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A Budget with a Balance

India

This article was first published in Business Standard, 1 March 2013

"Overall, I would rate the Budget as balanced, given that the fear was a populist and tough Budget. In hindsight, though, I expected him to do more on tax reforms and dispute-resolution measures to encourage FDI and calm investors' nerves, particularly after the retrospective amendments in last year's Budget. It would have signalled benevolence on the part of the Indian government". Mukesh Butani, Taxand India, discusses the impact of the India Budget 2013.

As anticipated, the Budget's announcements were predicated on social and financial inclusion to catalyse economic growth. Given that 2012-13 saw the lowest growth this decade (five per cent) and mounting deficits, the finance minister (FM) was faced with the daunting task of reviving growth, and at the same time, addressing the expectations caused by social and demographic changes. He has delivered a well-rounded Budget - albeit one with an overdose of allocations to social schemes and with an eye towards attracting all forms of foreign direct investment (FDI).

Deficit management and reinstating fiscal discipline were at the top of the FM's agenda. His assurance that fiscal deficit in the current year would be restricted to 5.3 per cent is comforting, and next year's target of 4.8 is achievable - although a rising current account deficit would depress macroeconomic indicators in the short term unless he expects robust FDI and institutional investments. Revised targets for fiscal and revenue deficits (three and 1.5 per cent, respectively) for 2016-17 reaffirms the government's commitment of returning to the path of fiscal consolidation in line with Kelkar's recommendations.

Pushing infrastructure and finance
The Budget, besides singing paeans to India's demography, contains measures to refuel growth in the infrastructure and financial sectors. Mindful of the need for $1 trillion worth of investments in the 12th Five-Year Plan (47 per cent to come through private sector participation), the FM promised to allay investors' apprehensions of a regulatory impasse through improved implementation. Enhanced limits for tax-free infrastructure bonds and a boost to infrastructure debt funds would catalyse resources for the sector to a large extent, as should tax breaks to investors. The proposal to review the oil and gas exploration policy to move from production-sharing to revenue-sharing contracts is a major policy shift, and champions long-pending reforms in the energy sector. A policy framework for shale gas exploration should encourage overall energy production, as well as foreign investment in the sector, hitherto muted.

The Budget lays much emphasis on the importance of financial soundness of discoms, and pushes state governments towards the former's financial restructuring proposals. The proposed regulatory authority for the roads sector is positive, and should help attract private sector participation for the new road projects due to be bid for in the next financial year.

The fine print contains multiple proposals for catalysing financial sector growth. While applauding the robustness of capital-market regulations, the FM has proposed progressive reforms for foreign institutional investors (FIIs). The proposal that entry formalities and KYC (know your customer) norms for FIIs be simplified, and the delineation of FII investments from FDI (with a stake threshold of 10 per cent) are intended to do away with unintended ambiguity in regulations. The Budget proposes to accord tax-exempt, venture capital fund-like status to angel investors' pools, to encourage inflow of experience and capital in the capital market. A renewed commitment to consider the recommendations of a commission set up to review the laws governing financial markets suggests the importance of the sector.

Discover more about the tax proposals in India Budget 2013


Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010
E. mukesh.butani@bmradvisors.com

This article was first published in Business Standard, 1 March 2013

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