A key positive was a substantial increase in personal income tax slabs and increase in exemption limit. Not only will this help boost consumption, but also widen the tax base and grow the revenue kitty of the government (New software for tax administration and a 2-page simpler Saral form will also be rolled out). While we expected the fiscal deficit target of 5.5% set for FY11, a strong signal came through about fiscal consolidation by providing a roadmap for three years (4.8% in FY12 and 4.1% in FY13). Furthermore, the government set a reasonably low borrowing target of Rs3,450bn for the coming period. The stock market also took comfort from the fact that excise was rolled back by only 2% (our expectation) and not 4% and service tax remained unchanged (our expectation).
The FM’s budget speech sent strong signals by reporting 6.9% fiscal deficit for FY10 (market expected a much higher figure), targeting 8.5% GDP growth in FY11 and hoping for 10%+ growth in future years. Although delayed implementation of GST was known, what is encouraging is that a deadline of April 2011 has now been set for the same (for the direct tax code as well).
We see faster policy momentum in times to come with targeted disinvestments of Rs400bn (beating our expectation of Rs250bn), aim at direct subsidy to farmers (added to partial decontrol done recently) and goal of 20kms of national highway development per day (Railway budget targeted 1,000kms of line addition in a year).
The major negative from the budget was the increase in MAT rate from 15% to 18% on book profits, which will negatively impact many companies like Reliance, Cairn, Bharti, RCom, Cipla, Dabur, Godrej Consumer, JSPL, Sterlite, Reliance Power, Tata Power, IT companies, to name some. It was expected that at least the infrastructure companies would be spared from the purview, but was not to be.
One major devil in the detail is for the real estate sector. Service tax has been levied on additional services provided by a builder to buyers like preferential location, internal and external development of complexes (except vehicle parking). Furthermore, unless the entire consideration for a property is paid after completion of construction, the construction activity will be charged service tax. Renting of property, rent of vacant land under agreement to undertake construction of building or other structures will be charged service tax.
The levy of 5% import duty on crude and 7.5% on petrol and diesel and Re1 increase in excise duty on petrol and diesel seemed like a negative for oil marketing companies, but fuel prices have been hiked already, negating the impact for OMCs. We also believe that better articulation of food security measures (plans to increase supply and distribution) and plugging system leakages were missing in the speech.
All in all, the positives outweigh the negatives. Focus continued on flagship schemes, infrastructure and rural development. Education, healthcare and defence were also given material allocations as expected. The government has set the tone for four more years with rejuvenated efforts - even finalizing a new symbol for the Rupee.
The Opposition parties staged a walkout during the budget speech. The onus is now on the Finance Minister to walk the talk; for now the markets have given a thumb’s up.