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Saturday, Mar 01, 2003

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A Budget that means business

Shailendra Bhandari

THIS Budget actually seems to work. Yes, several of the components were strategically leaked in advance, and possibly there has been some dilution, but given the fact that this is election year in several States, there is more to praise than criticise.

Looking at the big picture, there is some disquiet in the fiscal deficit shooting beyond Rs 1,53,000 crore. However, this seems to have been done with a purpose.

The Budget clearly seems to accept that the bigger risk facing the economy today is the loss of growth momentum, rather than inflation. What makes the deficit more palatable is the fact that much of the expenditure is going towards infrastructure, with around Rs 60,000 crore going towards various projects.

The truly laudable part of this expenditure is the funding mechanism. If the proposal to leverage public money through private sector partnership can be made to work, it will firmly set India back on the path of economic reforms, and that too without putting up any Government guarantees.

The other aspect of this Budget, which does not seem to have attracted too much attention, is the restructuring of the outstanding debt of State Governments.

The debt swap scheme proposed in the Budget seeks to save Rs 81,000 crore over the next three years for the States. This is a huge sum and should hopefully enable the States to stay out of the bankruptcy which otherwise confronts them.

It is also good to see that political considerations notwithstanding, the Finance Minister has actually reduced the subsidy on fertilisers, and even more surprisingly reduced the interest rates on small savings schemes by one per cent.

The removal of long-term capital gains tax on equity investments after March 1, 2003 will hopefully tilt the risk-reward balance more in favour of equity investments.

The news for mutual funds seems extremely positive.

While we still need to study the final details of the Bill, it would seem that not only are dividends on equity funds totally free of tax (for one year) both in the hands of the investor and at the time of distribution, but dividends on all other types of funds are tax-free in the hands of the investor, though they would be subject to the 12.5 per cent distribution tax.

Banks have received various pieces of good news, though there was some disappointment in the FDI limits for public sector banks not being raised. In all this, however, what should not be missed are the clear signals that are guiding banks towards using their un-booked profits on Government securities towards writing off their NPAs.

The increase in the FDI limits for private banks is promising, along with the removal of the restriction of 10 per cent on voting rights irrespective of holdings.

The icing on the cake was provided in the afternoon by the RBI, which has cut interest rates on repos and savings accounts by 0.5 per cent each.

With all the positives, there are a few negatives. There is a tendency towards populism, with the new scheme for subsidising pensions being a prime example.

The partial removal of income-tax surcharge is by and large positive, though there is little justification in raising it to 10 per cent for incomes above Rs 8.5 lakh.

The increase of service tax from five per cent to eight per cent will be mildly inflationary, and was probably not necessary.

Even some of the administrative reforms and simplification will go towards easing some of the frustrations in dealing with the income-tax department.

The overall impact should be positive for both the debt and equity markets over the next year.

To conclude, this is a Budget that improves on second reading.

The author is Managing Director, Prudential ICICI AMC.

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Account well opened

Pat on the back in order
Changing the psyche, not the system
Well-intended despite detail
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The party is over

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