Money Matters: Budget 2014 and the Great Expectations
Money Matters: Budget 2014 and the Great Expectations
As FM Arun Jaitley announced the Budget on 10th July, the stock market responded in a volatile manner and so did the Opposition. But for the individual taxpayer, the Budget has good news. The FM raised the exemption limit by Rs.50,000 from 2,00,000 to 2,50,000 for taxpayers below 60 years of age. Senior citizens earning up to Rs.3,00.000 have been exempted from the budget for all income groups. For those earning between Rs. 2,00,000 to 5,00,000, exemption hike is Rs.30,000 and not Rs.50,000. There is a benefit of Rs.5,150 for those whose income is between Rs.5,20,000 and Rs.1 crore. For those with incomes above Rs. 1 crore, the net benefit is only about Rs.5,665 as 10% surcharge is levied.
The Cabinet of 45 had only about 45 days to deliberate before the FM presented the budget. With the monsoon playing hide and seek so far and the economic situation looking so grim, it is hard to find a Budget that will reassure both domestic and foreign investors. Nor is it easy to walk away from the welfarist stance as many Indians continue to live in poverty.
Budget 2014 contains a few echoes of the previous UPA budget. The final product aims to be a “something for everyone” type of budget. The NDA government has voiced its commitment to spruce up rural and urban infrastructure particularly in key areas such as sanitation and drinking water.
In good news for mineral-rich states such as Odisha, Jharkhand, West Bengal and Chhattisgarh, the government has also assured the rate of royalty on minerals would be reviewed to ensure higher revenue. The Modi government is faced with the tough task of reviving economic growth in the face of a massive slowdown even while it has to limit borrowing. The Budget is mostly a balancing act between the bitter pills and the healing salves. With the FM declaring that he is accepting the challenge as “one fails when one stops trying”, the numbers game takes on a whole new meaning in the Indian economy.
The FM raised limits of foreign investment in defence and insurance ventures to 49% from the previous 25%. this is good news for foreign defence contractors who wanted a higher threshold to provide justification for sharing technology for site operation in India. A fiscal deficit target of 4.1% GDP has been accepted for 2014-2015. Fiscal deficit is seen as 3.6% of GDP in 2015/2016. The FM reiterated that “We cannot spend beyond our means”. Tax to GDP ratio will also be raised.
Around 7-8 percent growth is aimed for in the next 3 to 4 years. The FM also said new policies will be ushered in for higher growth and lower inflation. The aim will also be to approve goods and services tax by the end of the year. Rules on retrospective tax will not be changed. All pending cases of retrospective tax for indirect transfers will be examined by high-level committees before action is taken.
Changes are also proposed in transfer pricing mechanism. The government also extended 5% withholding tax on corporate bonds till June 30, 2017. Necessary tax changes will be provided to introduce real estate investment trusts and infrastructure investment trusts. FDI limit in defence sector was raised from 26% to 49%. FDI limit in the insurance sector was also raised from 26 to 49 percent.
Capital outlay for defence rose by 50 billion rupees over the interim budget. Around 70.6 billion rupees were allocated to create 100 “smart cities”. What was also proposed was 50 billion rupees for warehousing capacity while 100 billion rupees of private capital was allocated for start-up companies. Around 378 billion rupees of investment was allocated for national as well as state highways. 40 billion rupees was allocated for affordable housing proposed through national housing bank and tax incentives were extended for housing loans. 80 billion rupees were proposed for rural housing schemes.
The plan was also proposed to make petroleum and food subsidies more targeted. Rural job guarantee scheme for 100 days of paid employment annually became more focused on asset creation. As far as agriculture is concerned, 4% growth is being aimed for. Farm credit target is set at 8 trillion rupees for 2014-2015. Long-term rural credit fund with a corpus of 50 billion rupees has also been set up.
The real estate sector really responded well to the budget. For instance, DLF was up nearly 10% at Rs.224 in what was positive announcement on REIT for enabling the company to monetize its commercial real estate assets. For the common man, there were many pluses and minuses as far as the Budget is concerned. Soaps and oil product became cheaper while proposals were announced to ensure color TVs become cheaper. Excise duty on footwear was reduced from 12% to 6% and basic custom duty on LED panels below 19 inch were made nil. Tax exemption on home loans was raised to 2 lakhs. Indian Custom Single Window Project was also taken up for trade facilitation.
The not so rosy picture was for the sin taxes as excise duty on cigarettes and cigars rose between 11 to 72%. Export duty on bauxite increased from 10 to 20%. No reduction was announced for rail fare hikes. The FM also stressed the need for fiscal prudence. This will entail a lot more hardships and bitter pills. But what cannot be cured must be endured.
The maiden Budget was announced even as there were a lot of expectations from the new government against a slowing economy and weak public finances. Though the Budget is generally seen as an income-expenditure card, this time around the huge burden of expectations is as unprecedented as the massive majority with which the NDA government came into power.
The basic targets of the budget are non-plan expenditure at Rs. 12,19,892 crore and non-tax revenue at Rs. 2,12,544 crore. Revenue deficit was pegged at 2.9% of the GDP while plan expenditure is at Rs. 5.75 lakh crore. The impact of tax changes have been factored. Long term capital gains tax on MFs has been raised to 20%. Several 100 crore schemes in important areas have also been launched. Whether the numbers translate into action is a development that India now looks forward to.
