Favourable balance in resource allocation

Updated: Mar 1 2006, 05:35am hrs
The Union Budget 2006-07 can be considered as a positive budget as it laid emphasis on continuity, discipline and was futuristic. In terms of continuity the tax rates were maintained static as previous year, even more transparency was seen as the positive factor. Moreover, in the budget the finance minister maintained the discipline by maintaining a favourable balance towards allocating of resources. Both social and infrastructure were given equal allocation in terms of finance. Such a balance would enable to bring down fiscal deficit.

For us, the few inclusions in service tax would impact such as ATM operation and outsourcing. In his budget speech the finance minister did not mention any special provision through which the liquidity condition could ease. However, by opening the corporate debt markets to the foreign institutional investor from the earlier $ 0.5 billion to $ 1.5 billion is one of move that could be viewed as a provision for increasing liquidity. This would also help in maintaining benign interest rates. The budget 2006-07 focused towards agriculture, social and infrastructure sector, as this would rightly help in the countrys development.

The issues such farm credit and micro finance was given substantial importance. However, for foreign banks like us, the branch network is a limiting factor to cater these kind of services. But we have realised the significance of this segment and hence last year we have started micro finance business, where the major part of business is done through self-help groups. We expect this business to further increase in the coming year.

Also a part of agribusiness we are planning to lend to the agriculture sector, even though we wont directly lend to farmers.The finance minister has made a balance in the social as well as priority areas such as education. The investment made in to infrastructure is substantial, however the industry expects much more allocation towards the infrastructure sector.

As an initiative to develop the corporate bond market, the finance minister in his budget speech mentioned that it would introduce a single unified exchange traded securities market. This would provide greater depth in the market, by increasing the liquidity. This initiative by the government can be interpreted as a move to attract corporates. However, only creating a unified market would not be enough, some more initiatives such as boosting secondary market corporate debt trades will act as a step in right direction.

The finance minister proposed to include the investment in fixed deposits for a term of minimum 5 years in section 80C of IT act.

This move of the government is to bring retired class and people depending on interest rates for their lively hood under the tax exemption.

By increasing the limit on FII inflows in Gsec market the government has tried signal that it is more comfortable to foreign participation. Unlike equity markets, in debt markets the cap of $ 2 billion for FII in Gsec is imposed so that they can control the volatility. We were expecting the finance minister would abolish the banking cash transaction tax, since the tax adds adequate administrative work load on the bank. However, going by the reasoning given by the FM it is clear that such tax is needed till some other provision would be made.

The writer is CEO, Standard Chartered