How to read Budget 2014: Full text with analysis

PTI

FP 10 July 14

Finance Minister Arun Jaitley presented the first budget of the Modi government.

The budget in the finance minister's own words, should be seen as a statement of intent and directional change. "A roadmap budget" as he described it in an interview with Lok Sabha television.

Firstpost editor R Jagannathan in his analysis of the budget, said Jaitley has taken a gamble: he has gambled that he will boost growth to reduce his fiscal deficit, and not immediately cut expenditures it to bring finances in order.

Here is a look at how you should view the budget, with notes and annotations. (Click on the yellow markers for analysis and comments)

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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.

Union Budget 2014: Highlights of Arun Jaitley’s speech

Live Mint : 10 July 14

Fiscal deficit

* Accepts fiscal deficit target of 4.1% of GDP for 2014-15

* Fiscal deficit seen at 3.6% of GDP in 2015-16

* “We cannot spend beyond our means,” says finance minister

* Tax-to-GDP ratio must be raised

Growth

* Aims for sustained growth of 7-8% in the next 3-4 years

* Finance minister says he is bound to usher in policies for higher growth, lower inflation

Taxation

* Jaitley vows to maintain a stable tax environment but stops short of scrapping rules on retrospective tax

* All pending cases of retrospective tax for indirect transfers to be examined by committee before action is taken

* Government will not ordinarily bring any change retrospectively that creates a new liability, Jaitley says

* Aims to approve goods and services tax by end of this year

* Extends 5% withholding tax on corporate bonds until June 30 2017

* To provide necessary tax changes to introduce real estate investment trusts and infrastructure investment trusts

* Extends 10-year tax holiday for power generation companies

To increase personal tax exemption limit by Rs.50,000 to Rs.250,000 for people less than 60 years; to Rs.300,000 for senior citizens

Education cess to continue at 3%

To increase investment limit under Section 83 to Rs.150,000 from Rs.100,000

To provide investment allowance at 15% for 3 years to manufacturing firms which invest more than Rs.25 crore in plant and machinery

Revenues and expenditure

* Estimates that total expenditure will be Rs.17.95 trillion in 2014/15

* Revenue deficit seen at 2.9% of GDP in 2014/15

* Capital receipts seen at Rs.73,950 crore in 2014/15

* Retains tax collection targets and makes no major changes to direct tax rates

* Allocates Rs.2.29 trillion for defence spending in 2014-15; capital outlay raised by Rs.5,000 crore over interim budget

* Earmarks Rs.7,060 crore to create 100 “smart cities”

* Proposes Rs.5,000 crore for warehousing capacity; Rs.10,000 crore of private capital for start-up companies; and Rs.37,800 crore of investment in national and state highways

* Rs.4,000 crore for affordable housing proposed through national housing bank;Rs.8,000 crore proposed for rural housing scheme

Foreign direct investment

* Raises limit on foreign direct investment in defence sector to 49% from 26%

* Raises FDI limit in insurance sector to 49% from 26%

Subsidies

* Plans to make food and petroleum subsidies more targeted

* Rural job-guarantee scheme, which provides 100 days of paid employment a year, will become more focused on asset creation

Agriculture

* Will focus on achieving 4% growth per year in agriculture

* Sets farm credit target at Rs.8 trillion for 2014/15

* Proposes a long-term rural credit fund with an initial corpus of Rs.5,000 crore

*Restructuring FCI and PDS a priority

*Rs.100 crore to set up agricultural investment fund

*To set up agricultural universities in Andhra Pradesh and Rajasthan

*To encourage farmers’ markets

Finance minister’s comments

* “The fiscal deficit target of 4.1% put out by my predecessor is indeed daunting. But I have decided to accept the target.”

* “The task before me is challenging because we need to revive growth in manufacturing and infrastructure. We need to introduce fiscal prudence and cannot spend beyond our means. For this, the tax-GDP ratio must be improved.”

* “A high-level committee will scrutinize retrospective tax cases. We are committed to providing a stable tax regime.”

* “We have no option but to take some bold steps to spurt economy; these are only the first steps and are directional.”

* “[India’s farming sector] has risen to the challenge of making India largely self-sufficient in providing food for growing population”, but there is “an urgent need to set up investment, both public and private”.

Excise duties

Excise duty on cigarettes hiked for 11% to 72%

To cut excise duty to 6% from 12% on footwear

Basic customs duty on non-fatty acids, glycerine to be reduced

To reduce customs duty of LCDs, LEDs on TV s below 19 inches

Duty on stainless steel products increased

Colour picture tubes to be exempted from customs duty

To reduce excise duty on food processing machinery

To impose customs duty of 10% on certain tele-communication items

Others

EPFO will launch unified account scheme

Capital of banks to be raised by allowing more shareholding

To allocate Rs.229,000 crore for defence

One Man, One Pension for soldiers- Rs.1000 crore allocated for this

To up capital outlay of defence by Rs.5,000 over and above sum provided in interim budget

Rs.100 crore allocated to create war memorial and war museum

Rs.1,000 crore over and above amount in interim budget to improve rail connectivity in Northeast India

A new 24/7 channel for Northeast India called Arun Prabha

To provide Rs.200 crore for power reforms, Rs.500 crore for water reforms in NCT Delhi

To provide Rs.180 crore to Puducherry for disaster management preparation

Rs.100 crore set aside for sports university in Manipur

To set up national sports academies in different parts of country

To provide special sum of Rs.200 crore to upgrade stadiums in Jammu and Kashmir

Rs.100 crore allocated for training for Asiad and Commonwealth Games

To set up ‘Young Leaders’ programme with initial allocation of Rs.100 crore

To provide Rs.500 crore to rehabilitate displaced Kashmiri migrants

To set up Centre for Himalayan Studies in Uttarakhand

Rs.100 crore to promote organic farming in Northeast India

Rs.100 crore set aside for ghat development

NRIs’ fund for cleaning up Ganga to be set up

To set up integrated Integrated Ganga Convocation Mission—Namami Ganga:Rs.2,037 crore allotted for this

Several major space missions planned for 2014-15

Rs.1,000 crore for railway lines in border areas

Rs.100 crore for technology development fund

Indian companies to move to new accounting standards by FY 2015-16

To raise PPF ceiling to Rs.1.5 lakh from Rs.1 lakh

Rs.500 crore to be set aside to create 5 tourist circuits

Rs.3,000 crore for modernizing police forces

Buddhist circuits like Gaya to be developed

Propose to revitalize small savings schemes

Special small savings schemes for education and marriage of girls

Govt in-principle agrees to consolidation of PSU banks

Long-term financing of infrastructure has been a constraint; banks will be encouraged to provide financing

Six new debt recovery tribunals to be set up

To accelerate exploration of coal and methane reserves

To encourage investment in mining sector and encourage sustainable mining practices

Royalty for mining to be revived on states’ request

To set up pashmina production scheme

Rs.10,000 crore for start-ups

Comprehensive policy for ship-building industry to be announced

Scheme for development of new airports through AAI and PPPs

To allocate Rs.100 crore to promote cleaner thermal power

Rs.11,000 cr allocated for development of ports

Rs.500 crore for setting up ultra-modern solar power projects Rs 500 crore for the scheme

To establish Export Promotion Mission

20 new industrial clusters to be set up

Rs.100 crore for Kisan television

Rs.5,000 crore to address the need to scientific warehousing

To set up trade facilitation centre

To support textile mega-clusters; 6 more clusters to be set up including Tamil Nadu and Surat

Ministries to be integrated through e-platform

National adaptation fund for climate change

Finance to 5 lakh landless farmers through Nabard

National Industrial Corridor with headquarters at Pune: Rs.100 crore allotted

Steps to operationalize SEZs to use unutilized land

Rs.400 crore for metro project in Lucknow and Ahmedabad

Adds slum development to list of CSR activities

Rs.100 crore for modernization of madrasas

Crisis management centre for women at Delhi; money to be provided from Nirbhaya fund

School assessment programme to be initiated at cost of Rs.30 crore

To allocate Rs.100 crore to set up virtual classrooms

To set up 5 more IITs including in Jammu and Kerala

Committed to have housing for all by 2022; will provide additional tax incentive on housing loans

Rs.8,000 crore for rural housing programme

Rs.3,600 crore for national drinking water programme

Free drug service, free diagnostic service to be set up

Backward region development fund to be launched

To set aside Rs.4,000 crore to set up 4 more Aiims institutes in Andhra Pradesh, West Bengal, Vidharbha and Purvanchal

Govt will make effort to create more inclusive society for differently-abled

Govt to print currency notes with Braille dots

Rs.50 crore to spent by road ministry to test schemes for safety of women

To revive Beti Bachao Beti Padhao scheme; to set aside Rs.100 crore for this

School curriculum to have separate chapter to inculcate gender sensitization

To encourage rural entrepreneurship

E-visas in 9 indian airports within next 6 months

Govt to cover every household under total sanitation by 2019

Rs.200 crore to be allocated to building Sardar Patel’s statue

Shyama Prasad Mookerjee Rozgaar Mission to be launched

National multi-skill programme called ‘Skill India’ to be launched

Manufacturing units can sell products in retail through e-commerce platform without additional charges

The govt will constitute an expenditure management commission

To make food and petroleum subsidies more targeted