India's Budget - Overall Positive

Mar. 08, 2015 3:25 AM ETFNI
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Alpha World
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Summary

  • India’s finance minister presented the much-anticipated budget last week.
  • While the budget lacks big bang reforms, it is overall positive.
  • India’s central bank also announced a surprise rate cut this week.

Last week, India's finance minister, Arun Jaitley delivered the much anticipated budget. This is the first full budget presented by the Narendra Modi-led government since winning the elections in May. Mr. Modi had campaigned on returning India to 8%+ growth. The budget presented on February 28th, 2015 takes a few steps towards this goal.

The budget did not have any big bang reforms, however, there were several small measures that if implemented could put India on a path of sustainable economic growth. Here are the key takeaways from the budget and the implications for investors.

Fiscal Consolidation Delayed

The Indian finance minister said that fiscal deficit for the year ending March 31, 2015 would be 4.1% of the GDP. Importantly, the fiscal consolidation target of 3% has been postponed by a year. This is being done, as I will discuss later, to improve India's weak infrastructure.

For the fiscal year 2015/2016, the fiscal deficit target will be 3.9%, up from the previous target of 3.6%. The deadline to meet the fiscal deficit target of 3% of GDP, meanwhile, has been delayed by a year to 2017/2018.

Fiscal hawks argue that the sharp pullback in oil prices since the middle of last year has presented the Indian government with an excellent opportunity to bring down fiscal deficit. However, the consensus is that the move from India's finance minister to push back the deadline to meet fiscal deficit target by a year is right. India desperately needs more investment in infrastructure.

Infrastructure Spending

The biggest impediment to India's growth is its weak infrastructure. Prime Minister Modi wants to transform India into a manufacturing hub much like other East Asian economies like South Korea and Taiwan. To do that though India will have to make significant investment in infrastructure.

In the fiscal year 2015/2016, India will spend an additional INR 700 billion ($11 billion) on infrastructure. In addition, the government will allow tax free bonds, which will be used to finance infrastructure projects.

Corporate Tax Rate & GAAR

India has one of the highest corporate tax rates in the world at around 30%. However, after various exemptions, the effective tax rate is around 22%. The finance minister announced in the budget that the corporate tax rate would be slashed to 25% over four years. At the same time, many of the tax exemptions will be taken off, making the tax system simpler.

Another concern for foreign investors is the General Anti Avoidance Rules or GAAR, a retrospective tax law. One of the main reasons why many foreign investors have been shying away from India is the lack of confidence in the taxation system. It may be recalled that the Vodafone (VOD) retrospective tax case significantly dented India's image as an investment destination. The budget announced by Mr. Jaitley last week has deferred the implementation of GAAR by 2 years. Ideally, GAAR should have been scrapped to build investor trust.

The Indian finance minister also said that the government will bring in a comprehensive Bankruptcy Code like the U.S.

Other Measures

Other important measures announced by the finance minister included more money for states. In the budget, states' share of taxes and duties has been increased by 37%. The visa on arrival scheme, which currently includes 43 countries, will be expanded to 150 countries now. This will give a significant boost to tourist inflow. The government could finally implement the much-awaited goods & services tax (GST) by April 1, 2016. The implementation of GST could have huge implications for India. According to Jayant Sinha, Minister of State for Finance, the GST roll out has the potential to transform the "fiscal architecture" of the government.

Implementation Key

Overall, the budget has been given a thumbs up by rating agencies, investors and businesses. It lacks the big bang reforms but it does take steps in the right direction. The key of course will be implementation. Having said that, India's perception as an investment destination has improved significantly in the last six months even as other emerging economics like Brazil and Russia struggle.

Earlier this week, India's central bank, the Reserve Bank of India (RBI) also announced a surprise rate cut. The RBI is also adopting inflation targeting, which ratings agency Moody's said is credit positive.

This article was written by

Alpha World profile picture
570 Followers
While an equity research analyst by trade, I am using this platform to focus on macro and geopolitical events, and the interrelation between these events and the markets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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