Growth-oriented budget that won't fuel inflation

The electoral victory of a stable majority government at the centre in almost 30 years was a clear signal that the people of this nation wanted a legislature that was decisive in its actions. The government's ability to convey a strong message that it wants to get the economy back on track has brought back confidence. The Union Budget is an important event and it was widely expected to lay down the roadmap for growth and introduce measures to revive the investment cycle.

In this regard, the finance minister took a bold step by increasing the fiscal deficit target to 3.9%(which I believe is more realistic) for FY 2016, while keeping the medium-term target of 3% intact. While private investment is vital, public investment is necessary in the interim to revive growth.

Presently, several companies with strong balance sheets in the private sector have excess capacity; and therefore have not been looking to invest. By government investing in infra projects (with a short capex cycle) the multiplier effect on the economy will be realised quickly. Private investments will follow to back the government investment and a combination of the two will create more jobs and consequently generate more income. This will boost consumption and enable companies to use up their existing excess capacity. The focus on infrastructure will in the long-term also address structural supply side bottlenecks, which have previously caused inflationary pressures.

I do not believe that public investment in infrastructure will have any spillover effects on inflation. The CPI has eased down to 5.1% in January 2015 from double digits in 2013. Similarly, the WPI is currently in negative territory. The budget has also emphasised that it will adhere to the Monetary Policy Framework target of keeping inflation below 6%.

Hence, I continue to believe that interest rates will reduce by another 50 to 75 basis points this year. The goal of building 6 crore housing units by 2022 will help the Indian economy. It will drive the demand for affordable housing and generate new employment opportunities. Housing has a multiplier effect on the economy and forms 6.7% of India's GDP. The housing and real estate sector also has strong forward and backward linkages to nearly 300 industries. Improved sentiments caused by larger investment by government together with lower interest rates will make housing more affordable.

The Budget also announced strong measures against the generation of black money. I would view this as extremely positive as it can generate significant tax revenues for the government. Effective implementation however is critical. The step to reduce the corporate tax rate from 30% to 25% over the next four years and at the same time rationalise various tax exemptions is also very positive.

However it is important to understand which of the incentives are proposed to be removed. Currently the effective tax rate due to numerous exemptions is 23% from the actual 34%. In conclusion, I think it is a very balanced and growth-oriented budget without creating inflationary pressures.