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What was the union budget and monetary policy meet all about?

  • Naren
  • 13 Feb
  • 2 minutes

                             (This article has been published in Finsight- February 2017)

The two news-worthy pieces this month have been the Union Budget on 1st Feb and monetary policy on 8th Feb. Both were noteworthy for what they didn’t announce than what they did!

The Union Budget shied away from any major changes in personal, corporate or capital gains taxes. But it also stayed clear of any populist giveaways ahead of the state elections, choosing fiscal prudence instead. The uncertainties around recovery from demonetization and impending GST roll-out could be major reasons for the modest budget.

The RBI, in its monetary review, decided against cutting interest rates. It cited the need to further control inflation. It also signaled that it was unlikely to cut rates in the near future, by shifting its monetary stance to ‘neutral’. This indicates the RBI believes that current rates are low enough for economic / investment revival. We need to see if the future bears this out.

The relatively radical moves in the budget include a cleaned up political funding through electoral bonds and more powers to the taxman for search-and-seize and property confiscation of absconders. Yet, the Finance Minister shied away from more bold moves – bringing agriculture into the tax net, changes to service tax thresholds/rates, banning of participatory notes, bringing down overall tax rates or announcing a universal basic income.

The government has made the realistic projection of its revenues and set a good fiscal deficit target of 3.2%. We expect buoyant government coffers this year, which could increase public expenditure, especially towards affordable housing and infrastructure development. We believe more changes on the indirect tax side could kick-in once GST is rolled out later this year.

On the whole, we share the market’s relief that there are no more giveaways and freebies in the budget. The fiscal deficit target and the RBI’s hawkish stance indicate strong commitment to keeping macro-fundamentals stable. This makes us positive on the Indian economy and equity markets in particular.

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