Union Budget 2014-15 Prologue to Modi 2014-19

Thursday, 10 July 2014 OPINION

This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Readers should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. InvesTrekk Global Research (P) Limited does not provide portfolio management, stock broking or any other fund based service. The model portfolios mentioned in this report are merely to illustrate the investment style and strategy recommended in the present times. Please refer to the important disclosures at the end of this report.

Without pressure The maiden budget of Modi government presented by the Finance Minister Arun Jaitely on Thursday, was only a continuation of the rail budget presented earlier this week. The minister showed no sign of any pressure from any lobby or economic conditions; though the longest budget speech did stretched him physically.

Status quo

The minister did not attempt to disturb the status quo on anything. He skillfully skirted all tricky issues like GST, GAAR, food subsidy, etc. by avoiding specifics.

Resource constraint

The resource constraint was conspicuous throughout his speech. He made meager allocations to numerous schemes that have mark of Modi and RSS. He avoided committing any resource for areas like bank recapitalization and pledged sub-optimal money for infrastructure development.

Focus on strengths

As we have been repeatedly suggesting, the finance minister emphasized the need to focus on internal strengths of the economy. He suggested numerous schemes to harness the economic benefits of Indian cultural heritage, youth, and tourism potential. Though the schemes are sketchy and resource allocation abysmal, nonetheless a new beginning has been made.

...and weaknesses too

It is matter of great comfort that besides focusing on strengths, the government appeared to have identified many key areas of weaknesses that present immediate challenges to the economy, e.g., water resources, regional imbalances, power generation and distribution, SME, long term funding for infra projects, fiscal discipline. Given that this government is just 6weeks old, it is remarkable to see that it has already set the agenda for meeting this challenges through concrete measures.

Businesslike approach

The best part of the general budget like rail budget is its businesslike approach in most matters.

Team InvesTrekk investrekk@gmail.com

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Key highlights The subsidy regime to be made more targeted.

Convergance with International Financial Reporting Standard (IFRS) by Indian Companies.

The composite cap of foreign investment to be raised to 49 per cent with full Indian management and control through the FIPB route.

The composite cap in the insurance sector to be increased up to 49 per cent from 26 per cent with full Indian management and control through the FIPB route.

Requirement of the built up area and capital conditions for FDI to be reduced from 50,000 square metres to 20,000 square metres and from USD 10 million to USD 5million respectively for development of smart cities.

100% retail allowed for all manufacturing units located in India including through Ecommerce platforms.

Bank capitalization through retail investors. No budgetary provision.

PSUs to invest INR2480bn in current fiscal.

INR71bn allocation for "100 smart cities" project. Special emphasis on Low cost housing.

Complete pass through status for REITs and INVITs.

Higher allocation for rural development including INR144bn for rural roads (PMGSY).

Special emphasis on drinking water and sanitation.

5 new AIIMS, IITs and IIMs.

Allocation for 600 new community radios and Kisan TV channel.

Present corpus of Pooled Municipal Debt Obligation Facility facility to be enlarged to 50,000 Crore from ` 5000 crore.

4% sustainable agriculture growth targeted.

Special emphasis on employment generation and skill development.

Schemes to develop coastal transport, ports, inland water transport and smaller airports.

8500kms of national highways to be constructed during FY15.

Emphasis on augmentation of electricity generation through conventional and renewable means.

Necessary changes in the MMDR Act, 1957 to be introduced to encourage investment in mining sector and promote sustainable mining practices.

Financial Inclusion Mission to be launched on 15 August.

Fiscal deficit of 4.1% of GDP and Revenue deficit of 2.9% estimated for FY15 Market borrowing at Rs46121bn.

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Budget highlights – Financial Markets Ongoing process of consultations with all the stakeholders on the

enactment of the Indian Financial Code and reports of the Financial Sector Legislative Reforms Commission (FSLRC) to be completed.

Government in close consultation with the RBI to put in place a modern monetary policy framework.

Introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial sector.

Introduce one single operating demat account.

Uniform tax treatment for pension fund and mutual fund linked retirement plan.

Banks to be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL).

RBI to create a framework for licensing small banks and other differentiated banks.

Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force.

Six new Debt Recovery Tribunals to be set up.

Kissan Vikas Patra (KVP) to be reintroduced.

A special small savings instrument to cater to the requirements of educating and marriage of the Girl Child to be introduced.

A National Savings Certificate with insurance cover to provide additional benefits for the small saver.

In the PPF Scheme, annual ceiling will be enhanced to Rs1.5 lakh p.a. from Rs1 lakh at present.

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Key tax proposals Personal Income-tax exemption limit raised by ` 50,000/-

Investment limit under section 80C of the Income-tax Act raised from Rs1 lakh to Rs1.5lakh.

Deduction limit on account of interest on loan in respect of self occupied house property raised from Rs1.5 lakh to Rs2 lakh.

Investment allowance at the rate of 15 percent to a manufacturing company that invests more than Rs25 crore in any year in new plant and machinery. The benefit to be available for three years i.e. for investments upto 31.03.2017.

Investment linked deduction extended to two new sectors, namely, slurry pipelines for the transportation of iron ore, and semi-conductor wafer fabrication manufacturing units.

10 year tax holiday extended to the undertakings which begin generation, distribution and transmission of power by 31.03.2017.

Income arising to foreign portfolio investors from transaction in securities to be treated as capital gains.

Concessional rate of 15 percent on foreign dividends without any sunset date to be continued.

It is proposed to include the investment linked deduction u/s 35AD within the ambit of alternate minimum tax (AMT) after making adjustment for depreciation.

Any advance received by the seller during the course of negotiations for transfer of capital assets if the transfer does not take place and such amount is forfeited, to be taxes as Income from other sources.

Income from sale purchase of shares of the companies whose primary business is dealing in shares etc. to be treated business income and not speculative income as per the explanation to s 73.

Rate of tax on long term capital gains increased from 10 percent to 20 percent on transfer of units of Mutual Funds, other than equity oriented funds. Indexation benefits will not be available on capital gains from these funds.

Income and dividend distribution tax to be levied on gross amount instead of amount paid net of taxes.

TDS @2% on taxable receipts in respect of life insurance policies.

In case of non deduction of tax on payments, 30% of such payments will be disallowed instead of 100 percent.

To boost domestic manufacture and to address the issue of inverted duties, basic customs duty (BCD) reduced on certain items.

The scheme of Advance Ruling in indirect taxes to be expanded to cover resident private limited companies. The scope of Settlement Commission to be enlarged to facilitate quick dispute resolution.

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Budget Estimates Non-plan Expenditure of ` 12,19,892 crore with additional provision for

fertilizer subsidy and Capital expenditure for Armed forces.

Rs.5,75,000 crore Plan expenditure – increase of 26.9 per cent over actuals of 2013-14.

Plan increase targeted towards Agriculture, capacity creation in Health and Education, Rural Roads and National Highways Infrastructure, Railways network expansion, clean energy initiatives, development of water resources and river conservation plans.

Total expenditure of Rs.17,94,892 crore estimated.

Gross Tax receipts of ` 13,64,524 crore estimated.

Net to centre of ` 9,77,258 crore estimated.

Fiscal deficit of 4.1% of GDP and Revenue deficit of 2.9% estimated.

Allocation of ` 53,706 crore for North East Regions.

FY14RE FY15BE Change Gross Tax Revenue 1158906 1364524 18%

Corporation Tax 393677 451005 15% Taxes on Income 241691 284266 18% Wealth Tax 950 950 0% Customs 175056 201819 15% Union Excise Duties 179538 207110 15% Service Tax 164927 215973 31% Taxes on Union Territories 3067 3401 11%

Non Tax Revenue 193226 212505 10% Total Revenue Receipts 1029252 1189763 16% Capital Receipts Miscellaneous Capital Receipts 25841 63425 145% Market Loans 453902 461205 2% Other receipts 66439 63339 -5% Total Capital Receipts (A+B) 546182 587969 8% Non Plan Expendirure 1114902 1219892 9%

Revenue 1027688 1114609 8% Capital 87214 105283 21%

Plan Expendirure 475532 575000 21% Revenue 371851 453503 22% Capital 103681 121497 17%

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Fiscal roadmap

Assumptions

Projections for 2014-15 have been made taking into account a realistic economic recovery and continuation of set of tax measures announced in the budget for 2013-14. It is also expected that reforms in the administrative machinery oriented towards strict implementation will yield result.

This will require an average tax growth of 17.7% which would be possible through a combination of better tax effort.

The fiscal plan outlined in this document will have to be redesigned if the 14th Finance Commission changes the State share.

Certain one-time receipts budgeted in 2014-15 will not be available in 2015-16 and 2016-17. With regard to dividends from PSUs, the policy of the Government would be to enable them in investing their retained earnings in their capital projects. However, in the absence of any concrete capital investment plan PSUs should pay their cash surpluses as dividend to Government and other share holders. From telecom sector it has been assumed that renewal of licenses issued for 20 years earlier will come up for renewal during the projection period.

The amount estimated under disinvestment works out to be Rs.63,425 crore for general budget 2014-15. Sale of SUTTI shares is estimated at Rs6500crores. Over the medium term frame work, an amount of Rs.55,000 crore has been estimated for the years 2015-16 and 2016-17.

Total borrowings requirement for 2014-15 has been budgeted at `6,00,000 crore or 4.7 per cent of GDP. Net market borrowings of `4,61,205 crore has been budgeted to finance 86.8 per cent of the fiscal deficit.

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