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Union Budget 2015-16
Continuity, simplification & incrementalism
Saturday, 28 February 2015 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. © Copyright 2012 InvesTrekk Global Research (P) Limited. All rights reserved. InvesTrekk – Trekking the path less travelled and InvesTrekk are trademarks of InvesTrekk Global Research (P) Limited.
FM sails without rocking the boat The first full budget of the incumbent NDA government reinforces the trend seen in past three years. The focus continues on gradual simplification in the tax laws and procedures, withdrawing the fiscal stimulus, and building rural infrastructure. "Incrementalism" against "Big bang" has been the strategy and continues to be so.
The question "whether FM could have done more?" is unfructuous in our view.
Market economists dominate - Financial markets get a cause to cheer
In a material departure from the past, the Union Budget, much like Railway Budget, has a distinct mark of the dominance of market economists. Historically the budget had been dominated by development economists. Financial markets should find a cause to cheer in this.
Vision 2022 - all encompassing development, execution to improve
The vision 2022 of the PM Modi finds some feet on the ground with this budget. The budget presents firm indications of execution strategy and plan for the vision to effect a wholesome improvement in the life of underprivileged (housing, water, power, health, education, access). "Plug and play" could be a game changer for infrastructure sector investments.
Accelerated globalization - focus shifts on "enablement" from "provision"
The budget seeks to accelerate the move towards globalization of fiscal practices and development policies. For example, consider the follwoing:
(a) Social security for all.
(b) Shades of Obamacare in health insurance, ESI to mediclaim etc.
(c) 401K makes an appearance in the form of 80CCD
(d) Platform for creating multiple layers of leverage
(e) Cashless society living on plastic money
(f) Foreign assets and income to strictly monitored & taxed just like US.
Policy focus is conspicuously shifting on enablement of youth through skilling, inclusion and access rather than just providing through subsidies and doles.
Team InvesTrekk
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Key highlights - Union Budget FY16 Vision 2020 Housing for all - 2 crore houses in Urban areas and 4 crore houses in Rural
areas.
Basic facility of 24x7 power, clean drinking water, a toilet and road connectivity.
At least one member has access to means for livelihood.
Substantial reduction in poverty.
Electrification of the remaining 20,000 villages including off-grid Solar Power- by 2020.
Connecting each of the 1,78,000 un-connected habitation.
Providing medical services in each village and city.
Ensure a Senior Secondary School within 5 km reach of every child, while improving quality of education and learning outcomes.
To strengthen rural economy - increase irrigated area, improve the efficiency of existing irrigation systems, and ensure value addition and reasonable price for farm produce.
Ensure communication connectivity to all villages.
Key Challenges Agricultural income under stress
Increasing investment in infrastructure
Decline in manufacturing
Resource crunch in view of higher devolution in taxes to states
Maintaining fiscal discipline
A step further in inclusion Micro Units Development Refinance Agency (MUDRA) Bank, with a
corpus of Rs20,000cr, and credit guarantee corpus of Rs3,000cr to be created. MUDRA Bank will be responsible for refinancing all Micro-finance Institutions which are in the business of lending to such small entities of business through a Pradhan Mantri Mudra Yojana.
In lending, priority will be given to SC/ST enterprises.
A Trade Receivables discounting System (TReDS) which will be an electronic platform for facilitating financing of trade receivables of MSMEs to be established.
Postal network with 1,54,000 points of presence spread across villages to be used for increasing access of the people to the formal financial system.
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Social security Government to work towards creating a functional social security system
for all Indians, specially the poor and the under-privileged.
Pradhan Mantri Suraksha Bima Yojna to cover accidental death risk of Rs2 Lakh for a premium of Rs12 per year.
Atal Pension Yojana to provide a defined pension, depending on the contribution and the period of contribution. Government to contribute 50% of the beneficiaries’ premium limited to Rs1,000 each year, for five years, in the new accounts opened before 31st December 2015.
Pradhan Mantri Jeevan Jyoti Bima Yojana to cover both natural and accidental death risk of Rs2 lakh at premium of Rs330 per year for the age group of 18-50.
Unclaimed deposits of about Rs3,000 crores in the PPF, and approximately Rs6,000crores in the EPF corpus to be appropriated to a corpus, which will be used to subsidize the premiums on these social security schemes.
Tax incentives increased for contribution to Pension Funds.
Infrastructure Sharp increase in outlays of roads and railways. Capital expenditure of
public sector units to also go up.
National Investment and Infrastructure Fund (NIIF), to be established with an annual flow of Rs20,000 crores to it.
Tax free infrastructure bonds for the projects in the rail, road and irrigation sectors.
PPP mode of infrastructure development to be revisited and revitalised.
Conversion of existing excise duty on petrol and diesel to the extent of Rs4 per litre into Road Cess to fund investment.
Atal Innovation Mission (AIM) to be established in NITI to provide Innovation Promotion Platform involving academicians, and drawing upon national and international experiences to foster a culture of innovation , research and development.
(SETU) Self-Employment and Talent Utilization) to be established as Techno-financial, incubation and facilitation programme to support all aspects of start-up business. Rs1000 crore to be set aside as initial amount in NITI.
Proposed legislation to replace the need for multiple prior permission by a pre-existing regulatory mechanism. This will facilitate India becoming an investment destination.
5 new UMPPS, each of 4000MW, in Plug-and-Play mode.
Target of renewable energy capacity revised to 175000 MW till 2022, comprising 100000 MW Solar, 60000 MW Wind, 10000 MW Biomass and 5000 MW Small Hydro.
The National Optical Fibre Network Programme (NOFNP) to be further speeded up by allowing willing states to execute on reimbursement of cost basis.
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Budget highlights – Financial Markets Foreign investments in Alternate Investment Funds to be allowed.
Distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments to be done away with. Replacement with composite caps.
Tax “pass through” to be allowed to both category I and category II alternative investment funds.
Rationalisation of capital gains regime for the sponsors exiting at the time of listing of the units of REITs and InvITs.
Rental income of REITs from their own assets to have pass through facility.
Permanent Establishment (PE) norm to be modified to encourage fund managers to relocate to India.
MAT rationalised for FIIs.
Public Debt Management Agency (PDMA) bringing both external and domestic borrowings under one roof to be set up this year.
Forward Markets commission to be merged with SEBI.
Section-6 of FEMA to be amended to provide for control on equity capital flows by Government in consultation with RBI.
Proposal to create a Task Force to establish sector-neutral financial redressal agency that will address grievance against all financial service providers.
India Financial Code to be introduced soon in Parliament.
Gold monetisation scheme to allow the depositors of gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal account to be introduced.
Sovereign Gold Bond, as an alternative to purchasing metal gold scheme to be developed.
Permanent Establishment (PE) norm to be modified to encourage fund managers to relocate to India.
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Key tax proposals Businesses Rates of corporate tax remain unchanged.
Surcharge increased from 5% to 7% and from 10% to 12% for domestic companies where income exceeds Rs10mn & Rs100mn respectively.
Tax rate for income of non-residents (including foreign companies) by way of royalty or FTS reduced from 25% to10%.
Where income of a company from its share in an AOP or BOI is exempt, then such income and its corresponding expenditure will not be taken into consideration while calculating book profits under MAT provisions.
Certain income from sale of securities by Fll not to be taken into account for calculating book profits under MAT.
The definition of charitable purpose now includes 'Yoga'.
Clarifications on taxability of indirect transfer of shares deriving substantial value from assets in India. 'Substantial' value clarified to mean 50% Indian assets vis- a-vis global assets and minimum Indian assets of INR 100 million.
Indirect transfer of shares of an Indian company pursuant to amalgamation or demerger of foreign companies shall be exempt from capital gain tax subject to fulfilment of prescribed conditions.
Cost of acquisition and period of holding of capital assets of demerged company to continue post demerger for the resulting company.
Applicability of GAAR deferred by 2 years and will now be applicable from financial year 2017-18.
Concept of place of effective management introduced to determine residential status of foreign company.
Higher additional depreciation and additional investment allowance on acquisition and installation of new assets in the State of Andhra Pradesh and State of Telangana.
100% Deduction on donation made to National Fund for Control of Drug Abuse, Swachh Bharat Kosh and Clean Ganga Fund.
30% deduction of additional wages paid to new regular workmen in excess of 50 regular workmen employed.
Pass through status provided to Category I and Category II AIFs.
Proposal to reduce corporate tax from 30% to 25% over the next four years, starting from next financial year.
Rationalisation and removal of various tax exemptions and incentives to reduce tax disputes and improve administration.
Monetary limit for a case to be heard by a single member bench of ITAT increase from Rs5lakh to Rs15lakh.
Domestic transfer pricing threshold limit increased from Rs5cr to Rs20c.
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Personal income-tax No change in the rates of income tax.
Surcharge increased from 5% to 7% and from 10% to 12% where taxable income exceeds Rs10mn & Rs100mn respectively.
Limit of deduction of health insurance premium increased from Rs15,000 to Rs25,000, for senior citizens limit increased from Rs20,000 to Rs30,000.
Senior citizens above the age of 80 years, who are not covered by health insurance, to be allowed deduction of Rs30,000 towards medical expenditures.
Deduction limit of Rs60,000 with respect to specified decease of serious nature enhanced to Rs80,000 in case of senior citizen.
Additional deduction of Rs25,000 allowed for differently abled persons.
Limit on deduction u/s 80C on account of contribution to a pension fund and the new pension scheme increased from Rs1lakh to Rs1.5 lakh.
Additional deduction of Rs50,000 for contribution to the new pension scheme u/s 80CCD.
Payments to the beneficiaries including interest payment on deposit in Sukanya Samriddhi scheme to be fully exempt.
Service-tax exemption on Varishtha Bima Yojana.
Indirect taxes Excise duty
Effective median excise duty rate increased from 12.36% to 12.50%.
Education cess and secondary and higher education cess exempted on all goods.
Manufacturers can issue digitally signed invoices and maintain records in electronic form.
Service tax
Effective service tax rate to be increased from 12.36% to 14%, from a date to be notified.
Education cess and secondary and higher education cess to be removed from a date to be notified.
Negative list pruned.
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Curbing black money - highlights Evasion of tax in relation to foreign assets to have a punishment of
rigorous imprisonment upto 10 years, be non-compoundable, have a penalty rate of 300% and the offender will not be permitted to approach the Settlement Commission.
Non-filing of return/filing of return with inadequate disclosures to have a punishment of rigorous imprisonment upto 7 years.
Undisclosed income from any foreign assets to be taxable at the maximum marginal rate.
Mandatory filing of return in respect of foreign asset.
Entities, banks, financial institutions including individuals all liable for prosecution and penalty.
Concealment of income/evasion of income in relation to a foreign asset to be made a predicate offence under PML Act, 2002.
PML Act, 2002 and FEMA to be amended to enable administration of new Act on black money.
Benami Transactions (Prohibition) Bill to curb domestic black money to be introduced in the current session of Parliament.
Acceptance or re-payment of an advance of ` 20,000 or more in cash for purchase of immovable property to be prohibited.
PAN being made mandatory for any purchase or sale exceeding Rupees 1 lakh.
Third party reporting entities would be required to furnish information about foreign currency sales and cross border transactions.
Provision to tackle splitting of reportable transactions.
Leverage of technology by CBDT and CBEC to access information from either’s data bases.
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Budget Estimates Non-Plan expenditure estimates for the Financial Year are estimated at
Rs13,12,200cr.
Plan expenditure is estimated to be Rs4,65,277cr.
Gross Tax receipts are estimated to be Rs14,49,490c.
Devolution to the States is estimated to be `5,23,958. Share of Central Government will be `9,19,842.
Non Tax Revenues for the next fiscal are estimated to be Rs2,21,733cr, including Rs69,500cr from disinvestment of PSEs.
Fiscal deficit will be 3.9% of GDP and Revenue Deficit will be 2.8% of GDP.
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Fiscal roadmap
Assumptions
The Gross tax revenue has been estimated at 10.3 per cent of GDP in Budget 2015-16, with a growth of 15.8 per cent over RE 2014-15. Projections for 2015-16 have been made taking into account a realistic economic recovery and continuation of set of tax measures announced in the budget for 2014-15. It is also expected that reforms in the administrative machinery oriented towards strict implementation will yield result.
For the budget of 2015-16, receipts from disinvestment have been estimated at Rs41,000 crore. However, as additional resource mobilization to meet the revenue shortfall following 14th Finance Commission, ` 28,500 crores have been estimated to flow from strategic disinvestments. These include sale of government holdings in non-government commercial entities, SUUTI, BALCO, HZL etc. Over the medium term frame work, an amount of Rs55,000cr and Rs50,000cr has been estimated for the years 2016-17 and 2017-18 respectively.
Total borrowings requirement for 2015-16 has been budgeted at Rs5,55,649cr.
Interest payment is projected at 49.6% of net tax to Centre, which is marked increase over the last year despite fiscal consolidation underway.
Major subsidies have been budgeted in 2015-16 at 1.6 per cent of GDP as against 2.0 per cent in BE 2014-15.
the GDP at current market prices expected to achieve a growth of 11.5 per cent in 2015-16 (real growth of 8.5 per cent and an implied inflation of 2.8 per cent) to attain a level of Rs14108945cr (US$2.28trn with USD= Rs62).
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Based on Economic Survey for 2014-15
Background of the Union Budget for FY16 The Union Budget for the fiscal year 2015-16 presented today is the first full scale budget of the incumbent government. Having given an overwhelming political mandate for faster, inclusive and sustainable development to the Prime Minister, all stakeholders have been looking forward to this budget with great anticipation of delivery on promises.
The government has delivered in right earnest inasmuch as administrative corrections are concerned. However, the economic reforms remain a work in progress and standing at this juncture in time, the road does not look smooth.
The economic survey for the year 2014-15, presented in the Parliament yesterday succinctly highlights the bumps in the road ahead and the strategy to move forward. The Budget should be interpreted in juxtaposition with this background to arrive at appropriate conclusion.
Highlights of the Economic Survey 2014-15
• Real GDP Growth Rate for FY2015 pegged at 7.4%.
• Average CPI to stand at 6.2% in FY2015. A further deceleration is expected opening up the space for further monetary policy easing
• Assuming a further moderation in average annual price of crude oil the current account deficit is estimated at less than 1.0% of GDP in FY2016
• Risks from a shift in US monetary policy and turmoil in the Eurozone need to be watched but could remain within control
• India’s services sector has grown rapidly in last decade with almost 72.4% of the growth in India’s coming from this sector which is growing in 2 digits
• India’s e-commerce market is expected to grow by more than 50 per cent in the next five years
• Proposals for the next five years, in renewable energy, are likely to generate business opportunities of the order of US$ 160 billion
• With contained inflation and fiscal deficit, Liquidity conditions are likely to remain benign in FY2016.
• To remain strong at external front, India should target foreign exchange reserves of $750Bn - $1 Tn over the long term
• Expenditure control and expenditure switching, from consumption to investment, both in the short and medium term will be key for maintaining fiscal discipline
• Raising economy-wide skills must complement efforts to improve the conditions for manufacturing
• Skill India objective should be accorded high priority along with, and indeed in order to realize, ‘‘Make in India’’
• Infrastructure growth in terms of eight core industries has been higher than industrial growth since 2011-12 and this trend is expected to continue
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Creative incrementalism with selected boldness
The policy stance of government so far has been incremental changes in status quo rather than any "big bang" departure from the past. This stance is likely to be maintained in the coming years also.
"Equally though, the mandate received by the government affords a unique window of political opportunity which should not be foregone. India needs to follow what might be called “a persistent, encompassing, and creative incrementalism” but with bold steps in a few areas that signal a decisive departure from the past and that are aimed at addressing key problems such as ramping up investment, rationalizing subsidies, creating a competitive, predictable, and clean tax policy environment, and accelerating disinvestment.
Thus, Weber’s wisdom cannot be a licence for inaction or procrastination. Boldness in areas where policy levers can be more easily pulled by the center combined with that incrementalism in other areas is a combination that can cumulate over time to Big Bang reforms. That is the appropriate standard against which future reforms must be assessed."
Lagging employment growth a worry
Unemployment is emerging to be the single most critical challenge for the policymakers. The challenge is even more severe in case of urban skilled workers who have been at the core of the India's urbanization so far. Given the current demographics of the country, a year's delay in finding a suitable job could jeopardize the whole professional career of a person.
Moreover, in past few years the rural wages have declined steadily thus impacting the very fulcrum of the India's consumption story.
"Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labor force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent. Creating more rapid employment opportunities is clearly a major policy challenge."
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Dramatic macro improvement warrant caution
Helped by some prudent policy measures by the government, RBI, lower global commodity prices and some improvement in business conditions, the matrix of India's macro parameters has improved materially in past 4-6 qtrs.
However given the speed and nature of the improvement some caution is in order and jumping to bold decisions may prove counterproductive at this stage.
"India’s macroeconomic improvement has been nothing short of dramatic—inflation has been cut in half to about 5 percent today, underlying rural wage growth has declined from over 20 percent to below 5 percent, and the current account deficit has shrivelled from over 6.7 percent of GDP (in Q 3, 2012-13) to an estimated 1.0 percent in the coming fiscal year.
That said, there is hardly room for fiscal complacency. To understand why, to realize where India needs to go, it is important to understand where it has been, and to draw lessons from this experience. The similarity between India’s situation today and in the early 2000s makes this exercise especially important."
Corporate balance sheets stressed, execution to remain challenged
The revival of investment cycle and improvement in project execution is also contingent upon strong corporate balance sheets. The data shows that the stress in corporate balance sheets has risen materially in past five years.
"India needs to tread the path of investment-driven growth. Can the private sector be expected to rise to the occasion? Highly leveraged corporate balance sheets, and a banking system under severe stress suggest that this will prove challenging."
"The biggest lesson from stalled projects and the associated credit aided infrastructure bubble is that perhaps more than a run up problem (over exuberant and misdirected private investment), we face a clean-up problem (bankruptcy laws, asset restructuring, etc.). Creative solutions are necessary for distributing pain equally amongst the stakeholders from past deals gone sour.
An idea to fix the clean-up problem is setting up of a high powered Independent Renegotiation Committee. In the presence of a market and regulatory failure, perhaps a creative step would be to involve external experts for a quick and independent resolution of the problems."
"Many infrastructure projects are today financially stressed, accounting for almost a third of stressed assets in banks. New projects cannot attract sponsors, as in recent NHAI bids, and banks are unwilling to lend. Given its riskiness, pension and insurance funds have sensibly limited their exposure to these projects. This current state of the public private partnership (PPP) model is due to poorly designed frameworks, which need restructuring."
As per a research study by Credit Suisse, almost one third of the companies are not earning enough to meet their interest liability.
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(ICR = Interest Coverage Ratio)
Banking sector repressed and stressed
The challenges in the Indian banking system fall into two categories: policy and structure.
"The policy challenge relates to financial repression. The Indian banking system is afflicted by what might be called “double financial repression”.
Financial repression on the asset side of the balance sheet is created by the statutory liquidity ratio (SLR) requirement that forces banks to hold government securities, and priority sector lending (PSL) that forces resource deployment in lessthan-fully efficient ways.
Financial repression on the liability side has arisen from high inflation since 2007, leading to negative real interest rates, and a sharp reduction in households’ financial savings. As India exits from liability-side repression with declining inflation, the time may be appropriate for addressing its asset-side counterparts."
The structural problems relate to competition and ownership. First, there appears to be a lack of competition, reflected in the private sector banks’ inability to increase their presence.
Indeed, one of the paradoxes of recent banking history is that the share of the private sector in overall banking aggregates barely increased at a time when the country witnessed its most rapid growth and one that was fuelled by the private sector.
It was an anomalous case of private sector growth without private sector bank financing. Even allowing for the irrational exuberance of the Public Sector Banks (PSBs) that financed this growth phase, the reticence of the private sector was striking.
Finally, even within the public sector banks there is sufficient variation in performance. Viewing public sector banks as one homogenous block would be a mistake."
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Need for public investment, Railways selected to engine the growth
Since the new government assumed office, a slew of economic reforms has led to a partial revival of investor sentiment. But increasing financial flows are yet to translate into a durable pick-up of real investment, especially in the private sector. This owes to a number of interrelated factors that stem from what has been identified as the “balance sheet syndrome with Indian characteristics.” If the weakness of private investment offers one negative or indirect rationale for increased public investment, there are also more affirmative rationales.
"The two biggest challenges facing increased public investment in India are financial resources and implementation capacity. the trick is to find sectors with maximum positive spillovers and institutions with a modicum of proven capacity for investing quickly and efficiently. Two prime candidates are rural roads and railways."
Conceptually, there is a strong case for channeling resources to transport infrastructure in India given the widely known spillover effects of transport networks to link markets, reduce a variety of costs, boost agglomeration economies, and improve the competitiveness of the economy, especially manufacturing which tends to be logistics-intensive. However, resources need to be prioritized among sectors based on assessments of risks, rewards, and capacity for efficient implementation."
Interest liability rising, subsidies, defence allocation down
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Important disclosures It is important to note that InvesTrekk does not offer any portfolio management , brokerage, money management, equity research or investment advisory services of any kind. Please take advise of a qualified and registered investment advisor before taking any investment decision.
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