We have to look at the backdrop in which this budget was announced. A growing fiscal deficit, a current account which was looking very weak, inflation, tight monetary policy - and in this environment, the finance minister, I think, has come out with a responsible and realistic budget. He has reduced the fiscal deficit for this year to 5.2% against expectations of 5.8% and 5.9%. Further, he is committing into the next year a fiscal deficit down to 4.8%. The reason why this is extremely important is this enables stability in the macro policy of the country. From the point of view of investors, including global investors, they will like this control and management of the fiscal deficit. It will give them confidence that India is a serious, mature and responsible economic policy maker and will not make the mistakes like many other countries have made which has got them into economic trouble. So, this kind of responsible behavior is a very good step, especially one year before an election.
Combine this with a series of measures which the finance minister has taken in this budget. Serious increase in spending for rural India. This is very good news for Bharat. And I see a significant stability in demand in rural and semi-urban parts of our country. The second important aspect is on mass housing, which again helps mid and rural India. So, anybody buying a house up to Rs. 25 lakh will get a tax break out of his income. Again, a significant positive for building the housing and construction sector outside big cities. Third, there is a shortage of new investments taking place in the country. So, the finance minister is recommending a 15% investment allowance, which is again trying to spur the investment cycle in the country. With reference to the financial sector and financial markets, a series of small steps in the areas of reduction of securities transaction tax (STT), benefits for insurance companies and mutual funds, clarity on the securitization guidelines as also on the SEBI guidelines on alternate assets are all small steps for encouraging financial savers to put money into Indian financial assets and away from gold. So, all in all, these are macro positive steps taken by the finance minister for building a robust, longer-term budget platform for the Indian economy.
What are the areas which are challenging? Immediately, I can think of two areas that put some pressure on the markets. Firstly, the Government of India’s borrowing program has been higher than what most bond market players expected. It has come out to be around Rs. 6,29,000 crore against an earlier expectation of around Rs 600,000 crore. This puts additional pressure on bond markets and therefore, the government securities market has seen an increase in its yields. Which is why there is a feeling that this may put some pressure on the treasuries of banks which run very large bond portfolios. So, this is one important challenge that markets are dealing with. The second one is with reference to increase in corporate taxation. Roughly, as I understand, tax rates are going up from around 32-odd% to 34%. This is roughly a 1.5% increase in corporate taxation, which will put pressure on post-tax earnings of companies to that extent. I do not think the amount is large and the finance minister has promised that he is doing it only for one year. I hope he sticks to his promise. And #3, the markets tend to expect steroids - quick fix drugs. And this time, the FM has avoided quick fix drugs like steroids. He’s saying, build the macro more steadily and in the short-run if micro has to pay some price for getting to a lower fiscal deficit, so be it.
• Therefore, good for improving our top-down situation. There will be a few companies and sectors where there will be pain out of additional taxation on excise and other things.• All in all, my view is, this restores some credibility of India’s macroeconomic management and that is a big plus. We were losing the plot on that and over time it will increase investor confidence into the Indian markets, particularly the foreign investors. Therefore, do not be excessively focused on the short-term and that is my advice to every investor. Think about the long-term and from a long-term point of view I am positive because this is truly a reasonable and realistic budget.
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