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Imperative to encourage private investment

Investors are no longer waiting for the Union Budget to see big bang reforms; they know that these are ongoing and will happen even outside the Budget.

Motilal Oswal        Last Updated: February 19, 2016  | 13:19 IST

Motilal Oswal, CMD of Motilal Oswal Financial Services
Investors are no longer waiting for the Union Budget to see big bang reforms; they know that these are ongoing and will happen even outside the Budget. They do not expect the Finance Minister to present an all-out populist face either. The Modi-led government has taken several steps to stimulate growth since it assumed office. The hope is that this trend will continue. I expect the focus to be on inclusive growth this year. The government has been dwelling on social issues such as upliftment of the rural sector, mitigation of adverse weather effects on agriculture, creation of more employment opportunities, and enriching the lives of women, children, senior citizens and people below the poverty line. I believe the Finance Minister's Budget speech will cover all these issues. While he is also likely to touch upon burning economic issues such as the Goods and Services Tax (GST), I do not expect the government to meet its deadline of April 1, 2016, to roll it out.

Considering the government's intention to achieve wholesome growth and sustainable development, I expect the Finance Minister to announce measures aimed at raising public spending and encouraging private investment. I expect greater outlays for infrastructure projects, which will not only enhance the standard of the country's infrastructure, but also provide large-scale employment opportunities. The government is likely to encourage private investment, too, as it has an imperative role to play in enhancing economic growth.

While increased social and infrastructure spending could threaten the achievement of the government's fiscal deficit targets, a supportive factor is the continuously falling prices of global commodities, particularly crude oil. As far as personal taxation is concerned, I expect the Finance Minister to disappoint. The widely anticipated enhancement of the minimum threshold for income tax may not materialise and personal tax rates are likely to be left unchanged. However, I expect reduction of about 1 per cent in the corporate tax rate, against the promised reduction of 5 per cent.

Strained tax receipts, given the general economic slowdown, implementation of the Seventh Pay Commission, armed forces one rank one pension outlay, need to boost the rural economy after two years of sub-normal monsoon, and necessity of infrastructure and social investments place increased demands on the expenditure side. As a result, there is little scope for relaxations on the revenue side. I do not expect significant concessions on the taxation front. In fact, there could be attempts to bolster tax revenues by expanding the base and raising service tax rates. The government could consider alternatives such as public sector disinvestments and spectrum sale to raise revenues.

I expect the thrust on 'Make in India' to continue. The encouragement to local manufacturing may, however, be more by discouraging cheap imports and minimising red tape, rather than by providing fiscal incentives. Given the diverse expectations on the expenditure side and limited options to increase revenues, the fiscal deficit targets may have to be revised upwards. While that would be worth doing in the interest of wholesome growth and sustainable development, too much deviation from the fiscal consolidation path could cost the economy dear.

Wisely planned social and infrastructure investments, possibility of a good monsoon and continuation of the benign global commodity price trend augur well for India.

(The author is the CMD of Motilal Oswal Financial Services)


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