The Hindu Business Line : `Back-to-basics' theme

THE 2004-05 Budget has surprised many with some bold moves judiciously weaved in between themes of "back to basics" and providing impetus to investment and growth. The Finance Minister outlined the economic objectives of sustaining 7 per cent to 8 per cent growth, providing universal access to quality basic education and health, creating employment in agriculture, industry & services, and acceleration of fiscal consolidation and reform.

Agriculture, rural infrastructure and agro processing has been given a major thrust through several initiatives. This includes easy access to credit, thrust on irrigation and restoring water bodies, strengthening rural infrastructure, flood control and focus on value added areas such as horticulture.

The second big area of thrust was infrastructure and a consortium of seven banks and financial institutions have been constituted to provide Rs 40,000 crore of resources to building infrastructure.

The element of positive surprise was the bold move on relaxation of FDI in the telecom, aviation and insurance sectors up to 74 per cent, 49 per cent and 49 per cent, respectively.

The capital markets announcements on abolishing long-term capital gains tax and reducing short-term capital gains tax to 10 per cent was positive and in line with market expectations. Turnover tax at 0.15 per cent to be paid by the buyer has been introduced. While the fine print on this is yet to be digested, this could impact liquidity in the market, which is driven by arbitrage and speculative trades. From a long-term investor perspective these moves are positive.

Selective disinvestment of PSUs with a target Rs 4,000 crore was announced. The option of raising resources through sale of equity in the capital markets was mentioned with NTPC as the first possible option.

On the direct taxes front, the exemption of salary earners up to Rs 1,00,000 and no change in other slabs was welcome. The auto industry benefited from the entitlement to claim 150 per cent deduction on expenditure incurred on R&D, while tractor industry got a bonanza with abolishing of excise duty.

While the Budget may have left some sectors wanting more, overall the direction and measures announced are positive with commitment to continuing reforms. Thrust is on investment in agriculture and industry to sustain growth while retaining buoyancy in the services sector. The key is going to be implementation. Also the target of fiscal deficit at 4.4 per cent of the gross domestic product (GDP) seems optimistic given the increased plan expenditure. This is likely to remain a key challenge.

(The author is Head, Corporate Banking, Kotak Mahindra Bank.)