"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"

To 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 companies.

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