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The Union Budget has focussed on pump-priming the economy at the cost of some fiscal discipline in the short term. However, albeit at a slower pace than earlier projected, it commits to glide path of the lower fiscal deficit in the medium term. While the fiscal deficit target of 3.3% of GDP for FY19 is higher than expectations, the budget also talks of limiting it to 3% by FY21. The budget also talked about limiting Central Government Debt to GDP to 40% over the medium term. These intentions should calm the nerves of rating agencies and investors reasonably well.
Significant government initiatives such as uplifting rural economy, improving agricultural sector, infrastructure development and Make in India continue through this budget as well. Accordingly, allocations have risen for rural and agriculture sectors. The total spend on rural livelihood and rural infrastructure was increased to Rs 14.3 trillion (including extra-budgetary allocation) – an increase of about 20% as compared to the previous year’s allocation. More importantly, the government has also proposed fixing the minimum support price of all kharif crops at a minimum of 1.5 times the cost of produce. The initiatives are also focussed on improving farmer profitability by reducing/ eliminating middle men. Apart from rural and agriculture spend, the thrust on infrastructure development continues with increased spend on roads and railways.
Another key focus area in this budget has been ‘Make in India’. There is significant support for to this initiative by way of increase in customs duties on various products ranging from electronics to tyres to auto parts, thus increasing protection or incentivising domestic manufacturing units. The budget has tried to support small and medium enterprises (SMEs) through the reduction in corporate tax rate to 25% for companies with annual turnover of up to Rs. 2.5 billion. Almost 99% of corporate India is likely to be covered by lower taxation rates.
The government also announced a national health insurance scheme a-la recent crop insurance initiative. The health insurance cover is likely to be Rs 500,000 per family per year and bodes well towards providing health insurance for almost half of Indian families.
The imposition of long-term capital gains (LTCG) tax of 10% (without indexation) on listed equity and equity mutual fund units is a negative for market sentiments. The immediate adverse impact, however, would be contained due to the grandfathering clause which exempts long-term capital gains up to Jan 31, 2018. LTCG tax has been introduced without removing Securities Transaction Tax (STT) which leads to double taxation in a sense. Ideally, indexation benefits should have been provided to equity asset class as well to make it at par with other asset classes such fixed income, real estate etc. Further, there is also the introduction of dividend distribution tax of 10% on dividends announced by equity and equity-oriented funds going forward. However, bonus stripping through which tax can be avoided has not been touched even in this budget, which is a disappointment.
The budget speech also mentioned Sebi exploring whether large corporates in the country could be mandated to raise at least 25% of their debt requirements from market. This augurs quite well for development of much needed corporate bond market in India. Further, some of the tax-related hurdles relating to the resolution of debt of companies referred to National Company Law Tribunal (NCLT) under the insolvency and bankruptcy code have been resolved. This would finally pave the way for resolution of large corporate debt and help many of the corporate focused banks clean up their balance sheets.
Nilesh Shah is MD – Kotak Mahindra Asset Management Co. Ltd. The views expressed are personal.
Disclaimer: Kotak Mahindra and associates are predominant shareholders in Business Standard Pvt Ltd.