Expectations from the Union Budget 2014-15

The first budget of the Narendra Modi Government is to be unveiled on the 10th of July. There are high expectations from various sectors of the economy that are looking forward to delivery of a promise by Mr. Modi on “Aaache Din”. The economy is passing through high inflation coupled with forecasts of a poor monsoon. The situation is further exasperated by the Iraq crisis. The finance minister has implied that Government does not have much  leeway in meeting the expectations of the industry and Aam Janata. The number one priority of the government appears to be fiscal consolidation, and that should be the basic strategy to contain government borrowing and reign in inflation. Therefore the wishlist of the different sectors may not be fulfilled in full as the finance minister believes sops do not translate into votes for the forthcoming assembly elections in several states. The Government is expected to focus on infrastructure, job creation, FDI, tax reforms, asset sale and reduction in fiscal deficit. In other words, the budget will definitely indicate a paradigm shift in focus and try to address the macro issues.

With this background, what can we expect when the budget is unveiled?

Direct taxes

Expectations are that threshold IT basic exemption of ₹2 lakhs may be tweaked marginally upward to, say, ₹2.5 to ₹3 lakhs and 80c limit may be increased to ₹2 lakhs from current ₹1 lakh. Since principal repayments of housing loans are covered u/s 80c, it should give a boost to real estate sector as well as banking and housing housing finance companies. The higher disbursement targets by lenders may lead to higher competition and better pricing of housing loans. Financiers may lower or waive processing charges for category one builders projects.

The exemption limit for senior and super senior citizens also may have to be revised upward by same proportion of ₹0.5 to 1 lakh. Section 24 exemption on housing loan interest may not be touched if 80c limit is increased taking into account resources constraint. The education cess and surcharge may continue.

Reduction in direct taxes due to increase in threshold limits for IT and doubling of section 80c  rebate should put more money in the pockets of “aam aadmi” leading to investments in real estate and securities market. The wishlist of brokerages includes reduction in STT. If the finance minister obliges it will be a boon to investors and speculators in the securities markets. I believe a booming stock market is good for the other markets as well, including the real estate sector.

I had an informal discussion with a loan executive of a large private sector bank. I asked him whether higher borrowing costs due to increase in interest rates results in loan delinquency, as RBI in successive policies provided more short term liquidity to banking sector, but kept the administered interest rates more or less at higher levels? He said, NPAs in housing sector loan portfolio is very low compared to other sectors. Hence, their bank wants to increase their sectoral exposure to housing by offering competitive pricing. Hence in the current market one can still get housing loans at competitive pricing. Coupled with higher disposable incomes due to changes expected in the budget, post budget demand for housing should get accelerated, leading to real estate price increases as well.

Although not directly connected with this topic, it is worthwhile to remember that Federal Reserve (FED) continued soft interest stance and deferment of immediate QE has resulted in FII pumping in large amounts of money to our markets.

Corporate direct taxes may not be tinkered with in the ensuing budget. But there is a bright possibility of MAT being reviewed.

Indirect taxes

Government has extended indirect tax sops by 6 months even before budget announcements. Simplification of indirect tax regime, early implementation of GST, revision of MAT, speedier refunds are some areas which this budget may address. There does not appear to be any scope of extending service tax net. The service tax threshold limit of ₹10 lakhs was set long back and may be reviewed.

To encourage investment and to bring down project costs, customs duty on infrastructure industries may be lowered to provide a sop for investments in infrastructure.

Containing  inflation

The subsidies are said to account for 14% of GDP. As a welfare state Government is committed to protect the poor from harsh economic environment. Given below is a table on subsidy spent in 2013-2014.

RegionSocial security programBillions in RupeesBillions in USD
Pan IndiaTotal subsidy for FY-2013-14 (approx)3,60060.00
Pan IndiaFood Security (PDS) (subsidy)1,25020.83
Pan IndiaPetroleum (subsidy)97016.17
RuralFertilizer (subsidy)66011.00
RuralNREGA (non-subsidy)3305.50
RuralChild development (ICDS) (non-subsidy)1772.95
RuralDrinking water and sanitation (non-subsidy)1522.53
RuralIndira Awaas Yojana (IAY) (non-subsidy)1512.52
RuralMaternal and child malnutrition (non-subsidy)30.05
StatesVarious programmes of state govts (subsidy/non-subsidy)60010.00

The government may take steps to reduce some subsidies and also try to bring in more transparency and accountability in administration of social security programs. It may do it through the budget or through administrative action (like the rail fare hike before the railway budget was presented). Subsidies are counterproductive as they contribute to the fiscal  deficits in good measure, leading to higher taxation, both direct and indirect. A high tax regime is counter productive as it leads to tax evasion as well as a high cost economy impacting demand. It also reduces the disposable income. It is also perceived that fuel subsidy on diesel and LPG is also enjoyed by those that can manage without it! This subsidy may be tweaked in the budget.

Policy shifts may result in taming the inflation gradually, which should result in lower interest regime, boosting investment. When this happens “Aache Din” would have arrived.

Raising resources

Government may give priority to tax reforms and set a time frame for it in this budget. This may include GST. The retrospective tax provision (remember Vodafone case?) may be repealed and simplification of tax regime may be proposed to curtail litigation which drags on for years.

FDI may get a boost to accelerate economic growth and creation of employment. It appears that FDI in defence and infrastructure industry will be articulated in this budget. It also appears certain that this budget will take credit for large scale disinvestment and may be mergers of state owned banks or asset sale by these banks for recapitalization to meet Basel norms.

A higher budgetary allocation is expected towards education and defence compared to previous budgets. Ultimately, the proof of the pudding is in the eating, and we have to wait till 10th of this month when the finance minister announces the budget provisions. One thing however appears to be certain, small sops will be provided to the salaried and middle class who are the main support base for BJP. A BJP functionary actually said that a sweet budget is on the anvil!

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