A Fantastic Budget

Motilal Oswal, CMD, Motilal Oswal Financial Securties Ltd

The Finance Minister was adversely positioned to present a landmark budget, as the 2015 budget comes in the backdrop of a difficult year2014. The manufacturing sector had been very sluggish of late, inflation remained sticky and country faced a big current account deficit. The finance minister had an opportunity to reclaim fiscal credibility, progress the reform agenda, regain community confidence, and secure sustainable long-term growth. He seems to have delivered on all these counts but execution of these proposals would remain the main challenge. It is therefore not surprising that one of the principle overarching themes of the budget was to raise public investment on manufacturing and controlling fiscal deficit. A secondary but equally important theme of the budget is to meet the aspiration of the common man by reining in inflation, food security, easing supply side constraints , improving basic infrastructure like roads, power, drinking water and medicare

The Finance Minister has reiterated his stance on the economy achieving a high growth. Increased GDP growth estimates would imply a multiplier effect in the creation of new jobs and the associated consumption and investment theme associated with that argument

The Finance Minister has remained committed to fiscal prudence. The revised budgetary estimates for 2015 project that continuing with the current trend past couple of years Revenue deficit will go down in absolute terms to 2.9% of GDP. Similarly, Gross fiscal deficit is projected to be at 4.5% of GDP from 4.8% in the immediately previous year. Plan expenditure growth has however been aggressive at29%. The mandarins at North Block are however hoping for aggressive revenue buoyancy pegged at 19.7% growth and reiteration of significant rationalisation on food and oil subsidy. Fuel subsidy has been pegged at Rs 65000cr apposed to the actual Rs180000cr in the previous financial year. Added to this is a practical and achievable divestment target. This, to my mind, highlights the pragmatic mindset of the new government.

Key notable announcements in the budget speech were increasing FDI in insurance and defense to 49%, allowing tax pass through benefits in REIts, allowing banks to raise capital for infrastructure financing through long terms bonds and deposits, tax holidays for the power sector started within a specified time frame, reversing inverted duty structures in specific industries, additional the gas grid pipelineof 15000km through PPP route and allocation of Rs 8000cr underthe rural housing scheme. However one needs to evaluate whether PPP model would really work in many of the areas like gas pipelines.

The finance minister has also taken a number of measures to kick start investments. PSU will invest Rs 2,47,941 crore this year to create a virtue of investment cycle The lowering of the threshold limits to Rs 25 crore for claiming investment allowance benefits will be a big positive for the MSME space. Sizeable allocations for NHAI at Rs 37,800 crore and development of infrastructure in north east at 53,706 crore are some key announcements to revive the investment cycle

The focus remained on the budget being for the common man includes a number of proposals for providing a boost to the spending power of the common man. It includes increasing spending on the social sector through various "Rs 100 crore schemes", raising the bar for financial inclusion and raising personal income tax threshold limits to Rs 250000, raising self occupied property interest deduction upped to Rs 2 lakh from Rs 1.5 lakh, raising the 80C limits to Rs 150000 and keeping personal income tax rates unchanged.

From the industry's point of view, the budget maintained the general rate of CENVAT, maintains income tax rates and surcharge on corporates and status quo minimum rates of tax.

From the capital markets point of view, taxing dividend in hands of recipients as opposed to the companies is mildly negative. Increasing long term capital gains tax and tenure for claiming long term capital gains benefits on units of debt schemes at par with term deposits of banks should facilitate capital inflows from debt instruments to equity schemes.

Sectorally, the budget impact has positive implications for banking, footwear, infrastructure finance companies, construction, power, real estate. It is neutral for sectors like IT, pharmaceuticals and metals. The budget has negative implications for mineral exporters like bauxite.

All in all, a very balanced budget which has something for everybody, something for every part of the country and for all sections of the society. I would call it a fantastic budget. I think equity market would give decent returns in medium to long term.