It’s budget time again…and five state elections in fiscal 2007 loom large over expectations from the forthcoming budget. The fact that the Left and the ruling UPA coalition are not exactly seeing eye to eye on reforms makes one skeptical about the fate of the reform process. Will the finance minister (FM) Mr. P. Chidambarum turn overtly populist, and will the reform process be scuppered? Yet the need to press the panic button has is not seen. The FM is capable of walking the tight rope between populism and reform.

The good news is that the government’s fiscal deficit is likely to not exceed the target – a feat made possible by good revenue collection and tight control on expenditure. Steady improvement in the tax/GDP ratio and the ongoing economic upsurge will drive tax revenues in the coming year too. This, it seems, will provide the government a much-needed headroom to spend on social sectors (an allocation we expect to jump 45%). And this can provide the FM some negotiating leeway to push through a few reform measures, at least the critical ones (foreign investment – FDI as well as through FIIs – and selective sale of minority stake in PSUs).

The budget is expected to focus on employment generation, infrastructure and rural sector. While radical reform measures are ruled out, funding of the expected “populist commitments” without raising taxes would be the single most important achievement. The FM also has the tough task of presenting a credible forecast of the fiscal deficit for the next year on hand. We do not expect any material changes in direct taxes but expect the ambit of the service tax, VAT and securities transaction tax to be extended. The apex bank will likely do its bit to assuage the liquidity situation by cutting CRR before the government’s borrowing programme for FY07 commences.

The sectors likely to benefit from the forthcoming budget include Agri related, Airlines, Automobiles, Banks, Cement, construction, textiles and power. The budget might influence negatively to standalone refiners like Reliance Industries, Chennai Petro, MRPL and BRPL.

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