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No big bang budget in India

Added 3rd March 2015

India's annual budget broadly looks positive for the markets, but has fallen short on some expectations, according to Craig Botham, emerging markets economist at Schroders.

No big bang budget in India

Botham wrote in a market commentary that the country's budget for 2015-2016 fell short of expectations in reform delivery and relatively little details were announced on the introduction of the “much-vaunted” goods and services tax.

India’s finance minister Arun Jaitley said in his budget speech that the country will put GST in place by 1 April 2016.  

Despite shortcomings, the budget's positives included a focus on infrastructure spending, a reduction in the corporate tax rate and improved fiscal targets, according to Schroders.

Infrastructure boost

Some of the key proposals for boosting the infrastructure included increased outlays for roads and railways.  

The minister also announced setting up a National Investment and Infrastructure Fund (NIIF) to raise debt to finance infrastructure projects. In a similar vein, tax-free infrastructure bonds will be used to directly finance road, rail and irrigation projects. 

“The shift to infrastructure spending was welcome. The expected pivot toward greater infrastructure spending was there, but this was more modest in scope than widely expected,” Botham added.

Fiscal consolidation

On fiscal consolidation, the finance minister said the government will be able to meet its fiscal deficit target of 3% in three years rather than the two years envisaged previously.

Accordingly, the minister pegged the fiscal deficit targets at 3.9% for 2015-16,  3.5% for 2016-17, and, 3.0% for 2017-18. 

“We are not surprised by this and do not view it as a negative as such. What does provide some concern is that assumptions around growth (11.5% nominal GDP forecast) and revenue to be raised from disinvestments (0.5% of GDP) look to be slightly optimistic. Consequently, there is a risk of fiscal slippage and cutbacks to budget outlays, potentially on the infrastructure side.”

Corporate tax cuts

Another positive move is a phased reduction in corporate income tax, alongside the elimination of exemptions, starting from the next fiscal year. 

The minister proposed to reduce the rate of corporate tax to 25% from 30% over the next four years, but said this will also be  accompanied by rationalisation and removal of various kinds of tax exemptions and incentives that corporate tax payers currently enjoy.   

“This [corporate tax rate cut] should reduce the tax burden for most companies as well as simplifying the tax code generally.”

Too Optimistic?

However, Sudarshan Murthy, research analyst at Matthews Asia, warned that bullish sentiment is running high, with the IMF now expecting India's GDP growth to outpace China's in two years.
"Optimism regarding India is becoming the norm," he wrote in a research note. 
"At the moment, India is trading on expectations -- expectations of accelerating earnings, expectations of better governance and expectations of faster economic growth. Given heightened expectations, even minor missteps can translate to pain in the stock market."

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