Given the short time available, most investors expected a Budget long on vision and short on details. There were two or three specific areas that investors expected the finance minister to address in his Budget speech. The first was food inflation, and what the government could do to clean up the policy framework related to agriculture. The next was putting public finances on a sustainable path through tax and expenditure reforms. The third was improving the legal and regulatory framework around running a business in India - second-generation reforms in land, labour, ease of doing business, etc.
Based on these expectations, the Budget was a disappointment. There seemed to be no big picture economic vision. Instead of focusing on how he will rationalise subsidies, shrink government or raise the tax-to-gross domestic product (GDP) ratio and broaden the tax base beyond three per cent of our population, the finance minister went into excruciating detail on small budgetary line items. There seemed to be no unifying economic vision, just a series of sector-specific measures.
The other criticism I would have would be on the budgetary arithmetic itself. When P Chidambaram presented his interim Budget in February, we all doubted the 4.1 per cent fiscal deficit target. Arun Jaitley has adopted the same target, with no new tax measures (on a net basis), and it is not obvious how he will get to the 4.1 per cent target. The 20 per cent revenue-growth target looks ambitious - as does the 27 per cent increase in Plan expenditure and only a 10 per cent increase in non-Plan. One would have thought that the new finance minister would use this opportunity to come clean, to establish his credibility and present more believable numbers - even if it meant a higher fiscal target.
Having said that, there are many positives in the Budget as well. He seems committed to achieving the long-desired target of three per cent fiscal deficit. There seems to be a conscious attempt to reduce tax terrorism: allowing the advance ruling facility for domestic companies; simplification of transfer pricing; a desire to reduce tax litigation and so on. Even on the retrospective tax issue, there seems to be some type of broad assurance that we will not go in this direction again, with the current cases being referred to a high-powered panel. It was naive to expect the government to scrap the retro tax amendment altogether; that was never likely to happen. On the goods and services tax, there seems to be a desire to introduce it as soon as possible - hopefully by April next year. The finance minister has also clarified the rules on capital gains versus business income for foreign institutional investors.
As far as foreign direct investment (FDI) is concerned, we have finally seen some movement on defence and insurance, with an easing of the requirements for FDI in mass housing as well. Anyone with a manufacturing set-up in India can distribute their products through their 100 per cent owned e-commerce platforms, which will go a long way towards allowing FDI in this space - though maybe not meeting the needs of pureplay e-commerce companies.
The desire to set up a Rs 10,000-crore fund for start-ups seems to follow in the footsteps of the incubator model pioneered in Israel with great success. An interesting idea, but hopefully executed well.
On infrastructure, the big step is the willingness to exempt resources raised for lending to infrastructure from cash reserve ratio and statutory liquidity ratio obligations. This will reduce the cost of funds for this sector, as well as improving the fundamental profitability of all new bank exposure in this space.
Real estate investment trusts for infrastructure and the realty market now seem to be a reality - though one will have to check the fine print here to make sure the pass-through for tax purposes in workable. If they can be set up and operationalised, it will help in unlocking assets and attracting long-term stable capital flows into these sectors.
There is some attempt to give incentives for financial savings with the increase in Section 80C limits from Rs 1 lakh to Rs 1.5 lakh. Bank deposits have been put on a level playing field with debt funds, which should help deposit mobilisation.
Mr Jaitley has also been able to give some tax breaks to the middle class by raising the taxable-income floor and housing loan deduction - effectively giving most taxpayers Rs 20,000 in tax savings.
On the whole, a decent Budget. But I wish he had spent more time on the big picture and clearly outlined how this government will be different from the previous one in its economic philosophy, approach to subsidies and populism, and desire to reduce the hassles in doing business in India.
The markets will now look closer at the fine print, and we will see stock-specific movements from Friday. I don't think this Budget will puncture the bull rally, but it will not give a new fillip to it either. We are probably headed for a period of consolidation as the markets digest their recent gains. The next move up will now need more concrete action on multiple policy fronts.
The writer is at Amansa Capital