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.