A very creditable job

BUDGET REACTIONS

Dominic Price
MD, JP Morgan Chase Bank

Budget 2004/05 sends a clear signal that the government means business.

True to form, finance minister P Chidambaram announced several changes in what is essentially a give-and-take budget that attempts to balance the government's various rural priorities, while setting India's fiscal finances on a long overdue correction.

It should reassure investors that the government welcomes foreign investment.

Given the compulsions of coalition politics and the current state of government finances, the finance minister has done a very creditable job in his balancing act.

The Budget deficit is forecast at 4.4% of GDP in 2004/05, down from 4.8% last year. It is encouraging that the government has avoided being heavily populist.

This, along with the unambiguous commitment towards fiscal consolidation, should boost foreign investors­Ý confidence in the administration once unrealistic optimism gives way to a reasonable assessment of what is possible.

The budget emphasizes the importance of improvement in rural infrastructure and has unveiled measures which should strengthen rural consumption, even though this entailed a small hike in service tax and the introduction of a special cess.

Individuals will welcome the doubling of the income tax exemption limit to Rs 1 lakh. Increasing foreign investment in telecom (74% from 49%), aviation (49% from 40%), and insurance (49% from 29%) sends a positive message.

Notably the abolition of long-term gains tax and halving of short term rate to 10% should be more encouraging to long-term investors, than the imposition of 0.15% transaction tax.