Union Budget 2015: The Weight of Expectations

The Union Budget has met a lot of expectations on the infrastructure and reforms front. Some of the highlights are as under:

Where the budget met expectations:

  • On the Macro Front, the Fiscal deficit target has been slightly revised upwards. For 2016 it has been revised up from 3.6% to 3.9% and for 2018 it has been revised upwards from 2% to 3%. Very subtly, the FM has left room for additional maneuvering to pump growth.
  • Defense allocation is up to Rs.2.47 lakh crore. The greater interest will be the focus on domestic manufacture of defense equipment to the extent feasible. This is positive for domestic defense companies like L&T, Bharat Forge, BEL etc.
  • Big push for infrastructure. 1 lakh kilometers of roads announced and 6 crore housing units announced. This is a major push for infrastructure and is positive for stocks like IRB Infra and J Kumar Infra.
  • Cut in corporate taxes is another major positive. The rate of corporate tax will be cut in phases from 30% to 25% over the next 4 years. This is positive for domestic stocks overall. However, the MAT stays at 18.5% and as a percentage of the revised rate of 25% it largely negates the benefits of the rate cut. Also, many exemptions for corporates will be withdrawn to reduce the complication in corporate taxation.
  • In tune with the international standards, the FM has announced a gradual movement out of specific targeted subsidies to direct transfer of benefits to end users. This will be possible due to the huge success of the Jan Dhan Yojna and will plug leakages in subsidies.
  • Wealth Tax has been abolished and a Rich Tax has been introduced. The abolition of wealth tax is a step in the right direction as it would help more families monetize their assets. The additional 2% surcharge on people with a taxable income of above Rs.1 crore was a surprise but that is in tune with what other countries like Singapore have recently done and what nations like the US are proposing to do.
  • Government will build 5 Ultra mega Power Projects with a capacity of 4000 megawatts each. A major push for the power sector and making the power deficit Nil by 2019.
  • GAAR has been deferred for a period of 2 years. But more importantly, the assurance has been given that even when it is implemented it will be only with prospective effect and not with retrospective effect.
  • The first step towards a Bank Holding company is a positive.
  • Divestment target of Rs.69,500 crore for 2015-16 is more aggressive compared to last year, but the question is whether such a target will be feasible with oil prices unlikely to pick up so soon.
  • There have been broad announcements on the ease of doing business although finer details of the same area waited.

Where the Budget did not meet expectations:

  • Across the board increase in excise duty has been announced. This could add to current costs. Also higher customs duty on many products will be negative for domestic costs.
  • Bank recapitalization allocation at Rs.7900 crore is below expectations especially as Indian banks need to move towards the Basel III norms.
  • The Rs.1000 crore allocation for IT startups may be good beginning but markets are more interested in what duty exemptions that will be available on the same lines as the IT sector got through the 90s.
  • The dilution of difference between the FDI and the FPI is a welcome measure. But what is interesting is that the onus of such limits monitoring will not rest with the RBI but with the government. In a way the independence of the RBI will be missing.
  • The budget has disappointed to the extent that the big bang government support to infrastructure seems to be missing. The private sector was looking at pump priming from the RBI for this purpose.
  • While the large mass of tax payers have been given marginal benefits, there is no clear policy on putting more money in the hands of the people.
  • Measures to curb black money are laudable. The argument can be that some of the penalties are extremely stringent, but whether they will really succeed in bringing back black money will actually translate.
  • The budget also disappointed on the focus on entrepreneurship. While there has been allocation of funds, the core issue of seed capital for start ups and tax breaks are not addressed. Also it is hard to understand how the “Ease of doing business will be actually implemented.
  • The confusion of MAT on FPI has been clarified hence the worry over hounding by tax authorities are not likely to be made any longer. However, MAT for Indian companies continues which becomes all the more sharp after the reduction in corporate tax rate.
  • Housing was a disappointment. People were looking for big bang tax breaks to encourage to acquire houses. Nothing of that kind was found in the budget.
  • Also there is an enabling provision to impose a 2% Swach Bharat Cess on tax payers. That will largely negate the effect of tax cuts.
  • The overall Service Tax rate has been raised from 12.36% to 14% all inclusive. This is surely inflationary and predicates largely on the ability of the government to get the benefits of GST quickly.

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