Notwithstanding the short lead time of six weeks, the Government has presented an investor-friendly Budget, particularly with the introduction of incentives to boost infrastructure financing, rationalisation of various taxes and the assurance of a stable and predictable tax regime.

Allowing banks to raise long-term funds for lending to infrastructure projects with minimum regulatory pre-emption such as CRR, SLR and priority sector lending is a positive step. Moreover, tax incentives for real estate investment trusts (REITS) and infrastructure investment trusts would help ease the constraints faced in raising long-term financing for infrastructure projects.

While there was no change in the stance on the sovereign right to retrospective taxation, the Government’s assurance of a stable and predictable taxation regime would help create a conducive environment to attract investment. Additionally, measures to enable a wider variety of advance rulings for taxation would help limit potential conflicts.

Moreover, the extension of the 10-year tax holiday to entities that commence generation, distribution and transmission of power by March 31, 2017, would boost investment in this sector. Nevertheless, various issues related to the transport and availability of feedstock would need to be addressed to enable a ramp-up in power generation. The investment allowance at the rate of 15 per cent to manufacturing companies investing in excess of Rs. 25 crore in any year in new plant and machinery up to 2016-17 is expected to provide some boost to investment activity.

The focus on fiscal prudence and announcement of a roadmap for consolidation with the commitment to reduce the fiscal deficit to 3 per cent of GDP by 2016-17 are encouraging. The proposal to constitute an Expenditure Management Commission to focus on improving the efficiency of spending is also welcome. However, additional clarity is awaited on plans to overhaul the subsidy regime.

Fiscal deficit target

In contrast to market expectations, the fiscal deficit target of 4.1 per cent of GDP announced in the Vote-on-Account in February 2014 has been retained in this Budget; achieving this target would be challenging. In particular, the assumption of net tax revenue growth of 20 per cent in 2014-15 relative to provisional data for 2013-14 appears optimistic. The unfavourable progress of the south-west monsoon over the previous five weeks would dampen growth of agricultural output as well as demand for various goods and services emanating from the rural sector.

This would, in turn, limit various taxes such as corporation tax, excise duty and service tax. Moreover, investment activity is expected to pick up gradually, notwithstanding the constructive measures announced in the Budget. The raising of the investment limit under Section 80C of the Income Tax Act would boost the economy’s financial saving rate, while the higher deduction limit on account of interest on loan in respect of self-occupied houses would benefit the housing and construction sectors. Moreover, the increase in the exemption limit under personal income tax would help buffer disposable incomes against high retail inflation. In this context, the estimated 20 per cent growth of personal income tax collections in the Budget Estimates (BE) for 2014-15 relative to the provisional actual for 2013-14 seems rather high. Moreover, the lack of a roadmap for the transition to the much-awaited Goods and Services Tax is disappointing. Notwithstanding the improved sentiments in the equity markets, actual disinvestment proceeds would take a cue from the timing of offerings as well as valuations.

Overall, while the tone of the Budget is growth-positive, we continue to expect a mild improvement in economic growth to 5-5.5 per cent in 2014-15 from the sub-5 per cent levels in 2012-14.

The writer is the MD and CEO of ICRA Ltd