Fw: Union Budget 2014-15 - Good to begin with...

 

Union Budget 2014-15: Good to begin with… The most anticipated event after a record election victory is now behind us. Mr. Arun Jaitley's Budget speech evoked confused response with wild swings during and after the Budget presentation. There was a feeling among certain sections of the market that bolder reforms were warranted given the strength of this government's mandate. Akin to the Railway Budget, the details were missed although the broad picture was conveyed reasonably well. Gross tax revenue projection was cut by ~Rs15,000 crore compared to interim Budget numbers - Indirect tax revenue projected to grow by 20.3% yoy and direct tax by 15.7%. While customs and service tax projections appear reasonable, excise duty growth projections at 15.4% appear steep. On the direct tax front, personal income tax projection has been substantially reduced (by Rs22,200 crore) compared to interim Budget, but still appear high. Perhaps, the government expects additional income from advance ruling settlement in case of individual tax-payer disputes. Otherwise, there is a risk of falling short of the tax revenue target set by Rs10,000 crore. Along expected lines, spending on Plan expenditure was substantially increased to support growth. Plan expenditure growth is targeted at 21% to be spent towards agriculture, capacity creation in health and education, rural roads, national highways, rail network expansion, among others. Surprisingly, non-Plan expenditure was not projected to grow at a slower rate than set during the interim Budget. Nevertheless, non-Plan growth is much lower than what is being spent on the Plan side. Subsidies have been pegged at 2% of GDP and only marginally higher than the interim Budget – petroleum subsidy seems to be under control with continued diesel deregulation and assuming gradual increase in LPG and Kerosene prices. Food subsidy target is reasonable but fertilizer subsidy looks under-provided, which could result in a working capital crunch for the sector. On MGNREGA, the minister aims to put this money to more productive us! e. To make up for the 13% yoy growth in total expenditure and Rs9,000 crore shortage in net tax revenue, revenue from economic activities, particularly telecom auctions and other non-tax revenue targets have been raised higher. Non-tax revenue is estimated to be 18% of the total revenue composition, Rs32,000 crore higher than interim Budget numbers. By doing so, the Finance Minister stuck to the fiscal deficit target of 4.1% that his predecessor had set. This is certainly a stretched target and could be missed by 20 basis points. Yet, that would not be seen as an under-achievement. The revenue deficit is pegged at Rs378,248 crore, 2.9% of GDP. With only a few weeks to prepare, the FM announced some important steps like opening up FDI in defence and insurance sectors. Increasing the capital budget for defence by Rs5,000 crore was also an important move. A major step undertaken was to boost financial savings and provide some relief for negative real returns in the economy. As opined in our pre-Budget note, the Minister raised individual tax slabs to Rs2.5 lakhs and also hiked the deduction under Section 80C to Rs1.5 lakhs. To boost savings further, the annual ceiling on PPF was raised and Kisan Vikas Patra and National Savings Certificate with insurance cover, were introduced. The Budget was particularly positive for infrastructure, housing and agriculture. While the FM touched upon the need for capital infusion in PSU banks, the figure of Rs13,400 crore allocated this year was much lesser than Rs15,800 crore the previous year. While banks were asked to lend to infra projects for the long term, it remains unclear whether their long term borrowings attract lower CRR and SLR norms. While end of retrospective taxation was needed to build confidence for investing in India, nothing concrete came in the Budget. The biggest negative from a capital market viewpoint was the increase in rate of long term capital gains (LTCG) in debt mutual funds to 20% and the period for LTCG raised to 3 years instead of 1 year. The Budget lays a broad roadmap for economic recovery and attempts to set in order the accounts, both in terms of deficit and quality of spending. The actual implementation on the ground will propel the economy and the market to a new orbit.

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Warm Regards, Amar Ambani