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Budget bonanza for core sector?

Finance Minister Chidambaram is expected to give a major boost to the infrastructure sector, which requires large dollops of investment.

india Updated: Feb 21, 2006 16:14 IST

Though there is not much room for Finance Minister P Chidambaram to manoeuvre in terms of tinkering with direct taxes, the union budget 2006-07 is expected to give a major boost to the infrastructure sector, which requires large dollops of investment. If India is to scale up its GDP growth from eight per cent to the next level, then infrastructure will be the cornerstone of that exercise.

Experts feel since five states are going to the hustings, there is tremendous populist pressure on the government. To pump prime investment in the infrastructure sector, the budget may come out with relaxation in foreign direct investment (FDI) in this sector, including urban infrastructure. The government may also allow the formation of real estate funds on the lines of the Gold Traded Exchange Funds last year. Real estate mutual funds complete with units will be allowed.

A thrust on infrastructure will automatically have a cascading effect on several sectors like construction, industrials and utilities. Construction will also act as a catalyst in higher allocations for infrastructure investment, urban development and irrigation. A reduction in excise duty on cement to Rs 350 per tonne from Rs 400 per tonne is on the anvil.

Significantly, it is learnt, shortselling by Foreign institutional investors (FIIs) is likely to be permitted in the derivatives market. Income tax on derivatives may be lowered to anywhere between 15 per cent and 20 per cent from the current 35 per cent. With the trading volumes increasing on commodity exchanges, the union budget may also include commodity trades under the derivative category. Sources said that government might do a balancing act for foreign portfolio investments. It is learnt that the gov ernment might give more sops in terms of fresh investment avenues like separating FDI from FIIs in the banking sector and partial rationalisation of FII investments.

However, at the same time, it may also impose some restrictions on exposure like limiting exposure of FIIs and sub-accounts (with common beneficial ownership ) to 10 per cent of the company’s equity over the next three to five years.

To pep up manufacturing sector growth, the government is expected to cut excise duty on cars and utility vehicles from 24 per cent to 16 per cent. This will make cars cheaper and jumpstart their sales further. Among the other major changes expected from the budget is rationalisation of fringe benefit tax (FBT), income tax exemption under Section 80 IA to be extended to power generation and transmission projects beyond 2006.

Since the rural economy will remain the cynosure, it will provide vital sops through a micro finance system for agricultural supply chains, marketing and horticulture. Here again, the key will be giving a thrust to rural credit and the announcement of likely measures for enhanced corporate participation in the agricultural economy.

Look out for... Relaxation in FDI in infrastructure Reduction in duty on cement Lower income tax on derivatives Cut in excise duty on cars and utility vehicles Micro finance system for agricultural supply chains, marketing and horticulture.

First Published: Feb 21, 2006 13:28 IST