The Union Budget set for itself the priorities of maintaining high growth, inclusion and improving delivery mechanisms while dealing with supply-side bottlenecks and fiscal consolidation that have led to inflation. The growth agenda was furthered with increased allocations for infrastructure, farm and social sectors and continued fiscal stimulus on the indirect tax front. Continuing the fiscal stimulus, especially with regard to the central excise duty and service tax rates, was unexpected given the expected buoyancy in economic growth. However, initial measures at resolving structural issues on the supply side have been announced; these need to be fast-tracked so that they can partially offset some of the rising demand-side pressures.
Key positives for the infrastructure sector were the increased foreign institutional investors (FII) limit for investment in infrastructure bonds, announcement of creation of special vehicles in the form of notified infrastructure debt in the coming months, reduction in withholding tax for foreign investors to 5% from 20% and issue of tax-free bonds by several infra entities. FIIs have also been permitted to invest in unlisted bonds. There seems to have been a concerted effort at broadening the sources of funding for infrastructure sector companies and that augurs well.
While the continuation of the governments stated intent of bringing off-balance sheet subsidies onto the balance sheet, coupled with the proposed move towards direct transfer of cash subsidy to the poor are reformist measures, the quantum of subsidies budgeted seems to be low. Unless there are more measures to deal with subsidies during the year, there is a risk to the fiscal deficit and net market borrowings target of 4.6% and R3.4 trillion, respectively, for the year.