India's budget pleases all

Chidambaram walks a tightrope to keep all sides happy with his first budget.

Palaniappan Chidambaram pledged to continue the disinvestment of state companies in his first budget for India's new government. The finance minister also scrapped some capital gains taxes, upped foreign investment limits in several industries and promised sustained GDP growth of 7% to 8%.

The biggest immediate fillip for the market was Chidambaram's announcement that the government would piggyback on the public offer of state-owned National Thermal Power Corporation (NTPC), doubling the size of the deal to Rs40 billion ($872 million). NTPC was originally slated to sell 5% in a primary offer, but the government will now also sell 5% of its own stake in the company, which left bankers rubbing their hands with glee.

And there was more good news on the disinvestment front. After scrapping the disinvestment ministry as one of his first executive decisions after assuming office, Chidambaram has now resurrected it in all but name. The new organization, to be known as the board for reconstruction of public sector enterprises, will fulfill the same role: to advise the government on how to restructure state companies, "including cases where disinvestment, closure or sale is justified".

Full privatization is off the cards for profitable state-owned companies, but it was a far from realistic goal under the previous government either. Arun Shourie, the former disinvestment minister, was forced in the end to resort to stake sales after zealously pursuing privatization of the oil industry.

The budget bore good news for foreign investors too. Chidambaram raised the minimum foreign direct investment limits in the telecoms, aviation and insurance industries - up to 49% in the latter two and up to 74% in telecoms. That could pave the way for Bharti Telecom to issue a big ADR and should provide other capital-hungry telecoms firms with a new source of investment.

Chidambaram also scrapped long-term capital gains tax and halved short-term capital gains tax to 10%. But he has not given investors a completely free ride - he replaced some of the lost taxes with a new turnover tax, which works out at 0.15% of each trade. However, that is still lower than the market was expecting.

The finance minister also raised service tax from 8% to 10%, in effect a tax on the middle class voters benefiting from the good times, and helped out the rural poor who elected his government by cutting excise duty on tractors, promising Rs250 billion for under-developed states and introducing a tax surcharge to boost investment in education.

All in all, Chidambaram's first budget was a small triumph, successfully balancing the competing interests of India's rich and poor. The Sensex probably will not be surging as a result, but it won't be plummeting either. "So far the market is still trying to digest it, but the response will probably be neutral," says one investment banker in Bombay. "He hasn't done anything stupid."