A responsible and balanced Indian budget

By Dr R Seetharaman/Doha

From the capital market perspective reduction in equity futures STT is a positive where as on commodities he has levied Commodities Transaction tax. Sebi Act to be eased for attracting more FII, sub-account holders and foreign portfolio investors in the Indian Equity markets. Number of institutions were allowed to issue tax free bonds, they raised Rs300bn, the finance minister proposed to raise this to Rs500bn. This is positive for infrastructure companies issuing bonds to raise at lower rates to fund the long-gestation projects.

Exemption limit increased by Rs100,000 for first-time home buyers up to Rs2.5mn will create demand for housing in the Tier-II cities. From a macro perspective, the expenditure was more than estimated so it was disappointing for the capital markets.

Expenditure growth is budgeted to rise 16.4% YoY in FY14, from 9.7% in FY13.  The minister has allocated Rs140bn for capitalising the PSU banks for complying with Basel III norms. This was expected but interest rate subvention is continued so it is negative for PSU banks, given the stressed asset quality of the PSU banking sector.

While the finance minister has, we believe, presented a prudent budget, the question is whether the numbers are achievable. In our view, the growing size of the government is worrying. Higher taxes are intended to redistribute income from the rich to the poor through the government’s social sector schemes, likely with an eye on elections.

Fiscal consolidation ought to be attained through a combination of higher taxes and lower spending, but the budget uses only the higher revenue route. Gross tax revenues are budgeted to grow 19.1% y-o-y in FY14 (from 16.7% in FY13), which could disappoint in the current weak growth environment. Further, the delayed payment on FY13 subsidies will mean the subsidy burden carries into FY14.

The imminent risk of India being downgraded seems to be evaded after presenting a prudent and pragmatic budget. It gets more evident with fiscal deficit stated at 4.8% in 2014 and 5.2% in 2013 which is lower as compared to market expectations of 5.3%. The greater cause of worry remains on the Current Account Deficit mainly on account of excessive dependence on oil imports, the high volume of coal imports, Gold imports and a slowdown in exports. The minister mentions the CAD financing needs US$75bn over a period of two years through Foreign Direct Investment, Foreign Institutional Investor or External Commercial Borrowing.

Fiscal Deficit, Current Account and Inflation

Budget estimates

The estimate of Plan Expenditure is placed at Rs5.55tn, as a proportion of total expenditure, it will be 33.3%. The budgeted expenditure in 2013-14 is 29.4% more as compared to the last year. Key allocations for planned expenditure are as follows:

1.Allocation of Rs373.3bn to the Ministry of Health and Family

2.Allocation of Rs658.67bn to the Ministry of Human Resource and Development.

3.The Mid-day meal scheme will be provided Rs132.15bn.

4.Allocation of Rs152.6bn to the Ministry of Drinking Water and Sanitation.

5.Allocation of Rs270.49bn to the Ministry of Agriculture.

6.Provided Rs140bn towards capitalisation of PSU banks for complying towards Basel-III norms.

The Non-plan expenditure is estimated at Rs11.09tn. The industry estimates an investment of Rs1tn in infrastructure. There will be contribution of 47% from the private sector.

1.Number of institutions were allowed to issue tax free bonds, they raised Rs300bn, the minister proposed to raise this to Rs500bn.

2.Road projects bottlenecks will get a preference and will be awarded in first six months.

3.A company investing Rs1bn or more in plant and machinery during the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15% of the investment.

Incentivising Household Sector

1.Rajiv Gandhi Equity Savings Scheme will be liberalised to enable the first-time investor to invest in mutual funds as well as listed shares and he can do so, not in one year alone, but in three successive years. The income limit will be raised from Rs1mn to Rs1.2mn.

2.First-time home loan buyers’ up to Rs2.5mn during 1.4.2013 till 31.3.2014 will be entitled to an additional deduction of up to Rs100,000.

Tax, Customs duty, Service Tax and excise structure:

No change in normal rates of 12% on excise duty and service tax.

1.Surcharge of 10% on persons (other than companies) whose taxable income exceed Rs10mn to augment revenues.

2.Increase surcharge from 5 to 10% on domestic companies whose taxable income exceed Rs100mn.

3.In case of foreign companies who pay a higher rate of corporate tax, surcharge to increase from 2 to 5% , if the taxable income exceeds Rs100mn.

4.In all other cases such as dividend distribution tax or tax on distributed income, current surcharge increased from 5 to 10%.

5.Additional surcharges to be in force for only one year.

6.Education cess to continue at 3% .

7.Modified provisions of GAAR will come into effect from 1.4.2016.

8.Specific excise duty on cigarettes increased by about 18%. Similar increase on cigars, cheroots and cigarillos.

9.Duty on mobile phones priced at more than Rs2,000 raised to 6% .

Reforms:

A sum of Rs90bn towards the first installment provided in the budget. Work on drafting GST Constitutional amendment bill and GST law expected to be taken forward.

lDr R Seetharaman is Doha Bank Group CEO