A Pasoly in the eye is worth several in the shins…..

Expecting budget to take away all your pains??? Look no further and let’s not forget that the budget is just an accounting exercise of the government. Taking stock of income, expenditure and borrowing requirements. One must not have high expectations about the policy changes, reforms and big push etc. else you are bound to be disappointed!!!

CPI inflation has crossed double digits again (from 9.09% in April to 10.21% in May’09) even as WPI inflation is negative! High CPI inflation means savers face a negative real interest rate. Low WPI inflation means industry faces high positive real interest rates. That leaves very little maneuvering left on the monetary front. The entire onus of pushing the economy then falls on the government which might impact its already brittle investment grade rating due to the rising fiscal deficits. Having said that, we do expect government to adopt innovative steps in order to maintain economic growth and contain deficit.

The task at hands of the FM is by no means normal. The government has identified infrastructure as a key thrust area—both in its manifesto and in the President’s speech outlining the policy priorities for the new government.

General expectations from the budget are:

Ø Infrastructure push

Ø Supporting consumer expenditure

o Increased tax brackets (while targeting larger base), if not ‘helicopter money’ (read farm loan waiver)

o Push for higher rural employment

Ø Providing impetus to labor intensive sectors through tax sops and interest rate subventions.

To contain fiscal deficit in manageable labels, budget is likely to have provisions for divestment. We may also see new form of FRBM Act in light of changing economic scenario, outlining the path for the fiscal consolidation and shift from cash accounting to accrual based accounting system.

We would do well to be aware of the fact that what gets presented in the budget speech on July 6^th may not be what it would end up to be. As in past as well there have been significant changes from the budget speech to the final budget.