Expectations from the Union Budget 2014-15: CARE Ratings

India Infoline News Service | Mumbai |

It will also set the tone for policy stance relating to fiscal issues as well as economic reforms.

The Union Budget for 2014-15 (FY15) is to be presented in the Parliament on 10th July 2014. This will be a critical Budget as it would be the first non Congress Budget after more than a decade. It will also set the tone for policy stance relating to fiscal issues as well as economic reforms.

The Budget is being announced at a time when the country has shown distinct signs of slowdown and is looking for a boost from thegovernment through appropriate policy announcements. Global as well as the domestic investors would also be looking for signals.

Two major problems for the economy today which have emerged in recent times are the possibility of a sub-normal monsoon and elevated crude oil prices on account of the crisis in Iraq. These issues would have to be kept in mind when drawing up the Budget. The government has already increased railways
tariffs which are an indication that the government would be walking the path of fiscal prudence and is likely to link any benefit to be given with a return in terms of fulfilment of economic objective.

The main themes for the FY15 budget would be:
Invoke measures to revive GDP growth.
Striking a balance between fiscal consolidation & public spending while maintaining sustainable inclusive growth

In particular take stance on subsidies and hence indicate policy relating to fuel pricing.
The ultimate targeted number will be indicative of the policy that will be followed during the year on calibrating prices of diesel, LPG and kerosene to the market.

Focusing on increasing infrastructure investment which can provide a big push to the economy.

Moving towards implementation of GST and DTC. While these will not be possible in this Budget a roadmap is likely to provide the market clues.

Measures to revive financial savings which have been declining in the last couple of years and also getting reflected in pressure on CAD.

Improving investor confidence by addressing issues that have caused apprehension in the past.

Budget Expectations
The Budget expectations are divided into four broad categories: macro-economy, revenue, expenditure and policy reforms.

Macro economy

I) Macro economy
Growth

The Governments objective in the Budget should be regaining the growth momentum. Affirmative action that has been initiated such as clearing of investments would translate into pick up in industrial activity and in turn enhance GDP growth. Therefore on the administrative side, there has been movement which should result in revival of investment. Also higher direct expenditure on infrastructure projects would be expected that can potentially forge strong backward links with the rest of the economy and provide an impetus to industrial growth. Focus is likely to be on roads and power.

Resurrection of financial savings
Personal taxation: Deduction under section 80C may be revised at a higher level from the existing limit of Rs 1 lakh to Rs 2 lakh to channel savings into financial instruments.
Rajiv Gandhi Equity Scheme (RGESS) scheme will probably need to be revisited. RGESS offers tax deduction to first time investors (in equity markets) having annual income of not more than Rs 10 lkhs. However, in order to enlarge its scope, the RGESS needs to be revamped and made applicable to all new investments for any investor.
Housing sector: Deduction of Interest on home loans is expected to be increased from Rs 1.5 lakhs to Rs 2 lakhs which will provide a boost to the home loan sector as well as housing industry.

Revenue

Disinvestment
With stock markets on an upturn and SEBI pushing for a minimum 25% public holding in public sector undertakings (PSUs), the disinvestment target is likely to be revised upwards from the Rs. 51,925 crore PSU stake sale target in the interim budget. Also the RBIs report on public sector banks has spoken of reducing the government stake in them. This could be the right time to offload equity into the market to the extent of 49%, so that banks would still remain in the public sector. Disinvestment proceeds are important to the government as it brings in additional revenue and also helps in reducing fiscal deficit burden.

MGNREGA
MGNREGA has not been too successful in producing meaningful public assets. NREGA programme needs to be reformed and redesigned to generate assets. This will address the issue of rural capital formation as well as employment. Higher allocations would be necessitated here in order to provide drought relief in case this situation arises.

Subsidies
The Budget will be looking at better targeting of the existing subsidy bill. Therefore, while absolute levels of subsidy are unlikely to go down, targeting the beneficiaries and improving the delivery mechanism will make the scheme more effective. In terms of absolute numbers it would be difficult to lower them for two reasons. First, with a sub-normal monsoon the amount to be deployed for food subsidy would be under pressure. Second, with international price of crude oil being uncertain, with an increase witnessed recently, the subsidy on protected products would increase. Hence any rationalization of subsidy on diesel or LPG will compensate for this additional increase.


Drought relief for farmers
With the specter of a sub-normal monsoon there will be pressure on the Budget to make provisions for relief for farmers. There can be a switch between accounts of allocations for bank capitalization with disinvestment to free resources for interest subvention or loan waivers for farm loans.

Power sector
Two aspects relating to this sector are likely to be addressed in this Budget. The first is availability of coal with some focus on the private sector participating in this sector. The other is ensuring that the sector is robust with emphasis on the discoms and the restructuring of state electricity boards. Subsidized power to the farm sector would be a contentious issue though it is being done by states. Also given that the monsoon would be less than satisfactory this year the government may not overemphasize this aspect this time.

Capital markets: Equity
To attract more investments, Securities Transaction Tax (STT) needs to be reduced. At present, STT is lower on options and higher on delivery transactions, making way for more speculation. An investor is charged 0.1% STT for shares bought for delivery however, STT of only 0.001% is charged for non delivery transactions. Hence, STT for delivery transactions need to be reduced to increase market participation and attract investments.

CARE Ratings

 

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