Pratik Kumar Ghosh, PGPM 2013 Batch

Finance minister Dr. P. Chidambaram delivered the Union Budget 2013 on 28^th February, which was mostly praised by the industry personnel. There was a huge expectation from the Finance minister, who is notably the only Harvard passed Finance minister of India. The finance minister was being challenged by the country’s twin deficit and a slowing investment. He had to make tough choices to make sure that the country gets back to the growth path, without hurting the fiscal situation of the country. Rating agencies had threatened to downgrade India’s credit rating to Junk status. A rating downgrade can lead to increased cost of overseas borrowing and lower foreign capital flows.

On this backdrop, the Finance minister opened the budget saying that Growth coupled with fiscal consolidation is the theme of the budget. He has assured to set up a committee to fast track the investments and also kick start the halted projects, which if implemented is expected to have a 1% positive effect on the GDP. He also gave investment benefits for high value projects with an aim to create an environment encouraging private capital investments. He extended the tax holiday for the power sector to help the ailing sector. He also took a couple of other initiative for real estate like giving an additional allowance of 1 lakh of exemption for payment of interest on first housing loan, hiking the excise duty on sectors like Cigarettes, set top boxes, etc, reducing the STT(Security transaction tax) which was a long standing demand on Indian investors, while introducing a commodity transaction tax on non- Agri commodities. One of the notable development was the extension of 4% farm loan to the private sector banks, which as per ICICI Chairperson Chandra Kochar is a positive development for private banks, as they can compete with public sector banks on this segment on fair grounds. In efforts to raise tax revenue, Chidambaram raised the corporate tax by raising surcharge on companies with income above a threshold while also raising the surcharge on personal income tax for people earning above 1 crore. He also increased the excise duty on many products like SUVs, cigarettes, Sedans, etc.

On the whole, the budget was a good one given that it could meet its fiscal deficit target of 5.2% for the present fiscal and set a target of 4.8% for next year while also raising the efforts to get growth back on track. However, a significant effort to bridge the Current account deficit by discouraging gold investment was lacking. However, there were talks on increasing natural gas production to reduce the long term dependence for oil imports.

Market impact:

Although the budget was praised by the industry, the markets gave it a thumbs down on the budget day, mainly because of two reasons:

·         There was an ambiguous statement on the Tax Residency certificates, which are used by FIIs having centres in Mauritius to invest in India without paying taxes. These TRCs are taken as the residency proof and the FIIs using this route are exempt from tax. However, in the budget P.Chidambaram made statements which implied that TRC may not be a sufficient proof of residency, which spooked the market(FIIs) to sell off.

·         The GDP numbers for Q3FY2013 was awaited after market closing, which was expected to be sub-5%, and in reality it came in at 4.5%.

Market Outlook:

·         The Budget was a non-event for the markets, and after the ambiguity regarding the TRCs being clarified by the Finance ministry, quoting that the TRCs still hold good and there is no change in law, the markets would look forward to the next event.

·         Banks and Infrastructure companies may be the top investment picks due to cheap valuation and an expectation of a rate cut by RBI on 19^th March after a credible budget by the government.

·         ITC and other cigarette majors are likely to be impacted by the Excise duty of 18% being imposed

·         Global markets may remain subdued due to the Sequester cuts in US and uncertainty over Italian election outcomes.

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Glenn D’Souza, Student, PGPM 2012-13 Batch

The Union Budget for FY 2013-14 has moved from the traditional populist approach to a more realistic one aimed mainly at bringing down the fiscal deficit. The decision to leave income tax slabs unchanged, though non-populist has been complemented by careful management expenditure without any big ticket expenditure projects. From a managerial perspective, the budget has been investment friendly especially for the middle class be it through the introduction of inflation-indexed bonds to facilitate long term investments, increasing the income threshold for new investors in the RGESS scheme or the tax break on housing loans, though increase in excise duties could impact savings. The 17% increase in allocation to the MHRD is an important step towards the education sector, which is the need of the hour.