Balancing act with a poll tilt

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FM likely to present budget for 'aam aadmi'

This budget is expectedly broad-based, and is focussed on agriculture, health and education, employment, and greater social equity. As economic activities might moderate, the finance minister stressed encouraging domestic consumption, albeit a cost. The minister announced substantial debt relief for small farmers. Amid the risk of lower tax buoyancy next year, he reaffirmed the fears of missing the FRBM target for revenue deficit. Cutting Cenvat, excise, and central sales tax, and raising the income tax threshold are further steps towards boosting demand. Lower duties will address inflation, a welcome move.

Over the years, India’s investment-led growth story has got well-established. The Budget mentions the government intends to carry forward projects in infrastructure. The increased outlay for projects, and enhancing power generation targets are heartening. The Budget, however, leaves room for criticism on ensuring the pace of investment.

Corporate taxes remain unchanged. A reduction in corporate taxes or even the fringe benefit taxes could have been beneficial in a year of moderate growth. The proposals to increase short-term capital gain tax to 15% and to impose commodities transaction tax have disappointed the capital markets. This move may yield certain positives in the long run, discouraging speculation. Allowing securities transaction tax paid by brokers as deduction from business income rather than being set off against tax paid will effectively reduce the benefit to only 33%. Commodities transaction tax will have a negative impact. These steps are negative for capital markets in the short-run.

There are few positives for the capital market. Initiatives to expand the market for corporate bonds, exchange-traded currency, interest rate futures, and credit derivatives are welcome. Dividend distribution tax relief on double taxation is also a mild positive for some large conglomerates with complex holding structures.The Budget is good news for the agriculture and social sectors, but does not produce stimulus to corporates and investment.