spending, especially NREGA (the rural employment scheme), with the mantra being ‘inclusive growth.’ The tax measures focused on boosting demand by reducing income taxes, the fringe benefit tax, and incentives for investment. The emphasis on GST implementation by 2010 was heartening to shore up the revenue base. In general, we commend the fiscal proposals to boost the economy, and think a 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. The budget, however, is a fiscal document and we think the short-term policy objective of stimulating demand will likely be achieved by this budget.

Expenditures:
The focus on infrastructure and the rural sector was as expected. Total expenditures are slated to increase by 13% yoy, with capital expenditures rising 27% yoy. The roads sector got a substantially increased allocation while the IIFCL was given greater flexibility as a refinance facility for infra spending. The National Rural Employment Guarantee Scheme—one of the key factors for the Congress victory saw a massive increase in allocation by 140%. Low-cost housing and rural infrastructure also saw significant increases.

Revenues:
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. The irritable Fringe Benefit Tax and the Commodity Transaction Tax was eliminated while incentives given to the new pension scheme and for investments in natural gas. The minimum alternative tax for companies who were otherwise enjoying tax benefits or exemptions was raised from 10% to 15%. 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, some of the earlier excise duty cuts were reversed, duties on gold and silver imports increased, while incentives given to investment related sectors.

Fiscal deficit:
The central fiscal deficit is slated to increase to 6.8% of GDP, higher than our expectation of 6.5%. The consolidated fiscal deficit may rise from 10.1% of GDP in FY09 to 10.4% of GDP in FY10.

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