Union Budget 2013-14: Lacks pragmatism; creates confusion

The Union Budget for FY2013-14 has failed to meet the heightened expectations of the Street. There are no big-bang announcements to revitalize the investment cycle or any material incentives to attract savings in the capital markets. But the key issue that has unnerved the equity market is the confusion over the retrospective changes suggested in Section 90A of the Income Tax Act relating to existing tax relief to foreign investments from countries having a Double Taxation Avoidance Agreement (DTAA) with India.

The high expectations were built due to the policy activism shown by the government in the past few months and the commitments made by the finance minister during his recent interaction with foreign investors. But the issue created by the unimaginative drafting of the explanation for Section 90A has now caused confusion among foreign investors. The finance minister and his team did clarify in the post-budget speech during a media interaction that nothing new has been incorporated and the situation would largely remain unchanged. However, the uncertainty has dented sentiments and come at a time when the finance minister has himself highlighted the dependence of Indian economy on foreign inflows (to the tune of $75 billion in FY2014) for controlling the widening current account deficit.

Apart from these two issues, the budget was largely in line with expectations on the macro-economic front. The finance minister did achieve the fiscal deficit target for FY2013 (at 5.2% instead of 5.3% targeted in the last budget) and set a target of 4.8% for FY2014. The net market borrowings figure of Rs4.84 trillion is also within tolerable limits. The finance minister has promised to introduce the direct tax code (DTC) by the end of the current session of the Parliament and is hopeful of finalizing the Goods and Services Tax Bill in this year. Therefore, the big picture is not so disappointing though there is a sense of missed opportunity among certain sections. However, we believe that the finance minister will keep the ball rolling with a series of policy announcements outside the budget to tackle serious issues like subsidies, restructuring of the state electricity boards (SEBs), pushing investment projects and removing bottlenecks in certain segments of the infrastructure sector. Consequently, we believe that the equity market will get over the budget related hiccups. We maintain our constructive view on the market in view of the cyclical upturn expected in FY2014, further easing of the monetary policy and a benign global environment.

RAZI ANWAR

PGDM 2nd Year