It's not a path-breaking budget from a viewpoint of vision statement or a roadmap. So there are no steps for large scale disinvestment (the target is a paltry Rs 1,120 crore), nor are there any measures to increase the foreign direct investment ceilings on sectors like insurance or aviation. Despite this, the PE/VC industry is satisfied with the annual economic budget since it provides a grand infrastructure push and also a huge thrust on consumer spending.
Industry is of the view that increased public spending towards urbanisation, education, infrastructure without increase in taxes will eventually improve the real economy and the investment climate. These measures will put more money into the hands of the consumers thereby benefitting the consumer discretionary linked sectors- the preferred sectors for risk capital investors.
However, concerns still remain on restrictions of pass through benefits to the venture capital industry and the tax structure for limited liability partnership - the model adopted for creation for asset management companies. VCCircle talks to a few leading VC/PE practitioners to get their first reactions to the budget:
Gopal Srinivasan, Chairman, TVS Capital: It's a very mature, wise budget which has a very long term impact. It is a short term pain for a long term gain. This is the kind of budget expected from a seasoned politician who has not tried to give a short term budget and has actually resisted the temptation to tinker with it. It is a highly pragmatic budget.
There has been a 100% boost provided to urbanisation and infrastructure investments by way of increase IN allocation to JNNURM and Bharat Nirman outlay. It spelled out plans for education sector which will be very, very positive for soft infrastructure.
It has certainly created pools of capital by providing encouragement on the pension funds, which will have a positive impact for the venture capital, private equity industry. The only little regret remains on the Section 10 (23 FB) with no clarity on the PE/VC pass through benefits. Also for creating asset management companies, there is still clarity awaited on the LLP ( Limited liability partnership) structure for these companies. Overall, its a very good budget which should be viewed with a long term lens.
Kanwaljit Singh, Managing Director, Helion Advisors: When we look at the major fillip given to rural economy, I feel the FM has presented a good budget. We can call this a Foundation Budget which sets the platform for the next several years of focused agenda. By focusing on infrastructure and rural employment, I feel the FM is setting the stage for sustainable growth. I wish there was more clarity on divestment and FDI in key sectors which could finance some of these initiatives.
The rural economy has been given a major fillip (Large allocation for NREGA, focus on agriculture credit flow, interest subvention scheme for short term crop loans, etc) that will lead to greater rural incomes and better demand generation, helping bridge the rural-urban divide.
High fiscal deficit of 6.8% is definitely a dampener, however, foreign investors are looking at reasons to invest in India and not to stay away from it. On the other hand, the Public Private Partnership route and the expectations from private capital are clear pointers about the FM’s positive outlook towards FDI. The Budget should not be considered as a statement on FDI policy. I will wait for more time before I make up my mind on Government’s attitude towards FDI.
Deepak I. Shahdadpuri, Co-Founder and Managing Director, Beacon India Advisors: The market’s reaction was clearly negative. I personally thought it was a good budget - it was very mindful of the fiscal deficit, it was thoughtful of releasing capital for consumption, and it removed cumbersome tax like FBT which was painful to manage. I think the market got ahead of itself after the initial election victory - partly due to liquidity and partly due to expectations.
This is probably the fairest budget you could have given considering the downside risks. Some were expecting it to be slightly more aggressive and I can see why people are disappointed, but I think its a good budget from a long term perspective. It will take 3-4 more days before people start to appreciate it.
What was missing was information on divestment, on FDI and on the opening up of sectors. As a PE investor I was keen to hear details on sectors we think offer attractive opportunities like education and insurance. Good news is that the Finance Minister was not worried about what markets would do, which to me is a sign that he isn’t a populist FM. He is doing what needs to be done - India is in a very good position but we should be very mindful of its downside risk.
There is a big push towards infrastructure sector - so our construction and power company will benefit. With more disposable income in the pockets of the consumer with the reduction in the effective rate of tax, consumer driven business should also benefit which will help our restaurant and art businesses. I was surprised by the higher fiscal deficit of 6.8% which was above the initial 6.2% announced. There was also no news on Section 10 (23 FB) Pass Through issues for the PE industry but that doesn’t mean that it will not happen later.
Alok Gupta, Managing Director & CEO, Axis Private Equity: The budget seeks to give a boost to investment, and in particular infrastructure investment where there exists acute shortages and inefficiencies. The budget also seeks to boost consumption, especially rural consumption. However, it lacks specific policy and reform measures market was expecting. The PE/VC industry will welcome these measures, however would have liked to see momentum in disinvestment of PSUs and in further opening up sectors such as banking, insurance and retail.
Infrastructure-related companies, including those that provide services and products to the infrastructure sector, and FMCG companies will get impetus. Logistics will benefit from the introduction of Goods & Services Tax (GST). A timetable for reverting to fiscal discipline, opening up of banking/insurance sectors, disinvestment and privatisation, fuel price reforms is missing from the budget.
Alok Mittal, General Partner, Canaan Partners: On the whole, I think there have been some welcome measures to stimulate the economy and put more money in the hands of the consumers. However, on the private equity side there isn’t really much that has been done. There had been expectations around extending the pass through benefits to more sectors for VC and PE investments. We did not find that in the budget. There certain things in the right direction such as outlining the commitment to commodity investment and entrepreneurship.
In terms of stimulating the demand, clearly infrastructure and consumer sectors are the two sectors where there is a lot of push. In infrastructure it is more through direct spending by the government whereas in the consumer space it is through tax reductions and hence being able to put in more money into the hands of the consumers. So I think these two categories should get the desired impetus.
Cyrus Driver, Director, Helix Investments: The finance minister has played it safe by not making any sweeping reform announcements. We can probably expect these announcements in the following weeks. The reforms that we were expecting could be announced throughout the year. Why these announcements haven't come now? Probably there could also be a constituency inside the Congress that is not pro-reform.
There are certain positives in the budget like removal of Fringe Benefit Tax (FBT) and increasing Minimum Alternate Tax (MAT). Most important thing according to me is the introduction of new Goods and Services Tax (GST) by April 2010. But finance minister has not laid out a roadmap as to how he is going to meet the fiscal deficit, for disinvestment or for implementing GST.
Kaushal Aggarwal, Managing Director, Avendus Capital Pvt. Ltd: The budget has attempted a balance between the expectations of acceleration in infrastructure creation and the constraints imposed by the high deficit and contraction in tax receipts. The markets may take time to appreciate the stimulus provided to consumption by the increase in allocation to targeted programs such as NREGS on one hand and, the removal of surcharge on personal income tax on the other hand. This would be good for several sectors such as consumer durables and non-durables and, pharmaceuticals.
Given the stability of the government it is surprising that more has not been done for infrastructure by raising resources through disinvestment. The overriding effort in this budget seems to have been to restrict the rise in the fiscal deficit in a still difficult year without sacrificing too much of growth.