Balanced and growth-oriented Budget
Keki Mistry February 28, 2015The electoral victory of a stable majority government at the Centre in almost 30 years was a clear signal that the people of this nation wanted a legislature that was decisive in its actions. The Union Budget is an important event and it was widely expected to lay down the roadmap for growth and introduce measures to revive the investment cycle.
In this regard, the Finance Minister took a bold step by increasing the fiscal deficit target to 3.9 per cent (which I believe is more realistic) for FY 2016, while keeping the medium-term target of 3 per cent intact. While private investment is vital, public investment is necessary in the interim to revive growth.
Currently, several companies with strong balance sheets in the private sector have excess capacity and, therefore, have not been looking to invest. With government investing in infrastructure projects (with a short capex cycle), the multiplier effect on the economy will be realised quickly. Private investments will follow to back the government investment and a combination of the two will create more jobs and consequently generate more income. This will boost consumption and enable companies to use up their existing excess capacity - which in turn will cause them to invest.
I do not believe that public investment in infrastructure will have any spill-over effects on inflation. Hence, I continue to believe that interest rates will reduce by another 50 to 75 basis points this year.
The goal of building six crore housing units by 2022 will help the Indian economy. It will drive the demand for affordable housing and generate new employment opportunities. Housing has a multiplier effect on the economy and forms 6.7 per cent of India's GDP. The housing and real estate sector also has strong forward and backward linkages to nearly 300 industries.
The Budget also announced strong measures against the generation of black money. I would view this as extremely positive as it can generate significant tax revenues for the government. Effective implementation, however, is critical.
The step to reduce the corporate tax rate from 30 per cent to 25 per cent over the next four years and at the same time rationalise various tax exemptions is also very positive. However it is important to understand which of the incentives are proposed to be removed. Currently the effective tax rate due to numerous exemptions is 23 per cent from the actual 34 per cent.
In conclusion, I think it is a very balanced and growth-oriented Budget without creating inflationary pressures.
The author is Vice Chairman & CEO, HDFC Ltd.