Equity
Given that the primary problem dragging GDP growth is on the investment side, market observers are looking at policies which will significantly aid increase in the investment spending. Private capex continues to remain fairly weak, and reduction in subsidies gives some scope for increase in investment spending from the government's side. Simplification of the Tax structure via implementation of DTC and GST; but looking for major overhauls and not cosmetic changes via amendments. Cosmetic changes could be perceived negatively. Policies directed at make in India i.e making exports attractive could be another strong feature in the budget. One can expect significant sops for export oriented industries.
Debt
The government is expected to target fiscal deficit of 3.6 % of GDP as per the fiscal consolidation road map. There is a divide within the government to increase the fiscal deficit to 4 % of GDP, to spend on infrastructure. The reasoning is private sector is not able to do further investments due to low capacity utilization and high leverage in the balance sheet. However, the combined fiscal deficit of state and centre is around 6.5 % of GDP, which is high. The Debt to GDP ratio is at 65 %, which is higher than other countries with similar credit ratings. The Government may look at higher divestment receipts; it is also expected to curtail some expenditure as per the expenditure commission report prepared by the Jalan Committee. This should give some room for the government to increase public expenditure to boost economic growth without increasing the fiscal deficit target.
GoldIn its proposals for the coming budget, the commerce ministry has said import duties on gold and silver should be brought down to 2 per cent from 10 per cent to make exports of gems and jewelry more competitive.
However, cut in duty by such large magnitude looks difficult, the finance minister may consider a small reduction of somewhere between 2-4% given that the current account deficit is well under control and a much comfortable BoP position on account of sizable amount of portfolio flows. Also given the fact that they have already taken steps to liberalise the market by abolishing the 80:20 rule, a step further in that direction would be to reduce the import levies. Therefore, a reduction in import duty to the tune of 2-4% seems probable
Mutual Fund Industry
When it comes to mutual fund industry, in our view it will be important to see if the merger of schemes will be exempted of capital gain tax and will not be treated as a mere 'transfer' of the mutual fund unit. Also we would like to see if Mr. Jaitley this year expands the definition of equity oriented funds to include fund of funds schemes, which invest predominantly i.e., 65% or more, in units of Equity Oriented Mutual Fund Schemes. Moreover as suggested in SEBI's Long Term Policy for Mutual Funds published in Feb.2014, we are expecting that Mutual Funds should be allowed to launch pension plans, namely, 'Mutual Fund Linked Retirement Plan' (MFLRP), which would be eligible for tax benefits akin to 401(k) plan of the U.S. under a separate sub-section under Chapter VI-A of IT Act, 1961. This has the potential to solve the problem of investors' retirement money not flowing into equities. Mutual fund retirement plans could be the next best option to accomplish this goal.
Moreover with different views and expectations, all we can do is to wait and watch what Mr. Jaitley has decided and if he plans to fulfil any of our expectations.