A realistic road map has been laid by incentivising growth and investment in critical sectors
The Union Budget laid down the road map for economic recovery. Despite the high expectations and given the constraints and the low-tax-to-GDP ratio and high revenue deficit, it was a commendable effort by the finance minister. The government has done wonderfully well to reassure all of us on fiscal consolidation while increasing capital expenditure. It has been a fine tightrope walk. Although the government had to extend the fiscal prudence road map by a year – it now targets a fiscal deficit of 3% of GDP by FY 18 – to move the economy on to the fast lane to recovery.
The way to implement the much- awaited goods and services tax (GST) has been laid down. It will avoid the double taxation that most goods go through across the state and pave the way for a common Indian market. It will ease the movement of goods and services across the country, and considerably expand business and commercial activity, improve the tax structure and fuel economic growth.
The Budget has some good things for the common man. It has increased tax deductibles for individuals. The government has also come out with a system to monetise household gold holdings ,thus allowing for productive use of gold. It seeks to widen the social safety net, which all in all, will strengthen and aid India’s economic rise.
The government always tries hard to achieve its fiscal deficit targets every year. Thankfully, this time around the revenue numbers that have been estimated in the Budget are extremely credible and can be achieved by the government. The fiscal deficit target is also achievable as the increase in service tax and excise duties will shore up revenues.
There is an increased visibility on the capex revival front which the government is trying to improve. The outlay for infrastructure spend is increased by R70,000 crore, which is welcome, although a little higher spend would have been more desirable.
With the increased thrust on highways, rural roads, railways and rural and urban housing, the private sector will step in sooner or later, turning the investment cycle into a virtuous cycle. All this will lead to an increase in demand for cement, paints and other raw materials.
There are also measures to boost the domestic Real Estate Investment Trusts (REITs) market. The Budget seeks to address several hurdles in the implementation of REITs which will boost real estate financing.
The Alternative Investment Fund category has also received a fillip in the Budget, and is eligible for tax pass through capital gains and other income. Over the course of time, it can become an important tool to attract foreign investment to the country. Even sponsors of REITs are eligible for favourable tax treatment when they sell their units.
Another highlight of the Budget is the steps proposed to increase financial savings and reduce the physical savings through steps like gold monetisation. It will make dormant gold get it into mainstream economy.
On the markets front, debt assets offer a short-term opportunity for investors with interest rates expected to go lower and inflation to hover around 5% by the end of the year.
In many respects, the Union Budget can be viewed as constructive, as it has scripted a realistic road map for growth and to boost India’s recovery prospects.
On expected lines, the Budget maintained the central government’s ongoing push on supply side reforms, creating a business-friendly tax environment, while slightly relaxing the fiscal deficit.
S Naren, CIO , ICICI Prudential, Asset Management Company