<b>Devangshu Datta:</b> The BJP's bitter-sweet Budget

Life would be easier for almost everyone if the Budget presentation went virtual. The finance minister could record his speech. The Ministry of Finance could release it in downloadable format at 11 am on B-Day along with all e-documents. Questions and requests for clarifications could be e-mailed or tweeted to the ministry. Parliament could then meet to debate the Finance Bill after everyone had time to study the details at leisure.

But, of course, dispensing with a ceremonial physical presentation would mean depriving the finance minister of time in the spotlight. It would also deny the Opposition a chance to interrupt the speech (or snore through it). An e-presentation would also reduce the volatility of concurrent trading. Traders "discount" the Budget speech, sentence by sentence as it's spoken.

Arun Jaitley's first Budget was workmanlike. It avoided major missteps. If the economic cycle is on an upswing, this will not retard it. It may induce more foreign direct investment and it should encourage India Inc to restart capital expenditure.

But there was not much in the way of radical measures. There were no subsidy cuts - in fact, subsidies will expand. Admittedly, it is difficult to cut entitlements given that the Bharatiya Janata Party voted for many of these when in Opposition. Monsoon failure is odds-on (rainfall is 40 per cent below normal) and cutting food subsidies would lead to an outcry.

 

The Budget was also cautious with regard to direct taxes. This disappointed hopes of a big bang with the Direct Taxes Code, or the Goods and Services Tax, or a repeal of the retrospective amendments 2012 to the Income Tax Act, 1961. The overseas investor would have been particularly happy if the latter had been axed.

The individual taxpayer receives some relief. But tax-avoidance strategies will have to be reworked. The debt mutual fund segment will be hit by big changes in long-term capital gains treatment. A change in dividend distribution tax calculation method will equate to about three per cent less in the way of income for a dividend recipient (assuming the same gross payout).

The housing and real estate industries should see some activity, given larger tax breaks for mortgages and pass-through benefits on real estate investment trusts. There is also a focus on infrastructure, with allocations to roads and urban development, and several concessions in these spaces.

However, the government will have to do a great deal on the ground to reboot multiple stalled projects before private enterprise commits larger resources with any degree of confidence. If the Budget is coupled to efficient administration and it does engineer a bounce in infra, there would also be a rebound in construction, and in steel, cement, and so on.

Let's see how the Reserve Bank of India (RBI) responds to the somewhat radical proposal in taking infrastructure debt outside the purview of the cash reserve ratio. This is risky. There are inherent long-term asset versus short-term liability mismatches for banks lending to infra sectors. There is also a large existing overhang of non-performing infrastructure assets. Ideally, measures to energise the moribund corporate bond market would have been much preferable.

The tweaks to excise and customs imposts are as confusing as ever, with the exception of the big hike on tobacco. We'll have to wait for the departmental notifications. More clarity on the new transfer pricing norms is also awaited.

Anyhow, the Budget should not do damage and it may do some good. It sets reasonably realistic disinvestment targets. The FY2014-15 growth expectations are on the high side of reasonable and the tax collection targets, too, are optimistic, without being unrealistic. If the government meets its fiscal targets for this year, it won't be an inflationary regime. The credit rating agencies will remain in watch-and-wait mode. India retains its low investment grade.

But the stock market was expecting Jaitley to do an impersonation of Harry Potter and transform the growth rates with one wave of the wand. The election campaign had baked that sort of unrealistic expectations into retail psyches. The Economic Survey ratcheted up expectations some more notches by its commendably clear, market-oriented approach.

So there's been a sharp correction to five-week lows. The foreign institutional investors (FIIs) sold heavily in the post-Budget session. This may just be a one-off with the cutting of speculative exposures. It will be worrying, however, if the FIIs continue selling.

The monsoons and Iraq remain worrying factors. Monsoon failure equates to food inflation, which, in turn, equates to higher consumer price index (CPI) levels. Higher CPI implies that RBI will hold policy rates or even raise them. Fighting in Iraq could mean rising crude prices leading to pressure on various fronts.

The RBI has released an analysis of the results of 2,719 listed non-government non-financial companies in Q4 2013-14 (January-March 2014), compared to Q3, 2013-14 and to Q4, 2012-13. That suggests only marginal improvements in aggregate sales growth and net profits.

The buzz about Q1, 2014-15 (April-June 2014) suggests improved workings across sectors but Infosys is about the only major company that has released results. Given the elections, there are distortions in the April-June period that cannot be easily "deseasonalised". The May Index of Industrial Production suggests that there was improvement in activity.

There is no telling how deep the current correction could go. It depends on FII attitude. Retail seems to have suddenly lost enthusiasm and the domestic institutions still appear cautious. The Nifty rose from 7,200 levels on May 15, just before the election results. It hit an all time high of 7,808 on July 8. A move outside this zone of 7,200-7,800 would be significant. A lot of traders are holding puts at 7,000 strike levels.