Prime Minister Narendra Modi’s new government on Thursday unveiled a first budget of structural reforms that seek to revive growth, while spurning the temptation to resort to higher borrowing. The “Modi Sarkar” was handed a strong mandate on the back of reforms oriented pre-poll pitch and thus there were high expectations from the maiden budget. Though the budget did not have big bang reformist announcements but it did not veer from the path of fiscal consolidation and refrained from being populist. The fiscal deficit target continues to be 4.1% (as announced in interim budget) of GDP for FY15 as against street expectations of ~4.5%, further the fiscal deficit will be contained at 3.6% and 3% of GDP for FY16 and FY17 respectively.

The fiscal deficit target for current year and also its trajectory going ahead may seem a bit aggressive, but it is a clear show of intent to increase revenues. The absence of dole outs and sops from the budget note is again something that gives confidence that wasteful expenses will be minimalized and the focus will again be towards increasing revenue accretive Plan Capital Expenditure.

 

The budget was expected to be a prescription for various ailments bogging down the economy that led to sub 5% growth for two consecutive years and it did not disappoint. The budget may be devoid of any big bang measures but it makes sure that small cogs and wheels are well oiled so as to ensure a smooth transition to high growth phase. The budget is filled with slew of small ticket measures to address both physical as well as social infrastructure. The focus has also been maintained in attracting investments as well. Some key announcements in this regards are increasing FDI in Insurance and Defense, re-capitalization of Banks, PSUs directed to make capital investments, vision of 100 smart cities, incentivizing REITs and Infrastructure Investment Trusts, strong focus on Agri sector, tax incentive to Power companies, infrastructure sector with minimum regulatory pre-emption such as CRR/SLR & Priority Sector Lending and high spending on Transportation Logistics.

Commodity Market:

This has been as bad year for commodity trading like 2013, when turnover at the commodity bourses dropped 40 percent. Also the Union Budget was not in line with expectations. Some crucial announcements, such as amendment to the Foreign Contract Regulation Act, a cut in the commodity transaction tax and a reduction in gold import duty, were not announced. An allotment of Rs 5,000 crore for warehousing development will help increase capacity for increasing the shelf life of agriculture goods. The initiative would benefit not only the farmers but also banks, financial institutions, commodity exchanges and insurance firms. However, there needs to be more clarity on how this will be executed. Market participants were expecting financial institutions, such as banks, would be allowed to participate in the commodities segment. However, the same could not find place in the Budget. Prior to the Budget, there were hopes gold’s import duty would be reduced and some kind of relaxation steps would be announced to the 80:20 import norms.

Highlights of the budget presented by Finance Minister Arun Jaitley.

Fiscal Deficit:

•           Accepts fiscal deficit target of 4.1 percent of GDP for 2014/15

•           Fiscal deficit seen at 3.6 percent of GDP in 2015/16

•           Finance Minister says: “We cannot spend beyond our means”

•           Tax-to-GDP ratio must be raised

 

Growth:

•           Aims for sustained growth of 7-8 percent 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 percent 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

 

Foreign Direct Investment

•           Raises limit on foreign direct investment in defence sector from 26 percent to 49 percent

•           Raises FDI limit in insurance sector from 26 percent to 49 percent

 

Revenues & Expenditure

•           Estimates that total expenditure will be 17.95 trillion rupees in 2014/15

•           Revenue deficit seen at 2.9 percent of GDP in 2014/15

•           Capital receipts seen at 739.5 billion rupees in 2014/15

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

•           Allocates 2.29 trillion rupees for defence spending in 2014/15; capital outlay raised by 50 billion rupees over interim budget

•           Earmarks 70.6 billion rupees to create 100 “smart cities”

•           Proposes 50 billion rupees for warehousing capacity; 100 billion rupees of private capital for start-up companies; and 378 billion rupees of investment in national and state highways

•           40 billion rupees for affordable housing proposed through national housing bank; 80 billion rupees proposed for rural housing scheme

 

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 percent growth per year in agriculture

•           Sets farm credit target at 8 trillion rupees for 2014/15

•           Proposes a long-term rural credit fund with an initial corpus of 50 billion rupees.

Sector-wise Key Announcements

 

Sectors		Reforms	Remarks
Agriculture		Rs. 1000 Cr provided for “Pradhan Mantri Krishi Sinchayee Yojna” for assured irrigation.   Rs.100 Cr for “Agri-tech Infrastructure Fund”.   A scheme to provide every farmer a soil health card in a Mission mode will be launched.   “National Adaptation Fund” of Rs.100 Cr to meet the vagaries of climate changes.   “Price Stabilization Fund” of Rs.500 Cr to mitigate the risk of Price volatility.	Focus on agriculture sector will also help in taming food prices, which have been the main contributor to headline inflation.   With all the mentioned reforms Government could achieve a sustainable growth of 4% in Agriculture.
Banking/Fin Services		Allow banks to raise long-term funds to finance infra with minimal regulatory obligations on SLR, CRR & PSL   Increase foreign ownership limit in the insurance sector from 26% to 49% through the FIPB route.   Public Sector Banks to raise further capital from retail investors while retaining its majority shareholding.   Remove tax arbitrage by hiking tax rate on long term capital gains from 10% to 20% on Debt Mutual Funds. Also increased, LTCG tenor from 1 year to 3 years	To benefit banks to raise long term capital for infrastructure sector and help correct the Infra-Funding ALM mismatch.   Will help foreign partners to infuse capital & domestic partners to monetize their stake.   Negative as the expectation was that Bank Holding Company structure could be announced for Public Banks.   Will be beneficial for banks to garner higher deposits. Will aid deposit mobilization of the new banks.
FMCG & Retail		Reduction of basic customs duty on certain raw materials for the manufacture of soaps to Nil Excise hike on cigarettes by 11 to 72%. Increase excise duty on pan masala from 12% to 16%; on unmanufactured tobacco from 50% to 55% and on gutkha and chewing tobacco from 60% to 70% Reduce excise duty on specified food processing and packaging machinery from 10% to 6% Conditional Reduce excise duty from 12% to 6% on footwear.   The basic customs duty on semi-processed, half cut or broken diamonds, cut and polished diamonds and coloured gemstones rationalized at 2.5 percent.	Positive impact on FMCG companies having soaps portfolio   Adversely impacting cigarette companies   Endeavor to give a boost to the sector   Boost to the footwear sector   Adversely impacting jewellery companies with a portfolio in diamond jewellery
Infrastructure		Proposals to relax CRR/SLR requirements for infrastructure bonds and set up infrastructure investment trusts by banks Emphasis on PPP projects for attracting investments in roads, airports ports and roads. Has also emphasized on waste disposal & sewerage treatment and focus on drinking water.   Has extended the 10 year tax holiday to the undertakings which begin generation, distribution and transmission of power by31.03.2017. Assuring coal availability for the existing capacities is also a big positive for thermal power plants.   Focused on the need for renewables and has proposed to set up Ultra mega solar power projects and given benefits to the wind sector.	The proposed reforms will help in attracting capital, deepen debt market and create a risk appetite for infrastructure investments   An institution to provide support to mainstreaming PPPs called 3P India will be set up and this will help in the removal of structural bottlenecks
Oil & Gas	Govt committed to promoting & growing natural gas usage in cities/towns to replace crude oil derivatives, to focus on doubling the existing gas pipeline (additional 15,000 km) using appropriate PPP models.   Govt to focus on improving direct transfer of subsidy to poor sections thereby reduce subsidy burden for petrol fuels.   Gross subsidy on fuel provided at Rs.630bn, in line with the earlier provision in “Vote of Account‟ presented in Feb 2014		No major bold reform in terms of measured increase in the prices of products such as LPG & Kerosene was announced. Focus on gas pipeline and increasing the usage of PNG was re-iterated
Real Estate	Extended additional tax incentive on home loans.   Provided Rs. 4000 Cr for NHB from the priority sector lending to increase the flow of cheaper credit for affordable housing to the urban poor/EWS/LIG segment is provided.   Slum development to be included in the list of CSR activities to encourage the private sector to contribute more.   Requirement of the built up area and capital conditions for FDI to be reduced from 50,000 sq. metres to 20,000 sq. metres and from $ 10 mn to $ 5 mn respectively for development of smart cities.		Instruments to attract long term finance from foreign and domestic sources.   Should encourage people, especially the young, to own houses.
Tourism	Introduction of E-Visa at 9 airports   Sarnath-Gaya-Varanasi Buddhist circuit to be developed   National Mission on Pilgrimage Rejuvenation and Spiritual Augmentation Drive (PRASAD) to be launched   Develop an international convention centre in Goa   Development of more airports under PPP		Positive steps to develop tourism