The big themes of the Budget are broad-based growth, fiscal prudence, inclusion and governance.
The finance minister has truly delivered a growth-oriented Budget, with adequate emphasis on fiscal prudence, creating a conducive investment climate, suppressing inflation, fostering inclusive growth and promoting education and higher governance standards. By refraining from any major rejig in the existing tax structure, the Budget has reiterated its commitment to a transition to the Direct Taxes Code and Goods & Services Tax regime.
With robust economic growth expectations and strong underlying consumption dynamics, the Budget has rightly focused on supporting the investment cycle by augmenting the sources of funds and providing the right environment. Moderate government borrowing target augurs well for domestic liquidity, interest rates and availability of funds for private credit. The government has raised its outlay for infrastructure by 23 per cent YoY and raised FII infrastructure corporate bonds investment (with residual maturity of over five years) ceiling to $25 billion from $5 billion. The setting up of infrastructure debt funds with reduced withholding tax for FII investment in these funds is also a landmark measure.
What is worth mentioning is that the Budget and the RBI Monetary Policy are working in consonance towards a common objective of curbing inflationary pangs and fostering investments. Given the supply-constraint-driven nature of inflation, monetary policy, in absence of suitable fiscal response, would have had only a limited impact. Fiscal discipline, as rightly emphasised, had become a must to ensure sustainable non-inflationary growth. Higher allocation and other measures announced for the agriculture sector address the existing supply constraints.
India’s market capitalisation of $1.4 trillion equals about 70 per cent of the expected GDP for 2011-12, which is just half of over 140 per cent at the peak of January 2008. Although, 140 per cent level marked a bubble zone, the current level of 70 per cent is also not justified. With overall long-term economic growth story intact, investors’ apprehensions were flowing from high inflation, high government deficit, poor execution mechanism and low standards of governance — the issues the Budget has addressed. Although the execution mechanism of achieving the aggressive fiscal target of 4.6 per cent of GDP in 2011-12 has yet to pass the litmus test, success on this front will lead to a re-rating of equity markets. This, coupled with positive news on the movement in crude oil prices and geo-political worries in certain parts of the world, will set the stage for Indian economy to achieve its true potential and for equities to outperform other global peers and generate long-term wealth for investors. Hence, any dip in the short term will be an opportunity for patient investors.
The author is Deputy chief executive (financial services), Aditya Birla Group