Budget 2017, Arun Jaitley's fourth as Finance Minister, has put India back on the shopping list of Foreign institutional Investors (FIIs). By restraining the fiscal deficit to 3.2% and promising to prune it down to 3% in the next year, the Finance Minister has delivered on Fiscal prudence. All this has come about amidst a 25% hike in government spending and a 19% reduction on Government borrowing. This also increase chances of a rate cut in the months ahead.
The government had a tough call of treading very carefully between the need for stimulating demand in a weak economic environment after demonetisation and continuing on the path of fiscal consolidation. The budget needs to be complemented for bringing in greater transparency in political funding and relaxing the domestic transfer pricing rules. It has allocated higher sums for farmers, rural population, youth, the poor and the underprivileged, infrastructure etc which will have a ripple effect on the formal economy with a lag.
Another good step taken in this budget is in pruning down the term for eligibility of long-term capital gains tax on house property from three years to two. This would mean that investors can sell their house property a year earlier and still be eligible for lower tax. But what is more striking is the fact that the basket of financial instruments that qualify for long-term capital gains tax has been expanded. This gives investors more option to invest and still avoid paying tax. This will have very far-reaching impact on the financial markets. This will unlock the real- estate investments and divert them to financial instruments, which would be beneficial for GDP as these will have a higher velocity.
There is no Increase in service tax to bring it in line with proposed GST rates. It is not an anti-rich and pro-poor Budget.
But the Finance Minister's best action is that he has not tinkered with the equity capital gains tax regime. The markets are rejoicing that they can continue to enjoy the fruits of investment.
All said and done there have been a few disappointments. There has been no cut in corporate tax rate (for companies having sales of more than Rs 50 crore) despite the assurance in the FY16 Budget to cut taxes to 25% by FY20-FY21. Achieving this level over the remaining period is challenging.
There was also no mention about the creation of a Bad bank or Public Sector Asset Rehabilitation Agency that can speed up solutions for rising challenges of NPA for Banks and loss making PSUs. Though a lot of funds have been allocated for public capex, very few initiatives are visible for kick starting private capex (though there is a limit up to which the Govermentt can do this).
That said this is a growth oriented budget that will make the FIIs return to India.
Dhiraj Relli is Managing Director and Chief Executive Officer, HDFC securities.