Some steps now, more to follow

Written by Samiran Chakraborty | Updated: Jul 11 2014, 14:08pm hrs
The first Budget of the NDA government does not try to usher in radical changes but keeps the hope of change alive by taking some meaningful steps in the right direction. It demonstrates a strong resolve to stick to a medium-term fiscal consolidation plan while trying to provide some support to revive investment growth. The markets had high expectations about a reformist Budget. The finance minister has been able to deliver on some of these while on others there was disappointment. In our view, some of the issues where the Budget did not deliver specific measures could be taken up at a later date since the finance minister got only a month to prepare his first Budget.

Relaxing FDI norms for defence, insurance, urban development and e-commerce would bridge the funding gap in these sectors and bring in new technology. Markets were worried about the governments approach towards foreign capital after they expressed their reservations against the entry of foreign players in multi-brand retail earlier. That concern should now be addressed. A more favourable tax treatment for foreign portfolio investors and the promise about international settlement of Indian securities should be taken positively by foreign investors. But there could be disappointment that the retrospective taxation clause has not been repealed.

The Budget tries to push both consumption and investment under a tight fiscal constraint to revive the sagging growth trajectory. It pushes the PSUs to ramp up their investment, provides investment allowance to firms undertaking fresh projects, offers banks relaxation from regulatory pre-emption if they raise funds for infrastructure, creates a large venture capital fund for promoting start-ups and increases budgetary allocation to infrastructure areas. There is some protectionist bias in raising duties for a few products where India wants to promote domestic manufacturing; although the big push in manufacturing will come from the governments ability to improve the conditions for setting up businesses. There is a modest push towards stimulating demand by offering small tax sops to individuals.

Among the misses of the Budget, some of the assumptions around indirect tax revenue growth appear optimistic. This might make the market worried about a possible fiscal slippage later in the year but we think the divestment proceeds could spring a positive surprise if equity markets remain buoyant. The lack of any concrete plan to reduce subsidies is a negative but the finance minister can always resort to expenditure cuts later in the year to meet the deficit target. We hope that the newly appointed Expenditure Commission will squarely tackle the subsidies and the government will spend some political capital to implement few tough measures. Announcement on both direct and indirect tax reforms has been deferred with the government resolving a few contentious issues with the relevant stakeholders. Also, a more specific approach to address the issue of public sector bank recapitalisation would have been favoured by the markets, allaying any fears of fiscal slippage arising out of it.

The financial markets have shown a lukewarm immediate response to the Budget but we think that once the dust settles in, the markets will appreciate the Budget in a difficult environment. Clarity on the pending reforms and implementation of the infrastructure plan would be crucial in improving sentiment.