Reactions to the Union Budget (2013-14) - Travel and Tourism Industry Perspective

 

Reactions to the Union Budget (2013-14) - Travel and Tourism Industry Perspective 

The finance minister has presented the union budget amidst a difficult macroeconomic situation. Current account deficit is at a record high and fiscal deficit is swelling. The economy is in a ‘stagflation’ kind of a situation in which inflation is rising and GDP growth is falling. The domestic situation is precipitated by weak economic data from global economies. Under these constraints the Finance Minister has done a good job of presenting a budget that addresses the larger issues and looks at the bigger picture. The budget will essentially have a J Curve effect on the economy. Things will turn worse in short term before stabilizing and improving in the medium and long term. It’s after a long time that we have seen a firm commitment from the government to address the long term issues over the short term quick fixes.

The budget has done two important things. Firstly it has reassured the markets that the government is ready to step out of its comfort zone to follow the fiscal prudence path necessitated by the burgeoning current and fiscal deficits. Secondly it has communicated to global investors that India stands committed to carry out reforms to correct macroeconomic imbalances and aim for a sustainable growth path.

The effect of the budget on travel and tourism can be dissected from two different angles – the short term effect and the medium to long term effect. In the short term the budget is negative for the tourism sector and may lead to a demand pullback. Across the board increase in taxes on luxury products will hurt demand for luxury travel in the short term as the additional expenditure on luxury products will reduce disposable income of high net worth individuals for discretionary purchases such as travel. Although there is no change in slabs for personal income tax and there is only a marginal relief in the form of tax credit, the budget through its far reaching tentacles of fiscal consolidation will hurt demand for travel from low and middle income group segment. Food inflation is still high and in spite of efforts to control inflation, the rise in fuel prices and reduction in subsidies will have a negative impact on the discretionary spend of low and middle income group. The demand from industry / businesses will also remain weak in the short term as the interest rates remain very high and there is very little incentive for the industry to increase capital formation/ spending. The investment deduction allowance will encourage only the small and medium enterprises to make investments.

In the medium and long term the fiscal consolidation measures taken by the government will yield some positive results and economy may start to make a turnaround. There will be a three dimensional positive impact on the economy in the medium to long term. Fiscal and current account deficits will come down, Indian Rupee will appreciate relative to the US Dollar and inflation will taper off. The finance minister has taken stern measures to keep fiscal deficit under check and reduce current account deficit by putting measures in place to reduce gold import and reduce the fuel subsidy bill with a monthly increase in fuel prices. All these measures will give enough room and the confidence to the reserve bank to cut interest rates and infuse liquidity in the system. The reduced fiscal and current account deficit will also ensure appreciation of Indian Rupee relative to Dollar which will in turn reduce the fuel bill even further. The inflation is also likely to taper off and this will increase spending by individuals. This three dimensional impact in the medium to long term will propel demand both from individuals and businesses. The strengthening of macroeconomic fundamentals will have a multiplier effect on demand for travel and tourism.

Having said that the budgets have traditionally been disappointing for the travel and tourism sector as the subsequent governments have failed to recognize and encourage the potential of this industry. In fact there is a long pending demand of the industry for a ‘priority industry sector status’ for travel and tourism which yet again has failed to find favors. The finance minister has talked about rationalization of direct taxes and efforts to fast track the GST rollout, but he has failed to address the long pending demand of easing out service tax complexity and ambiguity in the travel and tourism industry.  Among other pending issues not addressed in the budget are the rationalization and reduction of taxes on ATF, tax concessions to tourism industry for infrastructure spending, fast track and single window clearing system for tourism and hospitality projects etc.

This budget reminds me of a 4x100 relay race in athletics. The finance minister has run a good first lap and handed over the baton to the reserve bank. It’s for other stakeholders including the reserve bank to compliment the good first lap of the finance minister by putting in their best efforts and ensure a podium finish.

Will the FM bare it all ?

Sum scans FM's mind ahead of his budget speech.

There’s something in the air and in the stock market which is not normal. This is especially true, when the budget is approaching. Market insiders do manage information in bits and pieces from their “moles” in the ministry and try to benefit from it. There is no budget rally, so I’m expecting a major roll back of fiscal incentives. Also since there is no interim fuel price hike, I foresee a moderated version of market price mechanism for fuel pricing in the budget. Diesel car owners in particular are on the radar, and they can expect a tequila shot from the FM. He would test the waters and not really go for a firm measure, maybe by giving a feeler of the market pricing mechanism scheme this time and leaving the bigger and more comprehensive implementation to a future budget. Still I’m sure government is firm footed to roll back part financing of my long drive with my date. With a heft subsidy on petrol I sure am enjoying longer and crisper drives with my girls (of course they are partly financed by the FM, No doubt why the girls love him so much).

I’m fond of this FM and his negotiating skills, especially in not yielding ground to the opposite parties on the negotiating table. He’s proved to be a hard negotiator with the states on GST implementation and I see some moderated steps in this direction. He’s also tested the market feedback on Direct Tax Code, so I foresee some positive news and a time frame defined for its implementation.

I’m expecting FM to act like Bipashu Basu on the 26th. While he will stop short of baring it all, expect him to leave little for imagination, and in the process grab everyone’s fancy.

"Things To Do" list for Union Finance Minister (2010)

Here it goes:
1. Give the economy a booster dose of "Viagra" by fast tracking Disinvestment, GST Implementation, Deregulating Oil Pricing, New Direct Tax Code implementation, returning to Fiscal Prudence Measures.

2. Set up an annual target of USD 50 billion for FDI. Coordinate with states to develop a single window clearance system for foreign investment and identifying areas in which FDI is required. A committee of state FMs chaired by the Union FM to be formed to focus on achieving the target. (Current status - USD 17 Billion of FDI from April -December 2009).

3. Increase the scope of social sector schemes like SSA and NREGA. Widen SSA in scope by concentrating on universal enrollment and retention with focus on development of technical skills. Develop R & D capabilities and provide incentives and tax breaks for R & D expense to the industry. Focus on R & D in agriculture and pharma. NREGA to be made a model for implementation of an employment guarantee program for urban poor.

4. Judicial, Police and Administrative reforms.

5. Set up a Centre - State Relation Coordination Forum with participation of Union and State Cabinet Ministers. Matters concerning state centre relations to be resolved through this forum.

6. Capital and Money Market reforms - Widen the scope and functioning of Corporate Bond Market and Derivatives Market. Define a Bankruptcy Code for companies.