Finance Minister Mr Arun Jaitley’s third budget was aimed at the poorer sections of society and saw focus on agriculture and farming while also providing impetus to infrastructure. Mr Jaitley decided to stick to the path of fiscal consolidation. Thus the fiscal deficit in Revised Estimate (RE) 2015-16 and Budgeted Estimate (BE) 2016-17 have been retained at 3.9% and 3.5% of GDP respectively.

The union budget 2016-17 has also proposed to amend the Companies Act, 2013 in the current budget session of the parliament with the intention to remove the impediments and increase the ease of doing business. The bill would improve the environment for start-ups and has proposed registration of new businesses to be done in one day.

The finance minister began the process of phasing out corporate exemptions while lowering the corporate tax rate for relatively small companies with a turnover of Rs 5 crore or less (in the financial year ending March 31, 2015) to 29% plus surcharge and cess from 30% plus surcharge and cess. Corporate tax rates would eventually be brought down to 25% accompanied by rationalisation and removal of various tax exemptions and incentives. Mr Jaitley also brought down the tax rate for manufacturing companies incorporated on or after March 1, 2016, giving them an option to be charge at 25% plus surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation. Phasing out the exemptions would offset the revenue loss from lowering corporate tax rates.

Focus on infrastructure...
A lot of impetus has been given to infrastructure recognising its role in transforming India and clocking high economic growth. An allocation of Rs 55,000 crore in the Budget for Roads and Highways has been proposed. This will be further topped up by additional Rs 15,000 crore to be raised by NHAI through bonds. It is proposed to allocate a total investment in the road sector to the tune of Rs 97,000 crore (including Pradhan Mantri Gram Sadak Yojana) during 2016-17. In addition, it is said that nearly 50,000 kms of State highways will also be taken up for up-gradation as National Highways. India’s highest ever kilometres of new highways were awarded in 2015. For 2016-17 nearly 10,000 kms of National Highways is set to be approved, which is much higher than in the two previous years. It is also proposed that necessary amendments in the Motor Vehicles Act will be made to open up the road transport sector in the passenger segment. States will have the choice of adopting new legal framework. Thus, entrepreneurs will be able to operate buses on various routes, subject to certain efficiency and safety norms. According to the Government, this will be game changing initiative that will provide for: more efficient public transport facilities, greater public convenience, new investment in this moribund sector, creation of new jobs for our youth, growth of start-up entrepreneurs and other multiplier effects.

The finance minister has also mentioned that the Government is planning to develop new greenfield ports both in the eastern and western coasts of the country. The work on the National Waterways is being expedited and Rs 800 crore has been provided for these initiatives.

The Government is considering to incentivise gas production from deep-water, ultra deep-water and high pressure-high temperature areas, which are presently not exploited on account of higher cost and higher risks. A proposal is under consideration for new discoveries and areas which are yet to commence production, first, to provide calibrated marketing freedom; and second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels.

In order to fuel activity in the housing sector, as part of Pradhan Mantri Awas Yojana it is proposed to provide a 100% deduction for profits to an undertaking in housing project for flats upto 30 sq. metres in four metro cities and 60 sq. metres in other cities provided they are approved during June 2016 to March 2019 and are completed within three years of the approval. But Minimum Alternate Tax would however apply to these undertakings.

A total outlay for infrastructure in BE 2016-17 stands at 2,21,246 crore.

Reforms in FDI policy...
A 100% Foreign Direct Investment (FDI) will be allowed through FIPB route in marketing of food products produced and manufactured in India. This is intended at benefitting farmers and giving an impetus to the food processing industry and creating employment in the sector.

Likewise, it is proposed to allow FDI in the insurance and pension sector vide the automatic route up to 49% subject to the extant guidelines on Indian management and control to be verified by the Regulators.

Similarly, 100% FDI in Asset Reconstruction Companies (ARCs) is proposed to be permitted through the automatic route.

With the objective of providing global competitiveness to Indian stock exchanges and accelerate adoption of best-in-class technology and global market practices, it is proposed to enhance the investment limit for foreign entities in Indian stock exchanges from 5% to 15% on par with domestic institutions.

The existing 24% limit for investment by Foreign Portfolio Investors (FPI) in Central Public Sector Enterprises (other than Banks, listed in stock exchanges), will be increased to 49% to obviate the need for prior approval of Government for increasing the FPI investment.

Also, with a view to promote Make in India Mr Jaitley in his budget speech said that “foreign investors will be accorded Residency Status subject to certain conditions”, thereby following the practice as in the advanced countries. Currently, these investors are granted business visa only up to 5 years at a time. Besides, in order to ensure effective implementation of Bilateral Investment Treaties signed by India with other countries it’s been proposed to introduce a Centre State Investment Agreement. This according to the Government will ensure fulfilment of the obligations of the State Governments under these Treaties, and States which opt will be seen as more attractive destinations by foreign investors.

There are changes also proposed to customs and excise duty rates on certain manufacturing inputs which will reduce costs and improve competitiveness of domestic industry amidst Make in India initiative in sectors like Information technology hardware, capital goods, defence production, textiles, mineral fuels & mineral oils, chemicals & petrochemicals, paper, paperboard & newsprint, maintenance repair and overhauling of aircrafts and ship repair

Will these measures help revive the investment climate?
Given the boost in infrastructure and lower corporate taxes the government has given a fillip to the industry. The huge boost in infrastructure spending will bode well for the sector and the Government’s measure to recapitalise public sector banks to the tune of Rs 25,000 crore will also relieve some stress in the banking industry whose balance sheets are plagued with NPA’s. Bringing down the corporate tax rate to 25% for new manufacturing companies along with changes in customs and excise duty rates on certain manufacturing inputs will help achieve Modi’s dream of transforming India into a manufacturing hub. Also, incentivising start-ups will promote a spirit of entrepreneurship. Likewise opening FDIs and even considering visa rules for business purpose will encourage foreign investments in the country.

The two sectors which will benefit the most in the union budget 2016-17 are the infrastructure and manufacturing sectors. Keeping in mind the limited flexibility due to the sticky path of reining in the fiscal deficit, the Government has tried to keep it within the constraints. The shortfall in revenue will be met by taxing the rich and wealthy and also levy of various cess that will increase the tax burden on middle and upper income sections of society.

How have the markets reacted?
On the budget day the market seemed upset (ended down -152 points on the S&P BSE Sensex after nearly 850 points swing), perhaps not seeing much tax sops and big bang reforms. In fact Securities Transaction Tax (STT) for “options” was increased from 0.017% to 0.05% and so was tax being levied on dividend income at the rate of 10% (besides Dividend Distribution Tax (DDT)) on individuals, HUFs and firms receiving dividend in excess of Rs 10 lakh per annum, which was a deterrent.

But reading into the fine print, the S&P BSE Sensex in the next trading session i.e. March 1, 2016 spiked 777.35 points reporting the biggest gain since May 2009 perhaps appreciating the path to fiscal consolidation charted and commitment on reforms. This rekindled hopes that the Reserve Bank of India (RBI) in its April policy may reduce policy rates. People’s Bank of China (PBoC), cutting reserve requirement ratio by 50 basis points (bps) also set a positive tone in the Asian markets. Further, there was a huge sense of relief that the period for long term capital gain tax on equities was not tampered.

But going forward corporate earnings data, implementation of reforms and global cues would set the course for the market. Finance Minister Jaitley has built a roadmap to put India on the path of growth. But market will not sail in green only on hopes of acche din; the real economy needs to witness growth, and for that to happen implementation of reforms is crucial.

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