Compromise budget ahead: Merrill

MUMBAI, May 25: DSP Merrill Lynch has said that forthcoming Union Budget would be a compromise budget' combining fiscal stimulus with an at...

MUMBAI, May 25: DSP Merrill Lynch has said that forthcoming Union Budget would be a compromise budget8217; combining fiscal stimulus with an attempt to reduce the deficit. It said the fiscal deficit would be targeted at 5.5 per cent of GDP from the current 6.1 per cent by increasing revenue collection. And certain sectors like insurance may be opened up for limited foreign participation.

In a pre-budget review, DSP said additional revenues were likely to be sought by expanding the tax base, raising customs duties and tax rates for the affluent category. It said due to resource constraints, the government should lay down transparent policies to facilitate private sector investments in the infrastructure sector.

The government is likely to begin an aggressive PSU disinvestment programme as in the interim budget, the Finance Minister had already indicated a target of Rs 500 crore, it said.

About the opening up of the insurance sector, DSP-Merrill said that in the first phase, only domestic insurance companieswould be allowed to enter the insurance sector. quot;With elections to four states scheduled in November, the budget will not announce any major steps to reduce fertiliser and food subsidies in the Union Budget,quot; it said.

DSP Merrill said the additional surcharge of 3 per cent on all imports would continue while sector specific protectionist measures mainly in terms of rationalising tariffs on intermediate and final products as in the case of the capital goods industry. quot;We believe that any increase in the customs duties would be more in order to protect the domestic industry rather than raise revenues,quot; DSP Merrill Lynch said.

On sector specific forecast, it said the measures to kick start the economy would be the biggest positive move auto makers can expect as auto sales are highly correlated to the economic growth. It said a proposal to allow share buy back should be positive for cash rich companies, particularly for Bajaj Auto which retains shareholders approval to consider buyback, when allowed.

Onthe banking sector, it said besides higher tax exemption limits for the housing sector, little impact on the finance sector is expected from the union budget.

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About the capital goods sector, DSP Merrill said during the last two years, industry8217;s performance has been severely affected by the economic slowdown, but it does not foresee any dramatic concessions to be given to the industry given the indications received from the recent Exim policy. The consumer non-durables industry would witness a buoyant phase due to sops expected to be given to the agriculture sector. Excise duties are likely to remain stable while levy of a tax surcharge would be a negative as most sector companies are high tax payers, it predicted. Customs duty hike would be particularly negative for Cadbury and Reckitt as these companies are big importers, it said.