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Analysts disappointed with Budget; UTI Act to be amended

Salil Panchal / Morpheus Inc

Finance Minister Yashwant Sinha pledged on Thursday to press ahead with economic reforms and announced a cut in interest rates on popular small savings schemes to help encourage economic growth.

Presenting the Budget for the financial year starting in April, Sinha said the government would sell state-owned companies and cut subsidies in order to cut the fiscal deficit and revive growth.

Following are some quick comments from analysts:

Pieter Van Der Schaft, Regional Economist, Barclays Capital, Hong Kong

"This is a very disappointing Budget.

"We are seeing an increase in this year's fiscal deficit, and government spending slightly in excess of nominal GDP growth.

"Also the cut in the small savings schemes rates is disappointing, because the funding rates of local banks should be much lowered given the state of economy.

"In terms of deregulation measures, the reduction in fertiliser subsidy only goes to help government finances. We would have liked to see more deregulation of the farm sector, particularly further easing of export restriction on foodgrains.

"And, we are not optimistic about the divestment target, which the government has been missing for four years.

"Not many measures are confidence-inspiring. The only positive is the Rs 650 billion defence expense, lower than what the market expected around Rs 800 billion.

"What we will see is increased fiscal deficit, so the Reserve Bank of India will retain an easy monetary policy to help government borrowing.

"This Budget does nothing to alter the possibility that Standard and Poor's could downgrade India's ratings."

Raja Visweswaran, Head Of Asian Credit Research At Bank of America, Hong Kong

"I cannot say I'm overly impressed. There's been a significant improvement in the pace of privatisation especially over the last few months. But the revenue projections are not being met.

"I expect a rollback on subsidies issues. I'm still very negative on the fiscal deficit situation."

James Malcolm, Currency Strategist, J P Morgan, Singapore

"The Budget has taken some limited steps towards capital convertibility, but its not a big surprise.

"On a longer term perspective we knew India was working towards capital convertibility.

"A large country like India's will benefit from an open capital account, and it is still fairly cautious in terms of the pace.

"The short term impact on the rupee should be limited."

R Balakrishnan, Chief Executive Officer, First India Asset Management

"The proposal to allow Indian mutual funds to invest in foreign sovereign debt will help asset management companies having foreign parentage and expertise in such markets.

"But the fine print is yet to be seen. Investments in such niche areas need to be capped as a percentage of total assets managed.

"If there are no caps then investors are likely to desert domestic funds and put money into offshore investments as the rupee depreciation will compensate returns available in India.

"By the same logic an Indian investor should now be allowed to hold a fixed deposit in foreign currency."

Sanjay Dutt, Director At Quantum Securities, Delhi

"The Budget so far is broadly positive on the macro economic front as it deals with sectors of infrastructure and agriculture where the demand is slackening.

"The cut in administered interest rates was expected, but it has fallen short. We would have been happier with a 100 basis point cut."

Govt to amend UTI Act, provide relief to MFs

The government has proposed further amendment of UTI Act while extending a host of relief measures to the mutual fund industry.

"The long overdue reform for making US-64 net asset value-based has been implemented. Further legislative changes in the UTI Act to put in place other major reform measures will be proposed during the year," Finance Minister Yashwant Sinha said in Parliament presenting the Budget for 2002-03.

He said a package of measures for reforming UTI and its flagship US-64 scheme had been announced, which seeks to balance investors' interest while ensuring systemic safety.

"The support to equity-oriented funds of UTI and other mutual funds will continue but the income received during 2002-03 by unit-holders of such funds will be taxed only at 10 per cent as at present," Sinha said while presenting direct tax proposals.

The government also abolished the 10 per cent Distribution Tax on companies' and mutual funds' dividends or income.

"Such income will henceforth be taxed at the hands of the recipients at the rates applicable to them and will be subject to tax deduction at source at the rate of 10 per cent," Sinha said while presenting the direct tax proposals.

The Budget also allowed mutual funds to invest in rated securities in countries, which have fully convertible currencies within the existing limits.

Earlier, mutual funds were allowed to invest in ADRs/GDRs issued by Indian companies in overseas market.

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