The finance minister has done a commendable job in his Budget proposals for 2016/17. He has reiterated his government's commitment to uplifting the rural sector, mitigating the impact of adverse weather on agriculture, creating more employment opportunities and enriching the lives of the less privileged.
As expected, he has maintained the thrust on social and infrastructure spending. And yet, he has not strayed from fiscal discipline. While he has left income tax slabs unchanged, he has doled out sops for tax payers at the bottom of the pyramid by raising the rebate under Section 87A, raising the house rent deduction under Section 80GG and providing additional deduction on interest paid on home loans for first time buyers of affordable homes.
At the same time, he has imposed additional levies on the super rich by raising the surcharge on income over Rs 1 crore and re-taxing dividend income of over Rs 10 lakh in the hands of the recipient. Capital markets have been demanding lowering of securities transaction tax (STT) and removal of dividend distribution tax (DDT).
The finance minister has disappointed on both these fronts. For long, I have argued that DDT should go, as it results in taxing the same income twice. Retaxing dividend income in the hands of the recipient too results in the same income getting taxed thrice. In a sense, it is a triple tax. Further, this measure could go against the interests of small investors as many promoters may reduce dividends due to much higher taxes at their end.
Among the positives, however, is the intent to stick to the fiscal consolidation path, which strengthens the case for interest rate cuts by the Reserve Bank. Coming to the sector-wise impact of the proposals, I believe social and infrastructure spends, thrust on agriculture and rural development, and implementation of the Pay Commission augur well for consumption.
Consumer companies, barring ITC, which would be adversely impacted by the fifth successive year of double digit increase in excise duty, should witness the benefits of greater effective demand. Companies such as Jain Irrigation and Shakti Pumps should benefit from the thrust on agriculture and irrigation.
In the automobile sector, companies such as Mahindra & Mahindra and Maruti Suzuki would be negatively impacted by the additional duty of 1 per cent on petrol and CNG/LPG cars, 2.5 per cent on small diesel cars, and 4 per cent on high-end SUVs/cars. Two wheeler companies should, however, see the benefits of higher effective demand. While the finance minister focused on financial sector reforms, and the banking sector in particular, the extent of recapitalisation proposed by him falls short of market expectations.
The doubling of clean energy cess on coal would have a significant negative impact on companies such as JSW Steel and Hindalco. Wisely planned social and infrastructure investments, targeted delivery of Aadhar-linked social security benefits, possibility of a good monsoon, and continuation of the benign global commodity price trend augur well for India.
The finance minister's focus on increasing the ease of doing business in India should encourage the setting up of new manufacturing companies. I believe the consequent revival in economic activity will further bolster India's position as one of the fastest growing economies.
Written by Motilal Oswal, Chairman and MD, Motilal Financial Services Ltd.
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