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FM is betting big on an economic upturn: U R Bhat

01 Feb 17 | 12:00 AM

I think it is a very good budget with emphasis on housing and rural development. There is some stability in terms of taxation for corporates. Every budget, there is some uncertainty in the markets as to how the corporates will be taxed. There were some expectations that the tax rates could probably be brought down, but then that has not been done. So, it is par for the course. 

On the other hand, smaller companies that bore the brunt of demonetisation exercise have been given enough impetus in taxation. In terms of allocation, the money directed towards housing and rural India has been long due. 

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The other sector that has benefitted is banking. By addressing the non-performing assets (NPA) issue – allowable provision for non-performing asset of Banks increased from 7.5% to 8.5%; and interest taxable on actual receipt instead of accrual basis in respect of NPA accounts of all non-scheduled cooperative banks also to be treated at par with scheduled banks – are two significant steps, in my opinion. As a result, the banks will be liable to pay tax when they actually receive the funds instead of paying on an accrual basis. 

Focus on rural development and spending on housing are the two central themes and the key points in Budget 2017. This is probably what was needed now, especially after demonetisation. I think the finance minister has addressed these two issues quite well in the budget.

However, the amount allocated towards banks’ recapitalisation (Rs 10,000 crore) seems less. This is one thing that the market was expecting to be higher than what has been allocated. But, if the FM has given some incentive for NPA recovery – with an upturn in the economy, there is a case for some of these NPAs to become ‘performing’ assets over a period of time. In case this does materialise, I don’t think there is a case for allocating huge amount towards recapitalisation. That apart, the FM has promised to allocate more, if needed. In other words, the FM is betting big on an economic upturn.

As regards political funding, I am unsure how this will happen as the threshold levels of Rs 2,000 is quite a small amount. However, a beginning has been made – and that is a positive step.

The fiscal deficit target of 3.2% for FY18 also seems logical. Though there were expectations of 3%, given the demonetisation impact, this target of 3% looked a bit stiff to achieve. The net borrowing figure has been lowered, and that saw bond yields softening a bit. I expect the Reserve Bank of India (RBI) to cut interest rates in future. This should also augur well for the economy and the government’s fiscal arithmetic as Arun Jaitley is not a big believer in market borrowings. 

The one thing that was missing was more details on demonetisation and its impact on the economy. I am unsure of if the government has the data yet. The government is expecting some inflow from the tax notices that they have sent.

The relief to the small-taxpayers in terms of halving the tax rates to 5% for those between Rs 2.5 lakh – Rs 5 lakh bracket is a very welcome step. The whole idea is to widen the tax base with a hypothesis that more people should be a part of the taxation mechanism. Lending stability to the taxation mechanism – for individuals and corporates – is one of the key elements in economic recovery.

Overall, I think it is a very fair budget.

(As told to Puneet Wadhwa)

The author is managing director, Dalton Capital Advisors

Disclaimer: The opinion expressed in this article is the personal opinion of the author. The facts and opinions appearing here do not reflect the views of Business Standard and the publication does not assume any responsibility or liability for the same.

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