After Congress led coalition government was re-elected in April-May '09, on the basis of governance, here is the chance for Congress to further the wishes of Indian voters through budget 2009. Tough economic conditions, followed by recession in monsoon, seem to make the coming year difficult to deal with. Industrialists, policy makers, are voicing their wish-lists for this year's budget, for the country to deal with this situation.
Here is my attempt to come up with wish-list for 09 Budget; My wish-list is based on following 3 broad ideas.
1> Real estate sector forms the most important sector, spurring economic activities, in a slew of other ancillary sectors, such as contract labor, cement, iron, tiles, etc etc. Hence budget should do all what it can do stimulate consumption in real estate
2> No matter how much government can boast success of NREGA and other employee guarantee schemes at the central and state level, we can not ignore the largely inefficient structures of such schemes. Hence government should look at making policy changes, which will give boost to small scale entrepreneurship, and self reliance, from this budget.
3> World wide Credit crisis, which ensued, after real estate market collapse, has a few lessons to be learnt for India financial sector. FM certainly has some scope to make policy changes in this regard.
Above ideas can be translated into action items for budget'09 which forms my wish-list for the budget '09
1> Removal of Service Tax on Works Contract:
Central board of Excise and Customs has come up with, a notification to abolish service tax on "agreement of sale" transactions between home buyer and developer, which stood at 12.5%. This has given much more relief, to the home buyers. But it is still unclear, whether, the "agreement of sale" is construed as "works contract" and whether it attracts service tax or not. Such a tax proves significant outgo towards home purchase, and that it should done away with.
2> Removal of VAT on real estate purchase:
State governments charge this in the form of sales tax on real estate transactions. This usually stands at 4/5 % in most state. This also constitutes significant outgo towards the home purchase. The fact that state governments earn significant amount of money in the form stamp duty, in every home purchase transactions, they can do away with VAT on home purchase.
3> Policy changes to give boost to Micro Finance Institutions (MFI) operations
Most micro finance institutions still depend on traditional source of funding, like banks, which have either limited amount of funding to be done for micro lending activities. Banks usually lend money to MFI from the quota of priority sector lending guidelines set by RBI. This quota often proves to be meager forming only a few percentage of the target funding required by MFIs.
Government can look at MFI as, an efficient means to provide finance, to poor farmers, peasants, and rural micro scale entrepreneurs. MFIs obliterate existence of local money lenders, which have flourished because of usury money lending practices, owing to either lack of lending from banks in this sector, or rather inefficient and corrupt lending practices, by govt sponsored lenders. This usury money lenders are seen to be the root cause of lot of farmer suicides seen Vidarbha Maharashtra and other states.
Hence towards that FM, can usher in policy changes which will link MFI to more sophisticated sources of funding, such as capital markets, Pension funds, Mutual funds. MFI can look at options of securitization, CDOs, to channel their loan assets to raise more capital for lending. Multi channel souring for MFI will reduce cost of funding to them, which will eventually help the poor better.
4> Stricter regulations on credit rating agencies operations
It is known fact that credit rating agencies played havoc in the United States, in rating of MBSs, CDOs, PTCs, bonds from various financial institutions. They were found to be guilty of colluding with financial institutions, products of which they rated. India must ensure that, Indian credit rating agencies are not allowed to operate in the same way. US is making structural changes, towards functioning of such agencies, by bringing in more regulations and by reducing the so called "Conflict of Interest" component in the whole process. India needs to evaluate its own system and make relevant policy changes to that effect
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