Finance Minister P Chidambaram presented the Union Budget 2005 on Monday, February 28, 2005. This budget has been lauded as the most forward-looking budget, which India has seen in many years. Experts say that this budget could be a major step towards taking India into the next phase of economic growth, supported by higher rates of savings and investment.

While on the one hand this budget targets rural growth, rural connectivity, education, health and increased investments in infrastructure, on the other, it has set a pace for industrial development. One of the most significant announcements is the proposed cut in customs duty, which will help Indian industries in making products that are more competitive.

Interest in NRE accounts and foreign currency deposits will continue to enjoy income tax exemptions. At present, interest income accrued on money deposited in an NRE account in any bank is exempt from income tax. Similarly, the interest payable by a scheduled bank before to a NRI on deposits in foreign currency is exempt from income tax

The most significant move is the proposal for derivative trades not to be considered as speculative transactions (currently attracting tax at 30%). Classification of derivative trades as normal stock market transaction will make them eligible for a much lower tax (short-term capital gains tax is 10%) - a move that will be welcomed by market participants.

There has been a marginal hike in the Securities Transaction Tax (STT) rate, however it is not expected to have any significant impact on market sentiments. It has changed as follows:

Transaction Current STT(%) Proposed STT(%) Delivery Based Purchase of Equities by Buyers 0.075 0.10 Delivery Based Purchase of Equities by Seller 0.075 0.10 Non Delivery Based Transaction by Seller 0.015 0.02 Derivatives Transaction (F&O) 0.010 0.0133 Sale of Units by Mutual Funds 0.15 0.20

Budget 2005-06 Analysis from Citigroup: UPA government's 2nd Budget got a favorable 2.2% response from the market, which Citigroup believes was more of a relief rally, on government avoiding populist pitfalls. Going ahead, Citigroup expects two key themes driving the India story in coming years: Investment cycle turn-up, Urban consumption. Various trends that support these two mega trends are - Corporate capex recovery, higher infrastructure investments, sustained strength in outsourcing trends to India, consumer credit growth, rapid overall credit expansion (+25% currently), ample liquidity and growth-supportive interest rates.

For more details on Union Budget 2005, click here.

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