investors to short sell and domestic investors to invest in
overseas securities would help take India's capital markets
a step forward as would the recognition of financial services
as India's next growth engine"
my mind, the finance Minister has done a fair job in his Budget
proposals for the year 2007-08. He has continued with a moderate
tax regime, has taken steps to control inflation, and has cut
revenue and fiscal deficits. The thrust towards infrastructure
development has continued, as has the focus on agriculture and
allied industries. The market's worst fears of a possible increase
in securities transaction tax (SST) and short-term capital gains
tax have not materialised. However, the imposition of dividend
distribution tax on mutual funds, the increase in distribution
tax on dividend paying companies and the additional education
cess of 1 per cent have come as a disappointment.
GDP growth remains robust and I am impressed
with the government's prudent fiscal management-revised estimates
for 2006-07 put revenue deficit at 2 per cent against a Budget
estimate of 2.1 per cent and fiscal deficit at 3.7 per cent against
a Budget estimate of 3.8 per cent. The Budget estimates for 2007-08
indicate further improvement-revenue deficit at 1.5 per cent of
GDP and fiscal deficit at 3.3 per cent of GDP. If the Budget estimates
are met, fiscal deficit would decline 800 basis points during
the three-year period 2005-08.
The focus on agriculture and allied industries
has continued, with several measures being announced in favour
of the farming community. The effects of the wide-ranging proposals
on agriculture could bring about the much-needed 'Green Revolution'.
Fiscal incentives have been given to the food processing industry
and small-scale industries have been encouraged. In my opinion,
these measures combined with higher social spending would eventually
translate into higher disposable incomes and better quality of
life for a larger section of India's population. Socio-economic
inequity is one of the factors that have the potential to derail
a country's growth process. Therefore, while the increased thrust
on social spending might be viewed as 'populist' or 'vote bank
economics' by many, I believe such measures would eventually result
in a more vibrant economy.
Coming to issues specific to the capital
market, while an increase in dividend distribution tax has been
proposed, the market's worst fears of a possible increase in securities
transaction tax and short-term capital gains tax have not materialised.
The proposal to make permanent account number (pan) as the sole
identification requirement for investors is a positive step as
is the focus on self-regulatory organisations. Further, allowing
institutional investors to short sell and domestic investors to
invest in overseas securities would help take India's capital
markets a step forward as would the recognition of financial services
as India's next growth engine.
From a sectoral perspective, cement has been
negatively impacted due to differential duty structure. it companies
would now be covered under mat, effectively increasing their tax
rates. Though excise duties have been raised for cigarettes, no
imposition of vat would be viewed as a positive. The extension
of the Technology Upgradation Fund is a positive for textiles
Lastly, let me dwell on some of my disappointments.
Given the robust growth in tax collections and much better tax
compliance, the Finance Minister could have done much more on
the direct taxes front. The additional cess of 1 per cent could
have been avoided, the increase in exemption limit for non-corporate
assessees could have been much more and the possibility of a cut
in tax rates could have been explored. The imposition of dividend
distribution tax on mutual funds and the increase in distribution
tax on dividend paying companies could have been avoided.
Motilal Oswal is Chairman,
Motilal Oswal Securities