The Budget Commits A Strict Fiscal Roadmap: Chandresh Nigam

The government presented the Union Budget for the financial year 2014-15 today outlining its policy priorities and fiscal targets. The government aims for returning growth to a range of 7-8% over the next two years while keeping inflation low. The budget commits the government to a strict fiscal roadmap that takes the deficit down from 4.1% of GDP this year to 3.0% in two years’ time. The government also committed to a stable tax regime and the finance minister said that retrospective tax changes would be normally avoided.

The government also took steps to encourage investment in India including from external sources. Rules for Foreign Direct Investment have been liberalized across several sectors including defense, insurance and real estate. In addition borrowing overseas has been made more liberal along with expansion of the 5% withholding tax on bonds (erstwhile restricted to infrastructure). Domestic savings too got encouragement through expansion of small savings schemes and tax benefits.

Infrastructure got a specific emphasis with proposals for pass through tax treatment for Infrastructure and Real Estate Investment Trusts. Housing for all would be targeted within 10 years, and several policy proposals towards low cost housing and tax deduction on home loans were announced. Bank lending to infrastructure would receive a push by allowing banks to raise long term funds specifically for infra lending without CRR and SLR being applicable.

The longer term priorities for the government were outlined as education, health and sanitation, tourism, agriculture and rural development, and urban renewal. The budget outlined several new programmes along these lines.

These additional programmes would entail an additional expenditure this year. In addition the government expects taxes to be lower than estimated in the interim budget. However the fiscal deficit is expected to be largely the same – the difference being made up through higher divestment receipts and non-tax revenues.

For investors, the budget has brought cheer for the most part. Equity and bond markets have cheered the commitment to growth and fiscal consolidation. Investors have been given more investment opportunities (REITs, small savings). However the tax on debt funds has been increased to reduce the tax arbitrage over other debt instruments.