<b>Akash Prakash:</b> No news is good news

Markets were braced for bad news hence the rally

When considering the Budget for FY18, the first thought which comes to mind is that while not very ambitious, thankfully the finance minister did nothing negative which could sour sentiment. There was no lurch towards anti-rich policies, or signs of the class warfare present in some of the recent speeches of the prime minister. We have no change in the long-term capital gains tax regime, no wealth tax, global tax, no estate duty etc. For a while it seemed that we were back to the 1970s and that being wealthy was seen as a crime. That rhetoric has thankfully been put into cold storage with this Budget.

As for the Budget arithmetic, it seems reasonable to me. Nominal GDP growth at 11.75 per cent, seems realistic. Gross tax revenues have been budgeted to grow at 12.25 per cent, mild buoyancy, seems okay. One can argue that within the tax numbers, income tax has been assumed to grow at 25 per cent and this seems high, but the government will argue that the demonetisation, data mining and tax base-broadening benefits will be visible here. Excise has been budgeted for only five per cent growth, realistic given the issues around oil prices and the introduction of GST. The one number which does seem high is divestment. It has been budgeted at Rs 72,500 crore. Of this Rs 72,500 crore, Rs 15,000 crore of strategic sales and Rs 11,000 crore of insurance listings are clearly questionable. It is positive that the FM has not budgeted for any windfall gains from the demonetisation, keeping that in reserve, neither has he built in any upside due to the GST. Capital expenditure through the Budget seems to be rising by 10.7 per cent, faster than revenue expenditure of 5.8 per cent, a positive shift.

I have no issue with the fiscal deficit target of 3.2 per cent, it continues the fiscal consolidation and does not (to my mind) dent the credibility of the government. This finance minister has a good track record on fiscal consolidation, as he has spurned many an opportunity to be more adventurous with the Budget arithmetic. The revenue deficit at 1.9 per cent is actually within the FRBM target and we are targeting a primary deficit of just 0.1 per cent. The FM has discussed meeting the FRBM committee targets of 60 per cent public debt/GDP by 2023 and keeping the fiscal deficit at three per cent from 2019 onwards. Even with the higher fiscal number the government net borrowing has dropped to Rs 3,48,000 crore, compared to Rs 4,25,000 crore in FY17. This is the number that bond markets care about and it is an unambiguous positive surprise.

As for structural changes, there are some interesting steps taken. The decision to disallow any cash transaction beyond Rs 3 lakh is significant and continues the war against cash. For the first time we see steps to legitimise political funding. The bearer bond scheme designed to shield the identity of the donor, but also ensure proper accounting from the recipient political party is quite innovative. Disallowing cash donations beyond Rs 2,000 is an initial step, but most parties can sidestep it quite easily. At least this topic is now on the agenda.

Listing of rail and insurance PSUs is a positive as is the decision to create a national champion in the oil and gas sector. Plans to monetise the land of the Airports Authority of India is another step in unlocking value of dead assets. The government is finally trying to maximise the value of its assets. If required, force consolidation, rethink industry structures and is thinking about its companies as an owner should.

Rules for start-up funding have been eased, and the withholding tax concessions for FPIs holding bonds extended to 2020, with masala bonds also included. Thankfully, a clear and unambiguous message was given, exempting FPIs from the indirect transfer provisions. Affordable housing was given a clear fillip, with infrastructure status granted. Moving the railways to accrual accounting by FY19, and the safety fund of Rs 1,00,000 crore were big steps.

There were steps on ease of business. Abolishing of the FIPB is important symbolically and can speed up FDI. There have also been some simplifications on domestic transfer pricing guidelines and the presumptive tax rules. The FM has talked of greater accountability of the tax administration.

On income tax, it was good that the FM did not hike the initial slab, cutting the rate to five per cent instead. We have too few taxpayers as it is. Promising a simple one-page tax form, with no threat of scrutiny for taxpayers with an income of up to Rs 5 lakh is sensible. This is the way to get people to file returns, there can be no excuses now. Given the fiscal constraints, the total relief of Rs 15,500 crore given to taxpayers was all that was affordable. A very limited stimulus, but better than nothing.

On corporate tax, he has tried to help the SME sector, cutting their tax rate to 25 per cent. Helpful, given the stress these companies are facing post demonetisation, and their effective tax rate today. Larger companies will hopefully get the same rate, once the revenues from GST fully kick in and the fiscal position improves in 18-24 months.

The biggest weakness remains the baffling unwillingness to recap the PSU banks. Only Rs 10,000 crore for bank recapitalisation. Even with their bond gains, the PSU banks will need a multiple of this figure. This remains the Achilles heel of the economy. There has not been enough fundamental reform of these banks, either in governance, management, incentive systems etc. Someday someone is going to have to bell this cat!

On the whole, a very decent effort. A steady Budget which does no damage, and moves the economy in the right direction. Markets were braced for something far worse, hence the powerful rally. Attention once again will move back to earnings.
 

The writer is at Amansa Capital. Views are personal