Post budget response by Anand Rathi

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Overall, the budget as exercise has been a reasonable one. A major positive for us was that the Government has refrained from taking a populist approach at a time when it seems embattled on most fronts. It was a concern from the financial markets perspective and we seemed to have crossed it safely with slight positives from an interest rates and infrastructure financing perspective. The macro uncertainty has to some extent been dispelled and investors can get back to focusing on specific investment opportunities on a more micro-basis.

Positives

• Fiscal consolidation – The targeted fiscal deficit number for 4.6% of GDP is in line with our expectations, but much lower than what markets expected. Also, the net borrowing figure of Rs. 3, 40,000 crores is at least a good Rs. 60,000 crores short of market expectations and positive for bond yields. Positive for both bonds as well as equities.
• No rollback of excise rates and broadly untouched direct tax regime – Most steps were towards aligning the tax regime to the DTC and the GST.
• Infrastructure financing – Increasing the FII limit for corporate bonds significantly as well reducing the withholding tax on that to 5% should go a long way in allowing infrastructure financing to happen at globally competitive rates

Concerns

• Bringing of SEZ units as well as LLPs under MAT – This move takes away a significant attraction of both SEZs and LLPs .
• No big moves in FDI regime – The opportunity to announce key and widely expected FDI policy changes in sectors like insurance or multi-brand retail was lost. While the budget may not be the only forum to announce these measures, these announcements would have sent strong positive signals on the government’s reformist intent.
• DDT on Debt MFs – The higher rates of DDT on money-market funds and also other debt funds has almost eliminated the tax arbitrage for investors, especially corporates. This move, though not announced in the speech, will hurt the asset management business significantly. So while they cheered the ability of foreigners to invest directly into onshore equity MFs, this will be a big blow.