The budget presents a realistic assessment of the current political and economic situation. Targeting fiscal deficit at 5.1% and 4.5% of GDP for the next two years, along with subsidy at 2% of GDP, are reassuring for optimists.
Sceptics would, of course, like to see execution through steps like oil deregulation, improvement in subsidy distribution through the banking channel and UID-based identification, etc.
Improvement in the macroeconomic situation in 2012-13, with a stable rupee, falling inflation and better liquidity may also convince sceptics to moderate their view.
Indian capital markets will strengthen by allowing qualified foreign institutional investors to participate in the bond market, having central KYC registry, equity saving scheme for enhancing retail participation in equity markets through special tax incentives, reduction in STT on delivery and streamlining of the IPO process.
Increase in the import duty on gold will induce households to save more into financial products. This is extremely important to ensure that adequate surplus is available for private sector investment. Setting up of a financial holding company is an innovative way to fund capitalisation requirement of public sector banks.
This, along with the provision of more than Rs 15,000 crore for bank recapitalisation, will be a positive for the banking sector. The telecom sector will be able to contribute budgeted spectrum licence receipts only if the current regulatory uncertainty is settled.
Transparent policies on licensing as well as consolidation can make the sector attractive to invest at current levels. The auto sector has been spared by not hiking excise on diesel cars, but it will look towards reduction in rates and increase in availability of finance to show better results.
The increase in oil cess as well as uncertainty on subsidy allocation makes the sector unattractive to investors, who will have to wait for real deregulation.
The fiscal deficit target seems a bit higher and can crowd out the private sector, but it looks pretty reasonable compared with the US, Japan and Europe. The markets will surprise most investors in the coming days if the government follows up the Budget with speedier action on the ground.