News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

Rediff.com  » Business » Budget: Good news and bad

Budget: Good news and bad

By Devangshu Datta
July 10, 2004 15:24 IST
Get Rediff News in your Inbox:

First the good news: there were a few pleasant surprises in this Budget. The abolition of long-term capital gains tax could provide an enormous incentive to individuals, who are prepared to patiently create assets.

The flattening of short-term capital gains rates is useful as is the (admittedly expected) introduction of tonnage taxes for shipping companies. The 150 per cent offset for automobile R&D could be a boon to the industry.

The hike of foreign direct investment limits in areas like insurance and telecom is a welcome signal that infrastructure creation won't be halted by misplaced nationalism. The promise of a serious review of tax structures in February, 2005 is also welcome.

The bad news: it was the expected measures that proved to be as unpleasant as people thought they would be. The turnover tax on securities trades is likely to choke off volumes in the short run at least.

The tax on leased aircraft could be the kiss of death for air-travel. Various cesses are being raised for socially useful purposes. But forgive me if I'm cynical about the delivery of education and related services by the public sector.

The massive increases in Plan expenditure and defence spending are frankly scary. So are the ballooning food subsidies. It'll be a miracle if the government succeeds in eliminating the revenue deficit inside the promised schedule. And, if the economy doesn't grow at least 6.5 per cent in 2004-05, there will be major problems in matching these revenue estimates.

It's a pity that PC couldn't muster up the courage to offer major tax incentives for entrepreneurs to enter sectors like education and healthcare, where efficiency is just as necessary as increased spending. That might have created a healthier climate than simply pumping money into inefficient delivery systems.

What leads does this Budget offer to the small investor? In sectorial terms, it offers the usual cyclical effects. Certain sectors gain from tax-breaks while others get hurt.

Tractors, IT hardware makers, teleservice providers, shipping companies gain, metal producers lose, auto-manufacturers lose, etc. The exact provisions will need to be carefully studied and clarified by notifications before the position becomes obvious.

The turnover tax is likely to be the burning issue for the next few weeks. The problem paradoxically lies in the fact that India has an efficient, highly competitive trading environment with very low brokerages. Where the trader is used to paying 0.05-0.07 per cent or 5-7 paise per Rs 100, an additional charge of 0.15 per cent triples costs.

The turnover tax will thus seriously impact volumes in the three most liquid financial markets: equities, bonds and derivatives. It also affects bid-ask spreads, which typically tend to be extremely low. Until the market adjusts to higher trading costs, most day-traders and even a lot of longer-term players will tend to stay out.

The tax may also have the strange effect of forcing interest rates up through a peculiar "tail-wagging the-dog" effect. Bond yields shot up today in the government securities market because of the panic caused by the turnover tax.

If liquidity dips in the bond market and yields remain high, rates will tend to travel up. That trend might be tough to control, given the expenditure increases at the core of this Budget.

Powered by

Get Rediff News in your Inbox:
Devangshu Datta
 

Moneywiz Live!