Decoding how Budget 2014 will impact India’s economy

By Madan Sabnavis FB 11 July 2014

In what must be one of the longest Budget speeches which goes on for 43 pages, the finance minister has not quite presented a revolutionary set of proposals as was expected by the market but focused on fiscal prudence and gradual movement towards the 3% fiscal deficit ratio. This does appear to be the starting point; and the numbers have been worked around it. The fiscal deficit ratio has been retained at 4.1% of GDP with the caveat that this would be challenging.

The FM has alluded to the strategy followed by earlier governments to achieve the target by cutting down on discretionary spending. Hopefully this may not have to be done this time. For this to happen, the nominal GDP growth rate of 13.4% assumed must be achieved. Based on their own assumption of GDP growth of 5.4-5.9% in the Economic Survey, inflation may be expected to be around 7.5-8% for this to materialize.

What is the macro economic impact? First, the Budget will have a positive impact on growth based on the government’s own spending of Rs 1.07 lakh cr on capex not being compromised during the year and the other investments taking of as anticipated based on the various programmes announced. Given that there are eight months to implement these schemes, the impact will however be minimal in FY15. But an initial push can be provided.

Second, an attempt has been made to lower inflation through selective tax cuts. Given that food inflation is the major concern, over which the Budget has limited impact, it is unlikely to make a major dent here. Also the fuel subsidy has remained unchanged and while there is talk of better structuring, with elevated global crude oil prices, this could mean some additional pressure on inflation. Probably that is why the GDP (nominal) growth assumption of 13.4% takes in a high inflation number.

Third, investment will definitely get a boost though the various focus projects spoken of in terms of roads, new cities, warehousing, etc, will be only partly met in FY15. Add to this the investment allowance for companies which invest more than Rs 25 crore, and there could be a positive overall impetus. The only militating factor for this to work out would be the existence of spare capacity with industry and high interest rates in the face of low demand conditions.

Fourth, an attempt has been to boost savings by increasing the amount of savings under Section 80C. Simultaneously one is allowed to put now Rs 1.5 lakh  in PPF. Given that there is limited scope in terms of number of schemes under this section, funds would move towards insurance and PPF. However, the government does not expect more than Rs 2000 cr to accrue through this source, which means that the impact will not be really sharp. In fact, by making FMPs taxable under short term gains, savings which hitherto went here could move out to gold or equity, which will impact productive financial savings.

Fifth, the Budget has spoken about making agriculture more robust, but that appears to be more in the medium term as issues like having a national market and repeal of APMC laws has been on for quite some time now with few states really taking action. There has been a commitment made to grow this sector by 4% per annum, though the route has not quite been explained. This is a concern as agriculture is in the private sector and the government can only be an enabler. The measures announced may not be able to mitigate the ill effects of an adverse monsoon this year.

Sixth, the capital market expected some major changes like the reduction or abolition of the Securities Transaction Tax (STT). However, this has not quite happened and the focus is really now on sentiment being furthered by better economic performance. Also the fact that the government has not given up its prerogative on retrospective taxation is significant as it does dampen to an extent the enthusiasm in the market. This was one reason why the Sensex dipped during the announcement of the Speech though  it recovered after the other announcements were made.

Seventh, the fiscal deficit has been retained at 4.1% which means that the borrowing programme too would be around Rs 6 lakh crore as in the Interim budget. This number is important as it means that the pressure on liquidity will not change and interest rates, especially GSec yields will remain stable and guided more by RBI policy action during the course of the year.

Image: Thinkstock

Eight, the disinvestment target this year is around Rs 60,000 cr which is again audacious considering that even in the last couple of years the government has targeted such high amounts but has not quite garnered the same. In fact, we have not seen genuine disinvestment of this magnitude and more often the programme is partially completed by getting PSUs to invest in each other’s equity. The positive factor is that the capital market has been robust for some time driven by sentiment, which can support such programmes provided the sentiment remains as any significant change in macro fundamentals will be only gradual.

Nine, the banking sector has been told to fend for itself when it comes to capital, which is a good signal because it serves a dual purpose: banks find their own funds for capitalization and the government does not have to make such provisions. The challenge for public sector banks will be to raise this money for which they need to get their books in order as their NPAs are high as are the restructured assets, which have to be brought down to get better valuations in the market. Banks have also to be allowed to borrow long with CRR and SLR concessions so that they can lend to infra projects at lower rates. This will be beneficial for the borrowers.

Tenth, the big bang reform was to be in the area of subsidies. The overall amount has been left virtually unchanged with that on fertilizers moving up marginally. There has been some talk on restructuring them, but it looks unlikely that a solution can be found in the immediate run. With inflation high and threatening to increase due to a weak monsoon and high crude oil prices, any reduction in subsidy would mean higher inflation, which is not advisable. But, it would be interesting to see any changes in the policy of disbursal of subsidy.

On the whole the FM has done a good job working through the constraints, and tried to give incentives wherever possible and allocating funds where necessary. There has been no deviation as such from earlier budgets but a modicum of continuity has been preferred. It may be assumed that if the government is able to successfully implement this Budget, it could bring in the necessary reforms in the next one, when the macro conditions are hopefully better and a consensus reached on DTC and GST. This exercise would on the whole score 7 out of 10.

Budget 2014: Arun Jaitley’s top challenges

For Arun Jaitley, there is no easy way to meet these expectations given that the budget will be presented against the backdrop of sluggish economic growth, high inflation and the precarious state of government finances. Photo: Hindustan Times

Live Mint  Dipti Jain 7 July 14 

The expectations from the finance minister’s maiden budget are sky high. Here are the six biggest challenges he faces

Mumbai: The expectations from finance minister Arun Jaitley’s maiden budget are sky high, as is evident from the fact that Indian stocks are scaling new highs daily. For Jaitley, there is no easy way to meet these expectations given that the budget will be presented against the backdrop of sluggish economic growth, high inflation and the precarious state of government finances. The finance minister has to attack the core problems facing the economy. Here are the six biggest challenges faced by Jaitley, along with their solutions.

1) Declare war on subsidies

Graphics: Paras Jain/Mint

The subsidy bill was allowed to balloon over the past 10 years. This was not due to benign neglect alone. Handouts were central to the political strategy of the past two United Progressive Alliance governments. Such subsidies are often captured by vocal groups such as large farmers in the case of fertilizer subsidies and the urban middle class in the case of fuel subsidies. Jaitley has to slash subsidies at a time when the National Food Security Act has to be funded.

Key reform: Keep increasing fuel prices till the subsidy is eliminated while committing to follow whatever the 14th Finance Commission, headed by Y.V. Reddy, suggests on how to insulate the pricing of public utility services from politics.

2) Increase public investment

India cannot have a sustainable economic recovery unless the investment cycle is revived, according to most economists. The private sector is still wary about funding new capacity; many corporate balance sheets are burdened by excessive debt. Public investment has been indiscriminately cut in recent years whenever the government has had to trim spending. India needs more capital spending by the government to improve its creaking infrastructure. Jaitley will have to switch his spending priorities from subsidies to asset creation.

Key reform: Revive the defunct National Investment Fund that will direct public funds into new infrastructure projects. The money available for such overdue capital spending should be ring-fenced by ensuring that all money collected from privatization and sale of telecom spectrum is sent into this investment fund rather than wasted in populist spending schemes that do not create assets for the future.

3) Sell assets to generate funds

A weak economy means that tax revenue will continue to be sluggish this year. That is why non-tax revenue from privatization will be especially important if the fiscal deficit has to be narrowed. But privatization should not be seen only as a tactical necessity. The Indian public sector is inefficient. The government has created assets that it cannot manage well. It should sell them and use the money for new projects, the way a private equity fund juggles its investment portfolio.

Key reform: Announce a credible privatization road map that will be overseen by an independent commission. The sale of state-run companies has to be done in a fair manner to avoid the sort of crony capitalist practices that have given privatization a bad name in so many countries from Russia to India.

4) Increase tax-to-GDP ratio

The government collects too few taxes to run its daily show, create quality infrastructure and build even a minimal welfare state. The tax-to-GDP ratio is low even by Asian standards—though the two decades since the 1991 reforms have seen it become more progressive thanks to the growing contribution of direct taxes and the declining contribution of indirect taxes. Increasing tax rates is a bad idea. The more useful strategy is to get more people into the tax net by having a simple and stable tax system.

Key reform: The introduction of the goods and services tax (GST) has been delayed for far too long; the constitutional settlement has to be driven by the finance minister’s boss, Prime Minister Narendra Modi.

5) Put public finances back on track

The splendid increase in the national savings rate after 2003 was because of fiscal consolidation. The sharp increase in the revenue deficit after February 2008—six months before the global financial crisis—was the biggest reason why the savings rate has declined subsequently (while deteriorating company financials also reduced corporate savings). India won’t have adequate domestic resources to fund faster growth unless public finances are repaired.

Key Reform: Move towards a new version of the landmark Fiscal Responsibility and Budget Management Act that was introduced by the previous National Democratic Alliance government led by Atal Bihari Vajpayee.

6) Shift savings into the financial system

Years of high inflation combined with negative real interest rates on financial assets have encouraged Indian households to shift money out of the financial system. Physical savings have grown in importance. India cannot fund its economic revival unless financial savings become more attractive. The likely end to the gold super-cycle may help, but the eventual solution is to contain inflation.

Key reform: Tax breaks on financial savings can be increased, but the more viable strategy is to back Reserve Bank of India governor Raghuram Rajan in his battle against high inflation.

Budget expectations and the sectors it will impact at one glance

Barclays 7 July 14

The government is likely to propose a pro-growth budget focused on long-term improvement in fiscal position ( may include measures like reducing subsidies, restructuring welfare programmes, raising divestment target); improving investment climate( liberalization of FDI norms in Defence, E-commerce and Insurance sectors, export incentives, increase in ECB borrowing limit); controlling inflation ( lower purchase of cereals for PDS, reduction in cereal inventory at FCI warehouses); and tax reforms (roadmap for the implementation of the Goods and Services Tax (GST) and abolition of retrospective amendments) Source: Barclays

BUDGET Jul 7, 2014 Budget 2014: FM sets ambitious asset-sale target to raise $12 bn as stocks enjoy Modi boom

First Biz 7 July 2014

The government will seek to raise up to a record $11.7 billion in asset sales in its maiden budget this week, a senior government source said, bolstering state finances and buying time for structural reforms to revive a weak economy.

The privatisation target could reach Rs 70,000 crore, almost equal to all proceeds over the last four years, in a budget Prime Minister Narendra Modi hopes will launch the growth and jobs agenda that in May won him India's biggest election mandate in three decades. The budget is due on Thursday.

"The finance ministry has approached different ministries to increase the divestment target," said the senior official with direct knowledge of the budget process. The previous government had pencilled in sell-off proceeds of Rs 56900 crore.

The 63-year-old premier has made a decisive start by naming a streamlined cabinet, approving a slew of infrastructure projects and embarking on what promises to be a whirlwind first year of trade diplomacy.

But his government has been plagued too by the economic ills that brought down its predecessor: weak growth and high inflation caused by spending too much and investing too little.

Despite the market reforms of 1991 that brought down the curtain on decades of socialist isolation, tracts of Asia's third-largest economy remain off limits to outside investors.

Modi wants to open up industries like defence, but selling controlling stakes in bloated state enterprises is out of the question. They are not competitive and any job cuts ordered by a foreign owner would cause an outcry.

Instead, he will whittle down state stakes in firms that have already been partly sold, like Steel Authority of India Ltd, without surrendering overall control, said the official and other sources familiar with the plans.

Stocks have enjoyed a Modi boom, rallying 23 percent this year. Listed state firms have outperformed on hopes that wider ownership would discipline managers and that their bottom line would benefit from a loosening of price controls.

Leading the pack is Indian Oil, which has gained 62 percent in 2014. ONGC, another oil firm, is up 46 percent. Coal India has risen 36 percent.

TAX, SUBSIDY REFORMS

In setting an ambitious asset-sale target, the government will face inevitable scepticism from investors who are used to seeing its predecessors miss their privatisation goals.

The Modi government will also have limited scope to put its stamp on this first budget, which has been delayed by the election and will be delivered three months into the budget year to March 2015. The deficit is already near half the annual goal inherited from the last government: 4.1 percent of GDP.

Finance Minister Arun Jaitley is expected to roll out other revenue measures in addition to the asset sales, including a General Sales Tax that would unite the 29 states into a common market.

The measure would make it easier to do business and, over time, broaden the tiny tax base, which last year was a mere 8.9 percent of India's $1.9 trillion gross domestic product - about a quarter of the average for the OECD club of developed nations.

Some of the "bitter medicine" that Modi has warned people to expect would come, the senior government official said, in the form of reductions to subsidies on fuel, fertiliser and food that cost 2.3 percent of GDP.

Jaitley in turn has warned against "mindless populism", heeding the advice of officials at the Reserve Bank of India (RBI) who have warned him that fiscal laxity would complicate their task of curbing inflation, now in the high single digits.

Fiscal consolidation, predictable taxes and low inflation are key anchors that India needs for economic and financial stability, Governor Raghuram Rajan wrote in the RBI's recent financial stability report, underlining that message.

OIL COMPANIES

The government has signalled its willingness to trim its stakes in listed companies by backing a regulatory move to gradually increase the minimum free-float requirement for stocks included in the benchmark indexes, to 25 percent from 10 percent now. State-controlled firms currently have a 16 percent weighting in the indexes.

"It is the right time to sell stakes in public sector companies as the stock market is booming," said the official, who requested anonymity as the budget process is confidential.

Jaitley plans to front-load share sales, with a 5 percent stake in Steel Authority of India, worth $340 million, on the docket for late July, say sources familiar with the deal.

That is likely to be followed by a 10 percent stake in Coal India, the world's largest coal miner that is now 90 percent state owned. A deal would, based on current market pricing, be worth around $4 billion.

A senior oil ministry official said some of the leading oil companies were contenders for the share-sale programme, but did not name any names. A final decision would be taken by the finance ministry.

Deutsche Bank Securities forecasts proceeds of Rs 60000-8,0000 crore from asset sales in this fiscal year. That would enable the government to avoid borrowing more even if it raises its deficit target to 4.3-4.4 percent of GDP.

Reuters

Budget 2014 :Will General Budget Fuel the Real Growth Engine?

S Gurumurthy IE 30th June 2014 06:00 AM

The intuitive habit of drawing macroeconomic conclusions (about India) from the corporate feedback (and vice versa) is fraught with risk. After all, only half of India’s GDP and 10% of India’s employment are in the formal sector. Further, only a fraction of the formal sector is listed.” This is not any Swadeshi ideologue speaking. This is what the Asia Pacific/India Equity Research paper of Credit Suisse titled “India’s better half: The Informal Economy” says about the most unique aspect of Indian economy. 

The paper points out that corporate sector accounts for only one-fourth of the national capital formed - the share of listed corporates in it is even less, just 13%. Again corporate sector generates only 15% of the national consumption - the share of the listed corporates in it is just a fraction, just 4%.

 The Credit Suisse actually compares the corporate sector, which is the celebrity segment of the national economy since 1991, to the tail that “cannot wag the dog”. The Credit Suisse’s study bares the truth that the star corporate sector in India is just the tail - a fact others were too afraid to say, like in the popular Danish fairy tale of “Emperor’s New Clothes” where every one saw the king without clothes but was afraid to tell the truth.

Informal is not illegal

When the Credit Suisse study dismisses the formal - read corporate - sector as marginal what does it find as the core of the Indian economy. The title of the study itself says it is the informal economy of India. In economic discourse informal economy is not a complimentary term. A World Bank study talks of two kinds of informal economy: one survival activities: casual jobs, temporary jobs, unpaid jobs, subsistence agriculture, multiple job holding and two unofficial earning strategies unregistered business for tax evasion, avoidance of government or institutional regulations.

 But the Indian informal sector is neither. Credit Suisse says that the Indian informal economy is not contraband. It says: “Unlike in the developed economies where informality is purely a deliberate choice to avoid taxation or regulations, in India it is more structural: a reflection of the lack of development and limited government reach.” This is significant. The informal economy in India should carry no stigma. Yet the media, elite thinkers and economic experts in India look down upon the informal economy in India like it is viewed in the West. This is one of the reasons for the mental block against this most productive segment of the Indian economy.

Non-corporates employ 84% of

What is informal economy in Credit Suisse is the non-corporate sector in Indian dictionary. What is the size of the Indian non-corporate sector? Credit Suisse study says that it constitutes 84% of the non-formal employment in India. How about other countries. It is about 4-6% according to World Bank in ‘Developed’ nations. In developing Turkey it is 31%, South Africa 33%, and Brazil and Thailand 42%. The Credit Suisse study says: “India’s informal GDP, i.e., economic activity by unincorporated enterprises, is half of total GDP, among the highest ratios in the world.” 

Three significant facts emerge now. First, in developed nations, the informal economy escapes the state; in India the state has not reached it. Second, in developed nations, it is a marginal player; in India it is the main drive. Three, despite the obvious differentials the Indian economists and policy makers, imitating the West where it is marginal, hate the non-corporate sector and are working to wipe it out. The question is whether they can wipe it out?

Staggering Size

The size of India’s non-corporate sector is staggering. The National Sample Survey Organisation (NSSO) Survey 2011 says that there are 57.7 million non-corporate business units excluding those in the huge construction sector. Seven out of ten of them are unregistered. The non-corporate units have almost doubled since 1998. The NSSO says that 85% of them “Own Account Enterprises” (OAE) - meaning self-employment units and the rest are “Establishments” employing outside labour. Here is the picture of this core sector in brief.

 The aggregate value addition by these units is `6.28 lakh crore - 70% of it in rural areas. Value addition per unit is not trivial. It is `1.09 lakh. And value addition per worker is `58,000 and per hired worker is ` 47,000, which equals the average per capita income of India in 2009-10 and higher than the rural per capita income. 

They employ 108 million - rural 53 million. The units do employ capital that is not insignificant. The value of fixed assets per unit is `2 lakhs. A fourth of these units is engaged in manufacturing, more than two thirds in retail trade and services. A majority of them operate in rural areas, the most difficult terrain for the government to reach. During the liberalisation period this sector grew faster than the organised sector whose employment came down from 8% in 1991 to 7% in 2011

OBC SC ST Entrepreneurs

The most significant part of the story is that the non-corporate sector is dominated by disadvantaged sections of Indian society - the Other Backward Castes (OBCs) Scheduled Caste (SCs) and Scheduled Tribes (STs). A study Caste and Entrepreneurship in India by Lakshmi Iyer Tarun Khanna Ashutosh Varshney Harvard Business School (HBS) links the non-corporate sector to caste-based entrepreneurship. 

The NSSO Survey says that two-thirds of the sector is owned by ST (5%), SCs (14%) and Other Backward Classes (48%), including 71% of the manufacturing, and 60% of the trading, units. The Survey shows that the disadvantaged castes are increasingly into trade and manufacturing. In rural areas, 72 per cent of OAEs are run by them. The HBS study said that while, in case of OBCs, their share of the business matched their population, in the case of SCs and STs it was less. But the SC share improved from 10% in 2005 to 14% in 2011.

 In India entrepreneuship is not a product of IITs and IIMs. They are generated by non-corporate sector. The non-corporate business units actually constitute the open the air university of entrepreneurship for the OBCs, SCs and STs. The non farming enterprises hold huge prospect for the promotion of entrepreneurship, self-employment and livelihood among the weaker sections. The advent of Dalit entrepreneur in Agra and Kanpur could become an all Indian phenomenon.

4% credit for 50% GDP, 90% for jobs

Yet, shockingly, according to the Economic Census 2005, institutionalised finance is available only to less than 4% of the 57.7 million units. More than 90% of the units rely on own or traditional sources including usurious money lenders. Banks garner most of the savings with the bank deposit to GDP ratio doubling from 34% in 1991 to 68% now. But they, perhaps rightly, do not finance unregistered businesses. With over seven out of 10 of the 57.7 million non-corporate business units unregistered, no bank would ever finance them.

 The banks are unable to finance even the registered MSME units, whose share in bank credit had halved to just 7.2% between 1994 and 2008. Though it improved to 13.4% in 2009-10, it was still less than in 1994. It does not need a seer to say that for ensuring social justice it is necessary to increase the ownership of SCs and STs and also OBCs in this sector. It is doable. Malaysia has done it. 

Through its affirmative action policy launched in the 1970s, Malaysia managed to increase ownership in private enterprises for the discriminated group of Malaya from only 2 per cent in 1970 to 20 per cent in 1990. The government brought about a systematic redistribution of ownership of private capital in favour of discriminated groups in a period of two decades. (The Hindu dt 30.11.2011)

Credit will formalise the sector

The Indian economic establishment detests devising policies for providing finance to them because they are not formalised. But it now needs to think differently. Providing finance to them is really the best way to formalise them. Says that Economist Magazine (Sept 28, 2013)”At the present rate, it will take half a century before India’s economy is fully formal. The best way to speed up the process is to extend the reach of the financial system.”

 Undeniably, it is the non-corporate sector, not the corporate sector, which is the back-bone of the Indian economy, employment, trading and manufacturing. Also it is the only practical escalator to lift the backward sections out of poverty.

 But blinded by the love of the corporate sector and hatred for the informal sector there has been criminal neglect of this sector in the past. And yet, despite being left to fend for itself, it has saved India from  socio-economic anarchy by employing 90% of the non-farm labour. It desperately needs a new financial architecture which will finance small businesses. 

The banks working on global banking norms are structurally disqualified to lend to these units. This requires indigenous, non-Western out the box thinking. Will the budget 2014-15 fuel this real growth engine?

Modi govt's maiden budget on 10 July

FP :Jun 23, 2014 13:25 IST

  

New Delhi: Finance Minister Arun Jaitley will present the budget for the 2014/15 financial year on 10 July, government sources said, three days after the parliament begins its budget session.

The new government, led by Prime Minister Narendra Modi, will present the railway budget on 8 July and the country's economic survey on 9 July.

The budget session of parliament is scheduled to conclude on 14 August, but it could be extended further, the sources said.

India's previous government presented an interim budget for 2014/15 to parliament on 17 February, ahead of national elections to cover expenditure until a new administration was installed.

The rail budget will be held on 08 July, although the Modi government has already decided to hike rail passenger fares.

The CCPA, headed by Home Minister Rajnath Singh, decided that bills to replace ordinances, including the SC/ST Prevention of Atrocities (Amendment) Ordinance, the one on Polavaram project, the TRAI Act (Amendment) Ordinance and the one on SEBI, will be brought on a priority basis for consideration in the session, official sources said.

The ordinances have to be converted into bills before third week of July.

The over month-long session will have a total of 28 sittings.

The vote-on-account budget approved by the previous Parliament ends on 31 July and a new budget has to be in place before that date.

The opposition is likely to rake up the issue of hike in rail passenger fares and freight rates ahead of the presentation of the Rail Budget. Naidu had recently said that the election of Deputy Speaker will take place during the Budget session.

Speaker Sumitra Mahajan has already said that she would take a decision on the issue of the Leader of Opposition in the Lok Sabha before the Budget session.

Congress, which lacks the requisite numbers, is seeking the post claiming that it is the single largest party in the opposition benches and its pre-poll alliance -- UPA -- has together more than the adequate numbers to claim the post.

Reuters

Govt looking to hike I-T exemption limit to ₹5 lakh

Finance standing panel under Yashwant Sinha had suggested slab changes

BL :NEW DELHI, JUNE 13:  2014

The upcoming Budget may put more money in people’s pockets as the Modi Government is considering raising the income tax limit and tinkering with the existing tax slabs.

Indications are that the exemption limit will be raised to ₹5 lakh from the current ₹2 lakh; meaning, people earning ₹5 lakh or less annually will not have to pay tax.

Currently, tax is levied at the rate of 10 per cent on income of ₹2-5 lakh, 20 per cent on income of ₹5-10 lakh and 30 per cent on income above ₹10 lakh (see table).

Education cess

Further, there is an education cess and an additional surcharge at the rate of 10 per cent on income exceeding ₹1 crore.

The previous Government had rejected the suggestion of the last Standing Committee on Finance, headed by senior BJP leader Yashwant Sinha, that the I-T exemption ceiling be raised to ₹3 lakh.

The panel had recommended nil tax for income up to ₹3 lakh, 10 per cent for income of ₹3-10 lakh, 20 per cent for ₹10-20 lakh and 30 per cent for income beyond ₹20 lakh.

However, the Ministry had said that the total revenue loss on account of the changes and removal of cess would work out to around ₹60,000 crore.

Pros and cons

The argument in favour of changing the structure is that it would put more money in the hands of people and, in turn, raise demand for various goods and services, boosting the manufacturing and services sectors.

At the same time, more consumption would also result in higher collection of indirect taxes, which would compensate the fall in income-tax collection.

While some feel that more money in the hands of people will also help them combat inflation, economists believe that more money in circulation may actually fuel inflation.

(This article was published on June 13, 2014)