I would begin by saying that the Budget is in line with what market experts have been talking about all this while—a clear focus on rural economy, with high attention toward creation of employment.
Higher allocation to rural development, right from irrigation to road infrastructure, works to boost rural consumption. And increases in income tax limit for low tax payers, and house rent allowance limit looks to increase income of the working population.
There is a clear focus in sticking to financial discipline by keeping the fiscal deficit at 3.5%. Also, that the pre-Budget expectations of change in the long-term capital gain tax has not come through should provide relief to the market. The Budget also had provisions for a variety of initiatives to drive long-term impacts such as use of Aadhaar to give social benefits in a structured manner.
The Budget has given importance to the development of the bond market, including giving pass-through status to asset reconstruction companies (ARCs). Inclusion of non-banking financial companies under the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) will give necessary impetus for development of the corporate bond market.
In a saving economy such as ours, the Budget has addressed the issue of newer instruments such as real estate investment trusts (REITs). Exemption granted to REITs from withholding tax will enhance the yield for investors, which can lead to a pick up in the REITs market. The Budget also focuses on provisions for taxing the high income segment through the introduction of 10% tax on dividend received. This will either increase tax for companies that continue to pay higher dividend distribution, or will force them to divert this surplus as investment into the existing business or new opportunities.
Public sector banks need to be capitalised and the provision made by the Budget is in the right direction, although as of now, it may not be considered sufficient. While the budgetary provisions seem to be low compared to market expectations, the government and the central bank seem to have a strong plan to provide necessary impetus to the banking industry. The recent Reserve Bank of India (RBI) amendment to certain accounting practices with respect to investments in properties by banks seems to confirm this. The importance given to the bankruptcy code and voluntary disclosures will drive eventual improvement in banking and in the tax-to-gross domestic product ratio.
Realigning the tax structure to encourage long-term savings, such as National Pension System (NPS), is also a good move for the market and the investor. Suitable modification in the tax structure for provident fund investment is also in the right direction. I would even say that it is one of the best moves in shifting savings from the Employees’ Provident Fund Organisation beyond certain limits to NPS or mutual fund long-term equity savings. Once implemented, the assets would pool into mutual fund systematic investment plans, be it debt or equity, and as a result, the power of compounding for the end-user will be much higher. Mutual fund distributors getting a relief on the service tax-related forward charge mechanism is a welcome move, and it shows that the government is recognising the role of distribution in building a strong capital market.
I would conclude by giving full marks to the budget, and call it a well-thought out one.
A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd.
