Budget 2004-05 :: What the Bankers say?   The Business Line Published on July 9, 2004

 

Dr. Rakesh Mohan, Deputy Governor, Reserve Bank of India:

 

The Budget provides no reason to the Reserve Bank of India for changing its outlook of either the interest rate or the inflation expectations, RBI's Deputy Governor, Dr Rakesh Mohan, said today.  "I don't see any change in the interest rate being brought about by the Budget," he said.  Dr Rakesh Mohan noted that the Budget gave two strong messages - fiscal consolidation and greater emphasis on encouraging investment in the real sector.

 

Asked for a view on the Government's market borrowing programme, he said that while he did not have the time to look at the exact numbers, "I think the market borrowing programme will be within the framework."   "The fiscal deficit at 4.4 per cent of GDP is a very encouraging sign, and so clearly no change in our expectations either to do with market borrowing," he said.  On inflationary expectations, Dr Rakesh Mohan said that the RBI, while formulating its annual policy statement (May 18) had "taken on board" international developments such as firm oil and commodity prices.

 

He observed that the price rise of the last couple of months was "internationally induced" and mostly "related to Chinese demand".   Dr Rakesh Mohan was here in connection with the meeting of the RBI's board of governors today.  "The policy action of China seems to be in terms of cooling their economy somewhat. Depending upon exactly what action comes out when the Chinese economy starts cooling, there will be less pressure on commodity prices internationally," the Deputy Governor said.  "Now the international view does not seem to say that there are expectations of prices going up a great deal in the coming months," he observed.

 

Further, he said, "You must remember, most of us are geared to looking at inflation in terms of Wholesale Price Index. But if you look at the consumer price index, it is about 3 per cent. The difference between the WPI and the CPI is that in WPI the weight for food products is much lower, as the index includes things such as oil and metals. People don't eat metals. The weight of food products in the CPI is much higher. The prices of essential commodities such as food products have been very benign."

 

Asked if the RBI would allow the forex reserves to be used, say, for making cheap dollar credit available to exporters, Dr Rakesh Mohan said, "First of all, if the reserves are used for any purpose of this kind, they would, by definition, cease to be reserves. Second, if the reserves are brought back into the country, it will add to the supply of dollars, which is in any case in excess. He pointed out that in the last few years the foreign currency lending to exporters "has gone up by large proportion".

 

Adopting the Keynesian route : Chairman and Managing Director, Bank of Baroda  

 

The Union Budget 2004-05 has reiterated the new government's increased thrust on agriculture, infrastructure and social sectors in line with its Common Minimum Programme (CMP). The Budget has adopted the Keynesian expansionary route to maintain investment momentum and promote higher levels of employment. In addition to the gross budgetary support of Rs 1,31,000 crore provided in the Interim Budget, the full version has decided to allocate an additional Rs 3,000 crore. However, its status quo on interest rates is justified on the grounds of rising interest rates globally and a surge in inflation rate in recent weeks.

 

The proposed measure in the Budget to amend the Securitisation and DRT Acts to strengthen the rights of creditors is a positive move but the government has to move fast while maintaining the necessary safeguards.  The RRBs have been advised to adopt new governance standard to receive funds from the government for restructuring. This will improve the health of the credit delivery channels and also be helpful in meeting the Finance Minister's target of doubling the agricultural credit over the next three years. Inter-institutional group of financial institutions and banks to finance infrastructure projects will speed up the process of infrastructure development.

 

Other noteworthy measures are the abolition of long-term capital gains tax and its replacement with tax on transactions, and reduction in short-term capital gains tax. This brings domestic investors on a par with the foreign institutional investors, which coming through the Mauritius route were anyway not paying long-term taxes. Other measures that will deepen the capital market further are the creation of an alternative trading platform for SMEs to raise equity and debt funds from the capital market and the proposed integration of commodities and securities markets.

 

In the realm of indirect taxes, the Finance Minister has retained peak Customs duty at 20 per cent. Even though the peak customs duty has not been cut, the FM has expressed his commitment to align the tariff structures with that of Asean countries. But he has carried out his intention of bringing more services under tax net. Services are ultimately to become the biggest source of tax revenues for the Government.

 

The Budget has taken a number of steps to perk up the sentiment of institutional investors in the capital market. To induce the FIIs to invest more in Indian capital market, the Budget has simplified necessary administrative procedures for the FIIs and raised the investment ceiling for their investment in debt funds from $1 billion to $1.75 billion.

 

 

Consolidation vital: CEO India, Standard Chartered Bank

 

The United Progressive Alliance's first Budget builds on the CMP in a comprehensive manner. India's fiscal position has worried international investors for a long time and the Budget brings out the Government's commitment to fiscal consolidation. The fiscal and revenue deficits have been projected at 4.4 per cent and 2.5 per cent of the gross domestic product (GDP), respectively, and we believe that these targets are achievable, especially in view of the strong growth outlook for the year ahead.

 

On the privatisation front, the Budget outcome was better than expected. Though the public asset sales target has been reduced to Rs 4,000 crore (from Rs 16,000 crore in the interim budget) markets were not expecting anything on this front. The Budget also talks about setting up a panel to advise the Government on issues related to closure and revival of weak PSUs.

 

On encouraging FDI, the Finance Minister has increased the sectoral caps on telecom, civil aviation and insurance to 74 per cent, 49 per cent and 49 per cent, respectively. We would have liked to see bolder measures but this is a move in the right direction. It is also positive that the ceiling for foreign investment in the debt market has been raised from $1 billion to $1.75 billion. These measures should encourage portfolio inflows and help the rupee.

 

The Government has imposed a 2 per cent cess on all central taxes to fund spending on education. They have also recognised the need to focus on HIV/AIDS and, clearly, the Government realises that progress on the human capital front is necessary for sustainable economic ascent.

 

The emphasis on rural infrastructure projects is laudable. The Budget proposes the re-establishment of the Rural Infrastructure Development Fund with a corpus of Rs 8,000 crore and seeks to enable farmers to diversify crop patterns. On the infrastructure front, the Budget envisages initiatives on drinking water and rural housing and the Government has proposed building an international Container Trans-shipment Terminal in Kochi port. Clearly, more could have been and needs to be done on the infrastructure front, as this is the biggest constraint on India's long-term growth potential.

 

On the taxation side, the Budget has taken the right steps. However, more could have been done as far as removal of exemption goes. Inclusion of more services in the tax net is also a step in the right direction.  Overall, this Budget promotes growth with equity. The move towards fiscal consolidation is a big long-term positive and the rural sector focus will encourage balanced regional development and should pre-empt future social tensions.

 

 

`Back-to-basics' theme: Head, Corporate Banking, Kotak Mahindra Bank

 

The 2004-05 Budget has surprised many with some bold moves judiciously weaved in between themes of "back to basics" and providing impetus to investment and growth. The Finance Minister outlined the economic objectives of sustaining 7 per cent to 8 per cent growth, providing universal access to quality basic education and health, creating employment in agriculture, industry & services, and acceleration of fiscal consolidation and reform.

 

Agriculture, rural infrastructure and agro processing has been given a major thrust through several initiatives. This includes easy access to credit, thrust on irrigation and restoring water bodies, strengthening rural infrastructure, flood control and focus on value added areas such as horticulture. The second big area of thrust was infrastructure and a consortium of seven banks and financial institutions have been constituted to provide Rs 40,000 crore of resources to building infrastructure.

 

The element of positive surprise was the bold move on relaxation of FDI in the telecom, aviation and insurance sectors up to 74 per cent, 49 per cent and 49 per cent, respectively. The capital markets announcements on abolishing long-term capital gains tax and reducing short-term capital gains tax to 10 per cent was positive and in line with market expectations. Turnover tax at 0.15 per cent to be paid by the buyer has been introduced. While the fine print on this is yet to be digested, this could impact liquidity in the market, which is driven by arbitrage and speculative trades. From a long-term investor perspective these moves are positive.

 

Selective disinvestment of PSUs with a target Rs 4,000 crore was announced. The option of raising resources through sale of equity in the capital markets was mentioned with NTPC as the first possible option.  On the direct taxes front, the exemption of salary earners up to Rs 1,00,000 and no change in other slabs was welcome. The auto industry benefited from the entitlement to claim 150 per cent deduction on expenditure incurred on R&D, while tractor industry got a bonanza with abolishing of excise duty.

 

While the Budget may have left some sectors wanting more, overall the direction and measures announced are positive with commitment to continuing reforms. Thrust is on investment in agriculture and industry to sustain growth while retaining buoyancy in the services sector. The key is going to be implementation. Also the target of fiscal deficit at 4.4 per cent of the gross domestic product (GDP) seems optimistic given the increased plan expenditure. This is likely to remain a key challenge.

 

 

A rural slant: Chairman and Managing Director, Union Bank of India

 

The Budget is on expected lines and shows a rural orientation. It attempts to achieve the objectives laid down in the Common Minimum Programme adopted by the Government. The major areas of focus are education, health, employment generation, and of course, agriculture and infrastructure development. As far as the banking industry is concerned, almost all the vital aspects of growth in the agricultural sector have been addressed. Simultaneously, some critical issues such as amendments to the Securitisation Act have also been contemplated.

 

The Budget envisages a benign interest rate regime and is an affirmation of the Government's resolve to achieve greater fiscal consolidation. It is really a balanced approached indicating a holistic view. Regional Rural Banks have been given their due importance with proper emphasis on the ownership of these banks. The task force proposed to examine issues pertaining to reforms in the co-operative sector is quite welcome as this is another segment of the financial sector that can play a critical role in boosting credit to the agricultural sector.

 

The measures proposed to revive the Rural Infrastructure Development Fund are welcome as they will boost infrastructure development in rural areas. The insurance schemes proposed will also go a long way in helping the banking industry to increase its flow of credit to small farmers. The exemption on excise duty on tractors should see a scenario in which more small farmers enhance their output. Banks might also consider changing eligibility norms for land holdings in this regard. Another fillip to this sector is the encouragement given to agro processing industries by way of deduction 100 per cent of profit for the first five years and 25 per cent of the profit for the purpose of tax for the next five years.

 

This will have a positive impact on agricultural production. The commercial production of fruits, herbs and medicinal plants will receive a fillip with the launch of the National Horticultural Mission on the Anand model. The proposed board for reconstruction of public sector enterprises is indicative of the Government's stand. The emphasis of the support of public sector enterprises in power, telecom, road, civil aviation, etc, will facilitate the growth of profit-making public sector enterprises. It also represents encouragement of the power sector, air and seaports, and tourism.

 

Changes in FII investment levels in telecom, insurance and civil aviation are welcome moves as well. Overall, the Budget has addressed structural as well as developmental issues and provides a basis for balanced growth with a distinctly rural orientation.