India Inc ignored, market’s OK

The run-up to the Union Budget is usually the time when all other voices are drowned out by the well-organised and highly visible corporate lobby. This time, with demonetisation taking a toll, corporate wish-lists were particularly lengthy and inventive.

But the finance minister needs to be commended for his laser focus on the fisc and the big picture in his budget, which has not pandered to piecemeal demands from varied sectors of India Inc. And the surprising thing is that the stock market seemed to be inordinately pleased with his effort.

Consider India Inc as a whole. Large companies had been demanding a steep cut in corporate tax rates from 30 to 25 per cent and a reduction in the Minimum Alternate Tax (MAT) to alleviate the pain from demonetisation.

But the minister gave in to neither demand, and reserved his 5 per cent tax cut for companies earning less than ₹50 crore in annual turnover. While 96 per cent of corporate taxpayers fall below this threshold, most listed firms don’t, and will not save any tax.

Given that the central problem for Indian business today is flagging demand and low capacity utilisation, the economy needed a demand boost more than anything else. On this count, with the promise to double rural income in five years, a record allocation for MGNREGS and an 11 per cent hike in infrastructure spend, the Budget has delivered the needed push. This may have a positive trickle-down effect on rural spends, simultaneously helping FMCGs, automobiles and agri-inputs.

With the country moving towards a unified GST and simplified corporate taxes, it would have been counter-productive for the finance minister to effect excise duty cuts, reduce MAT or effect protectionist customs duty hikes.

Therefore it is good to see that the Budget has been pretty frugal with hand-outs to specific sectors. Auto majors had pinned their hopes on a vehicle scrappage scheme that would boost replacement demand. Real estate and housing loan companies were lobbying for a hefty increase in the tax breaks on home loan interest. But the minister acceded to none of these demands.

With the personal tax cuts restricted to the lowest income bracket and a surcharge slapped on ₹50 lakh-plus earners, the Budget has designed its tax breaks to attract new taxpayers and widen the tax base. The additional ₹12,000-odd crore in the hands of the middle class is not material enough for an urban consumption boost. But then, recent quarterly results from India Inc already show that the impact of demonetisation has been more on rural than urban consumption.

The real estate sector is critical to job generation and the Budget has measures to revive stalled transactions (by reducing the holding period for long-term gains tax from three to two years) and giving builders a tax break on inventory. Outlays have been increased for affordable housing. But these measures, unlike tax breaks on home loans, don’t fuel speculative activity in upmarket homes.

The banking sector, after accumulating sizeable bad loans, had been demanding further accommodation in this budget. There was clamour for the Centre to use any windfall from demonetisation to recapitalise public sector banks, to provide a 100 per cent tax break on bad loan provisions and to set up a ‘bad bank’ to buy out bad loans. But all these ideas carry a moral hazard.

Instead, the finance minister has fobbed off PSBs with a ₹10,000-crore outlay for recapitalisation (more will be provided ‘if needed’). The tax break for bad loan provisions has been hiked marginally from 7.5 per cent to 8.5 per cent. With no easy ways out, banks will now have to look to actively lend to the underserved sections of the economy to pep up their growth.

While corporate handouts were missing, the Budget has done its bit to keep foreign capital coming. The decision to exempt select categories of long-term foreign portfolio investors from the indirect transfer provisions imposed by CBDT, should help boost FPI sentiment. Encouraging foreign direct investment by dismantling the FIPB is welcome too.

The idea of rebooting public sector disinvestment by taking the ETF route and listing profit-making firms like the IRCTC and the insurers is a good one. Not only will these listings put the disinvestment target of ₹72,500 crore within reach, they will also liven up the boring Indian listed market.

Finally, the biggest plus is that the Budget has resisted the temptation to use the escape clause on its fiscal deficit and plans to stick to 3.2 per cent of GDP. The stock market reaction only goes to show that finance ministers need not try too hard to please India Inc or the market. Take care of the economy and the market will take care of itself.