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D. P. Roy

THE Budget is tough and continues the reform process. However, the big opportunity to broaden the tax base has been missing. Rich farmers have not been touched. This has resulted in the tax incidence going up for the salaried and business classes.

Attempts have been made to curtail unaccounted money. However, the efforts should be supplemented by quickly passing the Money Laundering Bill. The Budget has focussed on the financial sector, and several positive steps such as setting up of the ARC have been taken.

The ARC, which will focus on loan recovery, should be manned by experts. The ARC initiative could be supplemented with training programmes to upgrade skills in banks where the incidence of NPAs is high.

Moreover, legislation to operationalise the Credit Information Bureau should be expedited as this would again help in containment of NPAs through information exchange.

Dividend income from mutual funds would now be taxed at the income-tax rate applicable. At the same time, mutual funds (MFs) would deduct TDS. The attractiveness of MFs as an instrument of saving has been reduced. Moreover, MFs would have to gear up to cut TDS and despatch certificates in time.

However, the banking sector would benefit from reduced competition from MFs and would be in a position to reduce interest rates for savings and term deposits thereby improving spreads.

However, the expectation that the banks would be allowed to deduct the full provision made against NPAs as per RBI norms, to enable them to clean up the balance sheets, has not materialised.

The yields in the debt markets are expected to increase as a consequence of higher taxation on dividend income from mutual fund schemes.

However, if the investment demand does not pick up, the surplus money would flow back to the debt markets through the banks, which are now expected to garner most of the deposits. Hence, the yields may shoot up as an initial reaction, but may eventually come down again. The stock markets have initially reacted negatively to the Budget. However, we believe that this would be a short-term reaction. Reduced returns on low-risk instruments would compel investors to look at other investment avenues, which are likely to propel stock valuations.

By reducing incentives to save, the Budget can result in higher consumption. This can propel the demand in the market in a scenario of low-capacity utilisation, as demand sluggishness has been identified as the main reason for slower industrial growth.

Moreover, the Budget has been positive for the FMCG and the shipping sectors and has tried to spur consumption of steel and cement through focus on infrastructure and housing.

The long-standing demand from the IT sector to increase the investment limit on acquisitions abroad to $100 million has also materialised. Moreover, the focus on disinvestments has remained, and the target of Rs 12,000 crore looks eminently achievable.

Disinvestments would further release shareholder value as has been demonstrated in the case of IBP and VSNL.

(The author is Chairman, SBI Caps.)

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