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Perhaps the Finance Minister wanted to play safe. He avoided controversy by refusing to acknowledge sticky issues such as Foreign Direct Investment (especially in retail), privatisation and disinvestment. However, with its ambitious projections of upgrading rural employment and spending power, an otherwise staid Union Budget 2006-07 may well contain long-term promises for FMCG brands and rural retail formats.

Some call it a populist strategy, and it is obvious that the Finance Minister wanted to play safe. Even as he did not touch personal or corporate taxation, P Chidambaram steered clear of controversy by cleverly avoiding even faint mention of controversial issues such as Foreign Direct Investment (especially in retail), privatisation or disinvestment.

To his credit, the next fiscal's budget contains determined focus and investment on building national infrastructure and empowering the rural populace. Both of this will be healthy developments for both manufacturing and retailing – they will gain from increased consumer spending in rural markets as a result of employment initiatives outlined in the budget.

A 2005 analysis of the rural market shares for about 35 FMCG and consumer durables product shows that the rural market share – as against the urban counterpart – is higher in about 20 of them. While in the service industry, in 2001-2002, LIC sold about 55 per cent of its policies in rural India. Similarly, out of 2 million BSNL mobile connections, 50 per cent are in rural India. The billing per mobile in small towns in Andhra Pradesh is higher than in Hyderabad. In the same way, the 24 million Kisan Credit Cards (KCC) issued in the rural markets exceed the 18 million mark issued in the urban market, while similarly Rs.64,000 crore was disbursed under KCC. Likewise, out of 20 million rediffmail signups 60 per cent are from smaller towns.

Chidambaram projected the GDP to grow at 8 per cent and manufacturing at 9 per cent. Savings are up 21.9 per cent of GDP, while agriculture growth, he said, was up 2.1 per cent.

Services tax has been raised to 12 per cent from 10 per cent and the government will set a nationwide goods and services sales tax (GST) on April 1, 2010. More services will be brought under the tax net – including ATM operations, registrars, share transfer agents, and bankers to an issue, sponsorship of events other than sports, and international travel other than economy class trips.

The excise on petrol & diesel cars not exceeding four metres and with engine capacity not exceeding 1200 cc and 1500 cc respectively has been reduced to 16 per cent from 24 per cent, ushering in an era of small cars.

Aerated drinks, too, will now attract an excise of 16 per cent instead of 24 per cent.

Excise duty has been reduced from 16 per cent to 8 per cent on LPG gas stoves of value exceeding Rs 2,000 per unit, footwear of retail sale prices between Rs.250 and Rs.750, heat resistant latex rubber thread and compact fluorescent lamps.

Sectors where excise duty of 8 per cent has been imposed with CenVat credit include goggles, articles of wood, henna powder, stationery items excluding notebooks and exercise books and roofing tiles.

Excise duty of 16 per cent has been imposed on umbrellas, tobacco used for smoking through hookah, Janata soap and specified goods meant for display in any fair or exhibition in India. Duties have gone up to 16 per cent from 8 per cent on cigarette filter rods, glass ware and mosaic tiles.

HIGHLIGHTS

• No change in personal / corporate income tax rates
• Service tax to be 12 per cent
• Excise duty has been reduced from 16 per cent to 8 per cent on footwear of retail prices between Rs.250 and Rs.750
• Excise duty on small cars reduced to 16 per cent
• Excise duty on aerated drinks cut to 16 per cent
• 50 milion rural telephone connections in three years
• Rural health spending at Rs.8,207 crore
• Rs.14,300 crore spending for rural employment programme
• Allocation of Rs.187 crore for rural infrastructure projects in 2006-07
• GDP growth target for 10th plan at 8 per cent
• Mfg sector growth target at 9.4 per cent
• Savings up to 21.9 per cent of GDP
• Grant to Textile Technology Upgradation Fund increased
• India to be made a manufacturing hub for textiles, steel, metals and petroleum products.

Automobiles

The government has declared its intention of making India a global hub of small cars. In light of this it has proposed an excise duty cut from 24 per cent to 16 per cent on small cars. A small car, for this purpose, will mean a car of length not exceeding 4,000 mm and with an engine capacity not exceeding 1,500 CC for diesel cars and not exceeding 1,200 CC for petrol cars.

Further, the ongoing success of the National Highways Development Programs and the government's decision to develop 1,000 km of access controlled Expressways will further boost demand for the automobile sector. The reduction in the peak rate of customs duty from 15 per cent to 12.5 per cent will benefit the industry in terms of lower cost of imported automotive components.

Infrastructure

Besides uplifting connectivity to rural areas, the Budget seems committed to developing the country's infrastructure, both in road networking and in higher power generation. Apart from the metro-rail projects in some metros, connecting key metros and state-level capitals, there is also a proposal to set up five ultra mega power projects with capacity of 4,000 MW each and the government intends to award the contract by December 2006.

All these measures will provide businesses greater access to remote areas, speed up logistics and also address foreign investors who lament on the neglected state of logistics support in India.

Banking and finance

The Union Budget was presented in the background of a non-food credit growth in excess of 25 per cent reflecting an investment boom in the country.

The Budget proposes to increase the credit flow to the farm sector to an amount of Rs.175,000 crore, an increase of 23.6 per cent during 2006-07. This would amount to adding another 50 lakh farmers to the banking industry's portfolio. Considering the importance of the food processing industry to the overall economy in terms of job creation, benefits to consumers and savings from wastages, this industry has been treated as a priority sector for bank credit.

However, the budget introduced few more services inter alia including ATM operations, recovery agent services, credit card and other card related services, share transfer agent services. This may affect the banking industry and would increase the transaction cost for the customers.