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Govt. Moves Expected to Boost Economic Sentiment
By Tabrez Khan
Mumbai, May 22, 2009 1737 hrs IST


Now that the euphoria raised by the election results has given way to saner thinking on the nitty-gritty of government formation, it appears that the government is not entirely proofed from blackmail tactics of coalition partners. Indeed this will be so unless any party or pre-election coalition gets an absolute majority. So witness messrs Mamata Bannerjee, M Karunanidhi, Sharad Pawar and other UPA partners hankering for key ministries.


With the swearing-in of the prime minister and 19 other cabinet ministers, hopefully the wrangling over ministries will die down and the ministers will sit down in the chairs, they so covet, to do some serious business. There are many things to do on the economic front and the government would do well to kick start the 100-day reform plan that it proposes in some key sectors. This will bring in much needed pension and labour reforms besides further opening up several key sectors that badly need infusion of investment and entry of new players to revitalize them.


The proposed reforms include opening up of some sectors like aviation to FDI and raising FDI limits in some other sectors.


The government is also contemplating raising the tax exemption limit from Rs 1.5 lakh to Rs 2.00 lakh and doing away with fringe benefit tax. This should boost sentiment among consumers and increase disposable income in their hands. Hopefully, this will lead to more buoyant demand for goods and services helping economic recovery to that extent.


The findings of a recent study by Ernst & Young lend credence to the argument that tax incentives are very effective in providing economic stimulus and are an important part of economic stimulus packages announced by governments worldwide in recent times.


Increased FDI inflow could result into appreciation of the rupee and this could be a worry for IT outsourcing companies as they become less attractive to their customers, price-wise, with every substantial rupee appreciation. However, any whopping rupee appreciation does not seem on the cards. The impact of FDI inflow in pushing up the rupee will be balanced by relaxed external commercial borrowing norms expected to be implemented in a month or thereabouts.


The government is preparing to disinvest in quite a few companies and their IPOs should catalyze financial markets. The financial market has shown its tendency to be affected by sentiment a lot in recent times, so it can hope to ride on this positive one for the next six months. Thereafter, reality will set in and dictate further course.
  Tags: economy   UPA government   IT   rupee appreciation   Tabrez Khan  
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