Budget Impact on VC/PE Industry and the Investment Climate

The budget coming from a government with a strong recent electoral mandate was expected to bring in bold reforms. What we saw instead was a pragmatic budget which was inclusive in nature (while not overtly populist).  Overall it was a good budget that addressed many critical areas of the economy while missing a few opportunities for much needed change.

There were no sweeping reforms in the budget. The finance minister has clearly played a delicate balancing act – balancing increased spend, reduced tax and increased fiscal deficit.

The budget increased allocation towards infrastructure spends including highways, railways and power projects as well as urban development. This commitment will help both short and longer term sustenance of our GDP growth.  And, with significant investments committed to infrastructure through increased allocations, I am optimistic that the investment climate will pick up again. Increased outlay towards rural housing and NREGA scheme will undoubtedly drive rural spend.  The elimination of surcharge on personal income tax will put more money in the hands of the consumer and lead to discretionary spends.  The planned rise in spending and consumption will have a multiplier effect and is aimed at returning India to the high levels of economic growth it enjoyed before the global financial crisis.

On the private equity side, there isn’t much that has been done. Some of the concern areas particularly for private investors are – a higher level of fiscal deficit (6.8%, Rs. 400,000 Crores) which will lead to increased government borrowing, crowding out of private investment, and higher inflation and interest rates.  What was also unwelcome status quo as far as the PE/VC world is concerned was no clarity on disinvestment, no enhancement of FDI percentages and no pass through benefits for additional sectors. There are certain measures in the right direction such as outlining the commitment to commodity investment and entrepreneurship.

As an Indian there was reason to cheer. As a Private Equity investor there is little benefit in the short term as more could have been done to specifically aid the fledging industry, but the actions will bring benefits in the longer term.

However we must realize that the Budget is just a start and is a promise for further action/intent.  How the government really executes on the promise will determine what benefits both short and longer term it will bring to the economy.

Harish Gandhi, Executive Director

Portfolio News

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