The Budget was characterised by a sequence of deferred promises, a hike in service tax rates, a hike in surcharge on high incomes, giveaways on personal income tax front and plans for enlarged infrastructure spending. The promises include a commitment to reduce corporate tax rates over the next four years, while plugging exemptions. The government will also seek to implement GST. If the distinction between Foreign Direct Investment and Foreign Portfolio Investment is removed, it might have a beneficial effect in certain sectors, especially in private banks.
There was a conscious effort to encourage manufacture and reduce raw material costs. Customs and excise duties were lowered on many intermediate goods. Also, additional depreciation at 20 per cent was allowed for plant and machinery installed at manufacturing units, or power generating units. This should encourage investment..
Central spending on infrastructure is to be hiked by some Rs 70,000 crore in 2015-16. The tax-exemptions for individuals investing in infra bonds could help funnel household savings into infrastructure. But of course, the government will have to demonstrate its ability to get projects moving. That is a bigger bottleneck than paucity of funds.
Allocations for building roads and bridges have been significantly enhanced. This should mean a boost for construction companies and for the roads developers and managers. The power sector gains with a commitment to setting up five new "plug-and-play" Ultra Mega Power Projects. Investors will be watching to see how long it actually takes for clearances and linkages to come through in the plug and play model. A doubled "green" cess on coal could mean higher thermal tariffs if it is passed on, while encouraging growth in the renewable sector at the same time. Effluent and waste-water treatment plants get a break from service tax and this maybe a boost to profitability for private players.
As always, customs and excise duties have impacts that can only be assessed after study of exact notifications. At first glance, customs duties have been cut on metal parts, insulated wires, refrigerators' compressor parts, catalytic converter compounds, sulphuric acid. Among sophisticated electronic equipment, duties on video cameras, endoscopes, optic fibre and LED/LCD panels have been reduced. Tablet computers should also become cheaper.
There appears to be some protection for domestic iron & steel manufacturers with customs duties being hiked on imports of iron and steel. Imported trucks and buses will also become more expensive, which could mean a boost to domestic commercial vehicle sales.
The extra two per cent surcharge on dividend distribution will have a mildly negative impact on investor sentiment if corporates decided to rebalance dividend payouts downwards to compensate. Higher service taxes will hit middle-class and lower income groups and may be a barrier to consumption. The surcharge on high incomes also seems to be applicable to domestic companies and this might mean an extra tax burden for India Inc.
The market has reacted with a mixture of hope and disappointment. On balance, it was a pragmatic Budget and it may help to accelerate growth. But it was not the big bang that many players were expecting.