India’s budget positive for foreign investors

India’s 2017/18 budget, presented on 1 February 2017, is expected to put the country back on the shopping list of foreign investors.

The budget announced is pro-growth, anti-corruption and has a focus on infrastructure and targeted incentives for the poor. It provides a further boost for the Indian economy and investors seeking to enhance international returns on a lowly correlated, risk-adjusted basis in a market that is now larger than the United Kingdom and projected to be world’s third largest economy in a few years.

The common perspective from many economists is that India’s Union Finance Minister, Arun Jaitley, has delivered on fiscal prudence by restraining the fiscal deficit to 3.2 per cent and promising to prune it down to 3 per cent in the next year.

Significantly, all this has come about amid a 25 per cent hike in government spending and a 19 per cent reduction in government borrowing. This, according to many, will also increase the chances of a rate cut.

The other key takeaways of this budget are the efforts to boost infrastructure (the sector has seen a record allocation), affordable housing, and micro, small and medium enterprises.

There is a strong emphasis on the creation of infrastructure for the country to continue with its economic growth momentum. It has committed significant resources to increasing the pace of building infrastructure, balancing the needs of the economy and fiscal astuteness.

It is clear the strengthening of the multi-modal transport system, with railways and highways sector playing a critical role, is the government’s priority.

Higher allocations to farmers, the rural population, the youth demographic, and the poor and underprivileged, coupled with tax cuts for the less affluent, are also likely to have a positive influence on the economy.

Interestingly, the budget announcement did not include many tax concessions for the infrastructure sector, but steps have been taken by the Modi government to rationalise tax provisions, curb and disincentivise black money, promote the digital economy and bring transparency (through measures such as funding of political parties), which should help in achieving good governance.

Another significant step taken in this budget is that the term for capital gains tax (CGT) on house property has been pruned down from three years to two. This means investors can sell their house property a year earlier and still be eligible for lower tax.

But what is more striking is the fact the basket of financial instruments has been expanded, giving investors more investment options while still being able to avoid paying tax.

Jaitley has consciously avoided changing the tax regime on listed equities, which continue to be exempt from long-term CGT. The markets are rejoicing that they can continue to enjoy the fruits of investment.

Of course, like most budgets, this one is not without a few disappointments.

There has been a cut in the corporate tax rate for companies having sales of less than 500 million Indian rupees (A$10 million), another welcome step for business, although one would hope the cuts are gradually extended to larger corporations in the years to come.

There was no mention of the creation of a Bad Bank or Public Sector Asset Rehabilitation Agency, which could speed up solutions to the rising challenges associated with non-performing assets for banks and loss-making public sector undertakings.

While a lot of funds have been allocated for public capital expenditure, very few initiatives are visible for kick-starting private capex, although there is a limit to which the government can do this.

Broadly speaking, consensus within the markets is that the current budget will in time turn out to be a growth-oriented budget. This in turn will make foreign institutional investors return to India, a view Jaipur Asset Management concurs with.

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