Meaningful Minutes

Banks divestment and capitalisation:

"Our banking system needs to be further strengthened. To be in line with Basel-III norms there is a requirement to infuse Rs 2,40,000 crore as equity by 2018 in our banks. To meet this huge capital requirement we need to raise additional resources to fulfil this obligation. While preserving the public ownership, the capital of these banks will be raised by increasing the shareholding of the people in a phased manner through the sale of shares largely through retail to common citizens of this country. We will also examine the proposal to give greater autonomy to the banks while making them accountable."

What this means: The government is limiting the amount it will give to banks directly for capitalization. This reduces its financial burden. Instead, it allowed banks to raise the money they need through sale of government stake to retail investors. This means divestment of PSU banks is on the cards. This also meets RBI's recommendation to reduce government intervention in PSU banks and give them greater autonomy. However, no details have been furnished about the timeline of the stake sales.

GAAR:

"The sovereign right of the government to undertake retrospective legislation is unquestionable. However, this power has to be exercised with extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate. This government will not ordinarily bring about any change retrospectively which creates a fresh liability... At this juncture, I would like to convey to this August House and also the investors community at large that we are committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth."

What this means:GAAR is here to stay. It will not be scrapped, as was expected by many ahead of the budget. However, to soften the blow, the finance minister tried to reassure investors that this power will not be misused by the government. This could help improve investor sentiment.

Growth strategy:

"The steps that I will announce in this Budget are only the beginning of a journey towards a sustained growth of 7-8 per cent or above within the next 3-4 years along with macro-economic stabilization that includes lower levels of inflation, lesser fiscal deficit and a manageable current account deficit. Therefore, it would not be wise to expect everything that can be done or must be done to be in the first Budget presented within forty five days of the formation of this Government."

What this means:The finance minister tries to lower the large expectations riding on the new government's first budget, and subtly shifts focus to the long-term strategy presented in the Budget. This could also indicate that better measures - including the bold reforms that were promised - may be part of the next budget in February.

Revenue v/s expenditure:

"We cannot go on spending today which would be financed by taxation at a future date. There is an urgent need to generate more resources to fuel the economy. For this, the tax to GDP ratio must be improved and non-tax revenues increased. We must remember that the decline in fiscal deficit from 5.7 per cent of GDP in 2011-12 to 4.8 per cent in 2012-133 and 4.5 per cent in 2013-14 was mainly achieved by reduction in expenditure rather than by way of realization of higher revenue."

What this means:A cut in expenditure is not the preferred way to narrow fiscal deficit - the difference between government expenditure and revenue. The government's idea is that as the economy grows, personal and corporate incomes will improve. This will, in turn, increase the ex-chequer's tax collections. Thus, with expenditure held largely constant, an improvement in revenue will automatically lead to a narrowing of the fiscal deficit.

Slum development:

"I also propose to add inclusion of slum development in the list of Corporate Social Responsibility (CSR) activities to encourage the private sector to contribute more towards this activity."

What this means:This has a massive implication for the realty sector. Under the new Companies Bill, every company has to undertake social sector-related activities to the tune of 2% of the total profits. Inclusion of slum development in the list of activities undertaken means allowance of private investment, thus reducing the burden on banks. In 2012-13, companies in India reported Rs 10,87,160 crore as profits before taxes. 2% of this amounts to Rs 20,000 crore. This amount could now be channelized for slum development.