The Hindu Business Line : Spurring investments

IT is a very pragmatic, forward-thinking and long-term investment-oriented Budget. The focus clearly is to encourage long-term investment into the country that has a direct impact on growth and infrastructure.

The reaffirmation of the Defined Contribution Scheme for Central Government employees is a welcome step and will pave the way for a voluntary pension system for all unorganised sector employees. Moreover, the decision to adopt the EET tax system for pensions will have a positive impact to participants as the contributions and accruals will be exempt from tax while tax will only be paid on the receipt of terminal benefits.

Among tax proposals, the 2 per cent cess is welcome but the flow of resources for the intended purpose has to be ensured. The change to a lower short-term capital gains tax (10 per cent) and withdrawal of long-term capital gains tax from securities is a welcome step and we expect markets to take the 0.15 per cent transaction tax levy without too much pain in the medium term. While arbitrageurs may be impacted negatively affecting volumes, long-term investors would benefit immensely from the cut in capital gains taxes. On a broad level, the Budget tries to reallocate resources to the rural and needy sectors through specific schemes. The key here would be to implement the plan effectively so that the benefits percolate down to the intended sectors. The Finance Minister has tried to balance this added expenditure through resource generating measures so that the fiscal targets can be met. The fiscal deficit is being targeted at 4.4 per cent of GDP while the revenue deficit is being targeted at 2.5 per cent. The stress on maintaining fiscal prudence is a significant step and could go a long way in achieving the goal of nil revenue deficit by 2008-09. It would have been better for the Finance Minister to set strict fiscal targets for individual States as well in return for higher allocation from tax revenues.

(The author is Managing Director and CEO, Principal PNB AMC.)