HIGHLIGHTS OF UNION BUDGET 2003 - 2004 AND ITS IMPLICATIONS

by Credence Analytics

Jaswant Singh’s maiden budget can be termed as a growth oriented populist budget owing to the several encouraging measures announced by him.

Government Forecasts & Finances

• Budget deficit for financial year 2003-2004 is estimated at 5.60 percent of GDP.
• One of the five priorities of this budget is fiscal consolidation through tax reforms.
• Government is confident that the domestic economy is well placed to withstand global uncertainty, given the fact that country's positive macro economic .
• Increasing need for greater co-operation between public and private interest is being felt, for improvement of the country's infrastructure.
• Government will pre-pay its high-cost external debt and will buy back high-interest government bonds from banks.
• States will swap all loans with interest rates of more than 13 percent by 2004 - 05. This will translate to savings of Rs 81000 crores.
• Savings rate interest on public provident fund and small savings schemes have been cut by 100 basis points. This will result in savings of Rs 5000 crores for the government.

Implications

• The higher Fiscal deficit (5.5% of GDP) which seems more than what is prescribed by the IMF (around 4% of GDP) for developing countries like India, threatens to induce more borrowing on the part of the central government
• This would in turn result in upward pressure on the yields and thus would also raise the cost of borrowing for the Non-SLR markets.
• Developments on this front would be keenly tracked as to whether the Union government resorts to funding the deficit or manages to lower it's expenditure in the forthcoming financial year.

Fixed Income Markets

• Government not going to raise any more funds in the market for the year 2002-2003. It has set a higher gross borrowing of 1.66 trillion rupees for next financial year.
• Rate of interest on government-administered small savings schemes which include public provident fund and small savings schemes have been reduced by 100 basis points.
• Reduction of small savings rate will enable the government to save Rs 5000 crores.
• RBI annouced reduction in Repo rate to 5 percent from current levels of 5.50 percent, to be effective from 3rd March.

Implications

• The 100 bps reduction in the government managed small savings rate and the PPF, stands the government in good stead and is in line with it's policy of keeping the interest rates down.
• The market will breathe a sigh of relief as it had been groping for support in these turbulent times. The Budget has been doled out as a "panacea" and has something in it for all sections of the economy.
• The corporate community has been given a fillip by scaling down the surcharge on the corporate tax payable, to 2.5 percent. This means a better avenue of funding business positions through internal accruals. On the banking front, the raising of the cap on foreign equity to 74 percent portends an improving scenario as regards risk distribution, better and innovative products for the consumers, influence of IT in banking making the Indian banking fraternity competitive at international levels.

Mutual Funds

• Dividend in the hands of investors will be tax free.
• Equity schemes have been exempted from dividend distribution tax dividend tax for a period of 1 year. Dividend distribution tax of 12.50 percent will be levied on debt schemes.
• Long term capital gain tax on shares had been abolished for purchases made to be made after .
• UTI 1 to be exempted from dividend tax. UTI-2 to pay dividend distribution tax.

Implications

• Several encouraging measures annouced in the budget bodes well to boom the growing mutual fund industry
• With all measures in line with market expectation, mutual funds get a good level playing field against other avenues of investments.
• Abolishing of tax on dividend (taxable in the hands of the investor) and long term capital gains would make the distribution of wealth more profound thus making the task of raising equity capital less onerous. This will also aid in changing investors outlook towards investments in capital markets and will further encourage investments in mutual funds.
• Cut in the small saving investments likely to boost investments in debt mutual funds as risk averse investors to prefer enjoying higher liquidity and returns compared others investment platforms.
• However the populist budget failed to announce anything on the much anticipated pension products. The industry veterans were expecting allowance of Mutual Funds to participated in the pension funds activities and develop new pension products.
• Also an expectation of allowing pension funds to invest in debt products of mutual funds was being contemplated from a long time.
• Budget failed to cheer equity market inspite of most of its expectations being fulfilled by Finance Minster. Hike in FDI limits of only private sector banks to 74 percent from existing 49 percent, played a spoilt sport. Gradual rally is expected in the equity market.

Report prepared by:

Credence Analytics (India) Pvt. LTD.,
228 / 229, Laxmi Plaza, Laxmi Industrial Estate,
Opp. Oberoi Towers, New Link Rd.,
Andheri (W), Mumbai - 400 053.
Telephone:(91-022)2633 1094 / 1376 / 2162 / 2553,56921552
Fax : (91-022)2631 3627
www.intreasury.com