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.
