f o r    m a n a g i n g    t o m o r r o w
MARCH, 2007
 Cover Story
 Sector Analysis

The centre is looking at removing the distinction between FDI and FII investments. This will impact sectors like asset reconstruction, real estate and aviation, where separate ceilings apply to FDI and FII investment. However, allowing FDI through the FII route in the realty sector could result in prices shooting through the roof. The Asian financial crisis of the '90s is still fresh in mind, and a method should be devised to moderate possible volatility in key sectors.

S&P And After
For the first time in 14 years, international credit rating agency, Standard and Poor's (S&P), has raised India's credit rating to investment grade. S&P is the last of the three major international rating agencies to do so. Moody's Investors Service did it in January 2004 and Fitch Ratings in August 2006. The upgrade is likely to spur the flow of foreign investment into power, steel and other industries, which receive less than a tenth of the funds going China's way.
More Net Specials
A Delicate Balancing Job
"The Finance Minister had to keep the growth engine running, take tough steps to counter inflation and also raise resources for agriculture, healthcare, education and infrastructure. He has succeeded in his job"

The finance minister had his job cut out in this Budget. India has grown at an impressive rate of 9 per cent in 2005-06. Advance estimates tell us we are going to better it this year. However, this growth has also led to bank credit expanding at 29.6 per cent during 2006-07. Consequently, it is putting upward pressure on prices. The Finance Minister has tried to focus on keeping India on this growth path clearly keeping an eye on inflation. He has managed to contain the revenue deficit at 2 per cent and the fiscal deficit at 3.7 per cent. Both figures are within last year's Budget estimates, which is very commendable.

The Finance Minister also stressed on the need for higher growth in agriculture for sustainable and equitable growth. Education was also high on his agenda. Consequently, we have seen a range of programmes with higher outlays being announced for the sector. Bharat Nirman and Sarva Shiksha Abhiyan have seen higher target outlays for the current year.

The idea of trying to channel a small portion of the foreign exchange reserves towards infrastructure is a good step.

The Budget has also mooted the idea of a debt management office for managing government funds, which is a step in the right direction.

The status quo on service tax rates is a welcome step. However, inclusion of commercial rentals in the service tax net will hurt Corporate India, which is already reeling under high real estate prices and shortage of space. The Finance Minister has reduced peak import duty on all non-agricultural goods by 2.5 per cent, moving towards ASEAN rates.

One of the progressive moves in the Budget is the introduction of exchangeable bonds, which will help promoters fund growth by leveraging on their equity stake in the companies. This will help Corporate India to expand without diluting the promoter's stake in the companies.

In keeping with his intention of containing inflation, the Budget has introduced differential excise duty structures for cement. While cement bags with retail prices of lower than Rs 190 will attract a lower excise duty, those with higher prices will attract significantly higher duties. While this has been introduced to keep cement prices in check, supply-demand dynamics may have a more important influence on cement prices rather than pure fiscal disincentives.

On the capital markets front, the move of not increasing the STT and capital gains tax on equity markets is a welcome step. On the other hand, the markets were expecting clearer guidelines to distinguish between a trader and an investor, which was not given. Dividend distribution tax amounts to double taxation. We hope the Finance Minister will reconsider the proposed increase in this tax from 12.5 to 15 per cent. Again, FBT on ESOPs needs to be reviewed, as it is an important tool for emerging companies to attract talent at reasonable cost, especially when they are competing globally.

On the corporate taxes front, it services companies have been brought under the mat regime. The IT industry is now becoming a mature industry from a sunrise industry and it is time for them to contribute to the exchequer for the development of India.

The Finance Minister marginally tweaked direct tax rates, by raising the education cess by 1 per cent. This additional revenue will be used to fund programmes on secondary education.

The Finance Minister had to do a delicate balancing job in this Budget. He had to keep the growth engine running, take tough steps to counter inflation and also raise resources for the priority areas of agriculture, healthcare, education and infrastructure. We believe he has succeeded in his job to a great extent.

Narayan S.A. is Managing Director, Kotak Securities