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Fiscal deficit target retained... Will it be Met?
Feb 29, 2016


February 29 is a special day. Not just because it happens to be Leap Day...but it's also Budget Day.

The big event has come to a close... The Equitymaster research team members are just back to their desks after a live stream of the budget and rounds of coffee, tea, and biscuits.

Now it's time to reflect...

How will this budget make a difference? What is different about this budget, the third now from this government?

Last year, the budget had just enough for everybody - be it the rural poor or India Inc. The latter had cheered the budget with its promise of a Goods and Services Tax (GST) by April 2016. Needless to say, we are close to the deadline, and GST remains a mirage.

India Inc, now disillusioned, is much harder to placate with empty promises. No wonder the government has given the budget a more socialist flavor this time around. Amid investor and corporate pessimism, the focus has now shifted conveniently to rural India.

This budget rests on nine pillars - agriculture, social programs, rural development, education (with a focus on skills development), infrastructure, financial reforms, policy reforms (with a focus on ease of doing business), fiscal discipline, and tax reforms. These pillars are precariously balanced, leaning more towards the rural economy and with industry and sectoral reforms taking low priority.

The key area of neglect is the banks - the real pillars of the economy and the key to its revival. The proposed support for their recapitalisation, at around 14% of the actual requirement, can hardly patch the gaping hole.

Agricultural reforms, rural roads, rural electrification, digital literacy in rural areas - and rural development in all - has been allocated Rs 878 billion. The aim is to double the income of farmers in five years.

But considering the Indian history of slip between the cup and lip, we wonder how much help these efforts will really be to the intended rural beneficiaries. And then it's five long years...with an election year in between!

While the Budget is big on promises, it gives little clue as to how the Governement will manage enough funds to deliver. Especially with the challenge of 7th Pay Commission and OROP scheme. Not to mention the tough act of balancing fiscal deficit (target at 3.5% for FY 17) and at the same time pursuing a GDP growth rate of 7.6%.

Overall, the budget fails to do justice to the confidence that common man placed in the government with its reform agenda.

So are we disappointed with the budget? No, but we never had huge expectations in the first place. Being long-term investors, more than the budget speech...we are interested in the short-term market reaction to it. And this time, it certainly bodes well for our long-term plans.

The market has already given thumbs down to the budget. The Sensex and Nifty have touched fresh 52-weeks low...and are offering a great opportunity to invest.

The StockSelect team has nailed this opportunity, identifying four blue-chip stocks that offer good entry points to long-term investors. To know more about these stocks, click here...

And here are more tidbits from the Budget speech that might be of interest to you....

On infrastructure

It wouldn't be an understatement to say that infrastructure is the bed rock of a country's development. The FM in the budget today allocated a big share to infrastructure that totalled to a Rs 2.21 trillion outlay. Within that, the allocation to road and rail stood at Rs 2.18 trillion. The FM also announced that as high as 85% of the stuck road projects (worth Rs 1 trillion and covering 8,000 km) have been put back on track. He also said that a new credit rating system for infrastructure would be developed. As it happens ever so often, while plans and allocations are all good, what really matters is the execution and what happens on the ground level. How this latter part pans out over the coming year remains to be seen.

A push to affordable housing...

In order to provide an impetus to affordable housing, a number of sops have been announced in the Budget. Apart from higher ceiling limit in the exemption for rent, deduction on additional interest of Rs 50,000 per annum has been provided to first-time home buyers on loans of upto Rs 35 lakhs (where the cost of the house does not exceed Rs 50 lakhs). Even the service tax has been exempted for affordable housing. This is also likely to benefit NBFCs such as HDFC, CanFin Homes, Repco Home Finance, Gruh Finance that are present in the affordable home loan segment.

Balancing taxes in favour of poor...

The FM chose to keep the tax slabs unchanged. However, there were two announcements that he made, the overall impact of which seems to be aimed at aiding the lower income groups and taxing the rich.

The first is to provide relief to Indians staying in rented houses. The tax relief on house rent allowance has been increased from Rs 24,000 to Rs 60,000. Many Indians are still not able to afford buying houses; they choose to live on rent. Budgets in the past have provided various incentives to home buyers. And thus, the bigger tax relief on house rent allowance is expected to give some breather to those who do not have a house of their own.

The second is on the dividend front. So far, dividend paid to shareholders was taxed in the hands of the companies in the form of dividend distribution tax. In other words, those getting dividends were exempt from tax. In his Budget speech, the FM has kept the dividend tax that companies have to dole out unchanged. But on top of that, he has also decided to tax Indians whose dividend income exceeds Rs 10 lakh. This additional tax will be at the rate of 10%. So in a sense, this is a sort of a double taxation on dividend. It will be interesting to see how this plays out. The immediate reaction was already seen in the stock markets which slid. Clearly, the wealthy and those investing heavily in equities are not too happy with this development. And this in turn could see some reduction in the investments of this set of people in the stock markets.



Data Source: Budget Speech, Economic Times

This Chart Of The Day was published in The 5 Minute WrapUp - Union Budget 2016- 2017: A Lost Opportunity

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