Union Budget 2014-15: Good to begin with…

India Infoline News Service | Mumbai |

There was a feeling among certain sections of the market that bolder reforms were warranted given the strength of this government’s mandate

The most anticipated event after a record election victory is now behind us. Mr. Arun Jaitley’s Budget speech evoked confused response with wild swings during and after the Budget presentation. There was a feeling among certain sections of the market that bolder reforms were warranted given the strength of this government’s mandate. Akin to the Railway Budget, the details were missed although the broad picture was conveyed reasonably well.

Gross tax revenue projection was cut by ~Rs15,000 crore compared to interim Budget numbers - Indirect tax revenue projected to grow by 20.3% yoy and direct tax by 15.7%. While customs and service tax projections appear reasonable, excise duty growth projections at 15.4% appear steep. On the direct tax front, personal income tax projection has been substantially reduced (by Rs22,200 crore) compared to interim Budget, but still appear high. Perhaps, the government expects additional income from advance ruling settlement in case of individual tax-payer disputes. Otherwise, there is a risk of falling short of the tax revenue target set by Rs10,000 crore.

Along expected lines, spending on Plan expenditure was substantially increased to support growth. Plan expenditure growth is targeted at 21% to be spent towards agriculture, capacity creation in health and education, rural roads, national highways, rail network expansion, among others. Surprisingly, non-Plan expenditure was not projected to grow at a slower rate than set during the interim Budget. Nevertheless, non-Plan growth is much lower than what is being spent on the Plan side. Subsidies have been pegged at 2% of GDP and only marginally higher than the interim Budget – petroleum subsidy seems to be under control with continued diesel deregulation and assuming gradual increase in LPG and Kerosene prices. Food subsidy target is reasonable but fertilizer subsidy looks under-provided, which could result in a working capital crunch for the sector. On MGNREGA, the minister aims to put this money to more productive use.

To make up for the 13% yoy growth in total expenditure and Rs9,000 crore shortage in net tax revenue, revenue from economic activities, particularly telecom auctions and other non-tax revenue targets have been raised higher. Non-tax revenue is estimated to be 18% of the total revenue composition, Rs 32,000 crore higher than interim Budget numbers. By doing so, the Finance Minister stuck to the fiscal deficit target of 4.1% that his predecessor had set. This is certainly a stretched target and could be missed by 20 basis points. Yet, that would not be seen as an under-achievement. The revenue deficit is pegged at Rs378,248 crore, 2.9% of GDP.

With only a few weeks to prepare, the FM announced some important steps like opening up FDI in defence and insurance sectors. Increasing the capital budget for defence by Rs5,000 crore was also an important move.

A major step undertaken was to boost financial savings and provide some relief for negative real returns in the economy. As opined in our pre-Budget note, the Minister raised individual tax slabs to Rs2.5 lakhs and also hiked the deduction under Section 80C to Rs1.5 lakhs. To boost savings further, the annual ceiling on PPF was raised and Kisan Vikas Patra and National Savings Certificate with insurance cover, were introduced. 

On the direct tax front, status quo in corporate taxation came as a big relief to many. Inverted indirect tax structure was also partly addressed in the Budget.

The Budget was particularly positive for infrastructure, housing and agriculture. While the FM touched upon the need for capital infusion in PSU banks, the figure of Rs13,400 crore allocated this year was much lesser than Rs15,800 crore the previous year. While banks were asked to lend to infra projects for the long term, it remains unclear whether their long term borrowings attract lower CRR and SLR norms. While end of retrospective taxation was needed to build confidence for investing in India, nothing concrete came in the Budget.

The biggest negative from a capital market viewpoint was the increase in rate of long term capital gains (LTCG) in debt mutual funds to 20% and the period for LTCG raised to 3 years instead of 1 year.

The Budget lays a broad roadmap for economic recovery and attempts to set in order the accounts, both in terms of deficit and quality of spending. The actual implementation on the ground will propel the economy and the market to a new orbit.

Other highlights of the budget
  • Convergence with International Financial Reporting Standard (IFRS) by Adoption of the new Indian Accounting Standards (2nd AS) by Indian Companies.
  • More productive, asset creating and with linkages to agriculture and allied activities wage employment would to be provided under MGNREGA – rural development
  • Agriculture - “Long Term Rural Credit Fund” to set up for the purpose of providing refinance support to Cooperative Banks and Regional Rural Banks with an initial corpus of Rs5,000crore
  • Introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial sector. Introduce one single operating demat account
  • Uniform tax treatment for pension fund and mutual fund linked retirement plan
  • Income arising to foreign portfolio investors from transaction in securities to be treated as capital gains.
  • Concessional rate of 15% on foreign dividends without any sunset date to be continued.
  • The eligible date of borrowing in foreign currency extended from 30th June ‘15 to 30th June ‘17 for a concessional tax rate of 5% on interest payments. Tax incentive extended to all types of bonds instead of only infrastructure bonds.
Income tax slabs for 2014-15
Tax slabs Individual till 60 yrs Senior Citizen above 60yrs and below 80yrs Senior Citizen above 80yrs
No tax 0- Rs250,000 0- Rs300,000 0- Rs500,000
10% Rs250,000-500,000 Rs300,000-500,000 -
20% Rs500,000-1,000,000 Rs500,000-1,000,000 Rs500,000-1,000,000
30% Above Rs1,000,000 Above Rs1,000,000 Above Rs1,000,000

Budget at a Glance
Rs bn 2012-2013 A 2013-2014 BE 2013-2014 RE 2014-2015 BE
1.   Revenue Receipts 8,792 10,563 10,293 11,898
2. Tax Revenue (net to Centre) 7,419 8,841 8,360 9,773
3. Non-tax Revenue 1,374 1,723 1,932 2,125
4.   Capital Receipts $ 5,311 6,090 5,612 6,051
5.   Recoveries of Loans 151 107 108 105
6.   Other Receipts 259 558 258 634
7.   Borrowings and other Liabilities* 4,902 5,425 5,245 5,312
8.   Total Receipts  $ 14,104 16,653 15,904 17,949
9.   Non-plan Expenditure 9,967 11,100 11,149 12,199
10.   On Revenue Account  of which, 9,143 9,929 10,277 11,146
11.   Interest  Payments 3,132 3,707 3,801 4,270
12.   On Capital Account 824 1,171 872 1,053
13. Plan Expenditure 4,136 5,553 4,755 5,750
14.   On Revenue Account 3,292 4,433 3,719 4,535
15.   On Capital Account 844 1,121 1,037 1,215
16. Total Expenditure 14,104 16,653 15,904 17,949
17.   Revenue Expenditure 12,435 14,362 13,995 15,681
18.   Grants for creation of capital assets 1,157 1,746 1,382 1,681
19.   Capital Expenditure 1,669 2,291 1,909 2,268
20.   Revenue Deficit 3,643 3,798 3,703 3,783
% of GDP (3.6) (3.3) (3.3) (2.9)
21.  Effective Revenue Deficit 2,486 2,052 2,321 2,102
% of GDP (2.5) (1.8) (2.0) (1.6)
22.   Fiscal Deficit 4,902 5,425 5,245 5,312
% of GDP (4.8) (4.8) (4.6) (4.1)
23.   Primary Deficit (20-11) 1,770 1,718 1,445 1,042
% of GDP (1.8) (1.5) (1.3) (0.8)
*  Includes draw-down of Cash Balance
$  Does not include receipts in respect of Market Stabilization Scheme

Sectoral impact

Agriculture
Key Announcement Impact
To formulate new urea policy Positive for all fertilizer players
To encourage new investment and capacity addition in the
chemicals and petrochemicals sector, BCD on reformate has been reduced from 10% to 2.5%
Positive for all chemicals and petrochemical players like Supreme Petrochem, Atul Ltd, Coromandal International
Targeting 4% sustainable growth in agriculture. Various initiatives announced to boost agriculture sector- soil health card for farmers, mobile soil testing labs, 2 new agri and horticulture universities, National adaptation fund and Agri-tech infrastructure fund Positive for all fertilizer, seeds and agrochemical players
Target of  Rs8tn has been set for agriculture credit during 2014-15 to give easy access of loans to farmers Positive for all fertilizer, seeds and agrochemical players
Rs10bn provided for “Pradhan Mantri Krishi Sinchayee Yojna” for assured irrigation to mitigate the risk of deficient rains Positive for Jain Irrigation, Finolex Industries, Supreme Industries, Astral Polytechnik

Auto
Key Announcement Impact
Retained excise duty cuts announced in Interim budget until 31 Dec 2016 On expected lines, no major stock reaction
Increase in customs duty flat rolled steel products from 5% to 7.5% Marginally negative for all auto manufacturers
Capital gains tax on FMPs Negative for MSIL, Bajaj Auto, Hero Motocorp which hold significant amounts in FMPs
Concessional rate of tax of 15% on dividend received by an Indian company from its foreign subsidiary proposed to continue without any sunset date Positive for Tata Motors
Extension of interest subvention with respect farm loans Positive for rural demand. Beneficial for M&M, Hero Motocorp

Banking & Financial Services
Key Announcement Impact
Serious intent to contain Fiscal Deficit at 4.1% and net market borrowing at Rs4.6tn for FY15  Positive for banks in general as restrained borrowings will not exert upward pressure on banking system liquidity and bond yields 
Allocated Rs134bn for PSU Banks re-capitalisation; though higher as compared to the interim budget, it is lower than market expectations. Further, no concrete roadmap provided for long term capital infusion from government. Negative for PSU Banks especially for those with low Tier-1 capital such as Central Bank, UCO Bank, Dena Bank, Allahabad Bank, Vijaya Bank, UBI, etc 
Banks to be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and PSL Positive for PSU banks and private corporate lenders as it would ease ALM risks and improve profitability in infra lending. Major positive for IDFC which in the process of converting into a bank and has a large infra exposure.
Banks encouraged to extend long term loans to infrastructure sector Positive for infra financing companies such as PEC, REC, PFS, SREI, etc as bank funding could become more competitive. 
Six new Debt Recovery Tribunals are proposed to be set-up for NPA resolution Positive for PSU Banks in general
Tax deduction for interest paid on housing loan for a self occupied property raised to Rs2lacs and various measures announced to boost development of low-cost affordable housing Positive for HFCs such as HDFC, LIC Housing, Indiabulls Housing Fin, Repco Home Fin, Gruh Finance and PSU Banks in general
Increase in FDI limit in Insurance sector from 26%  to 49% Would address long term capital requirements for insurance companies and unlock value for Indian promoters. Positive for MAX India, Reliance Capital, HDFC, ICICI Bank, SBI, Bajaj Finance and Kotak Bank
RBI to create a framework for licensing small banks and other differentiated banks. Positive for NBFCs that are aspiring for a banking license 
Measures taken to revive execution and investments in the power sector 1) stress on increasing availability of coal 2) extension of 10-year tax holiday for undertakings that begin operations by end FY17 3) various custom and excise benefits announced for renewable energy sector Positive in particular for power financing companies such as PFC, REC, PFS and SREI Infra

Capital Goods
Key Announcement Impact
10 year tax holiday extended to the undertakings which begin generation, distribution and transmission of power by 31st March ’17 Positive for power transmission companies. Would benefit companies like KEC, Jyoti Structures, Kalpataru Power, Alstom T&D
Increase in FDI in defence equipment manufacturing from 26% to 49% Positive for BEL, Astra Microwave, L&T, Bharat Forge
BCD on machinery, equipments, etc. required for setting up of solar energy production projects reduced to 5%. Positive for BHEL, Thermax
BCD reduced from 10% to 5% on forged steel rings used in the manufacture of bearings of wind operated electricity generators Positive for Suzlon
Excise duty reduced from 12% to Nil on forged steel rings used in the manufacture of bearings of wind operated electricity generators Positive for Suzlon
BCD is exempted on specified parts of LCD and LED panels for TVs. Positive for companies Videocon, Mirc Electronics
Rs5bn provided for Ultra Mega Solar Power Projects in Rajasthan, Gujarat, Tamil Nadu, Andhra Pradesh and Laddakh Positive for BHEL, Solar Industries Ltd, Thermax
Rs5bn for “Digital India” to provide broadband connectivity and other IT facilities at village level. Positive for Finolex Cables, Sterlite Technologies

Cement
Key Announcement Impact
Emphasis on infrastructure development : Investment of Rs380bn on new roads, housing for all by 2022, construction of  new ports, new airports, ghat development and smart cities Positive for the sector
Change in excise duty on coal Neutral for the sector; Minimal impact on cost

FMCG
Key Announcement Impact
Custom duty on Palm oil Fatty Distillate reduced from 7.5% to Nil and crude glycerine from 12.5% to Nil for soaps manufacturing Positive for HUL and GCPL
Excise duty on cigarettes increased by 72% for cigarettes of length not exceeding 65mm and by 11%-21% for cigarettes of other lengths. Similar increases are proposed on cigars, cheroots and cigarillos Negative for VST Industries, Godfrey Phillips, ITC. We believe ITC could lessen the impact by reducing contribution of 64mm cigarettes (which is currently lower at ~9% compared to other players (VST ~40%+). 
Excise duty increased from 12% to 16% on pan masala, from 50% to 55% on unmanufactured tobacco and from 60% to 70% on jarda scented tobacco, gutkha and chewing tobacco Positive for cigarette manufacturers like ITC, VST Industries, Godfrey Phillips
Reduction in excise on food processing unit from 10% to 6% Positive for Nestle, HUL, Britannia and GSK Consumer
Excise duty reduced from 12% to 6% on footwear of retail price exceeding Rs500 per pair but not exceeding Rs1,000 per pair. Footwear of retail price upto Rs500 per pair will continue to remain exempted Positive for Bata, Liberty Shoes
Customs duty on half-cut or broken diamonds increased from NIL to 2.5% and on cut & polished diamonds and colored gemstones from 2% to 2.5% Negative for TBZ, Gitanjali Gems, PC Jeweller

Infrastructure
Key Announcement Impact
10 year tax holiday extended to the undertakings which begin generation, distribution and transmission of power by 31st March ’17 Positive for all companies, will increase order inflow
Banks will be allowed to give long-term loans to infrastructure Positive for all companies, would increase capital availability
Infra REIT Positive for all companies, would increase capital availability
16 new port projects are proposed to be awarded this year with a focus on port connectivity Positive for port companies like Adani Port
Present corpus of Pooled Municipal Debt Obligation Facility enlarged to Rs500bn from Rs50bn Positive for companies in the water segment like Va Tech, L&T, Thermax
Rs1bn provided for Metro Projects in Lucknow and Ahmedabad Positive for companies for Reliance Infra, Voltas, Siemens, L&T
Investment of Rs378.8bn in NHAI, Target of NH construction of 8500km in current financial year, Rs143.9bn provided for rural roads development Positive for road construction companies like IRB, JKIL, L&T

IT
Key Announcement Impact
DDT to be paid on gross distributed profits To marginally impact cash flows of sector companies as many of them have a healthy payout policy
Higher taxability on transfer of MF units other than equity oriented funds 1) long term capital gains tax increased to 20% from 10% 2) holding period  for qualifying as long term capital gains increased to 36 months from 12 months  Marginal negative for the sector as IT companies have significant liquid investments, a part of which could be into such MF units. 

Media
Key Announcement Impact
Service tax introduced on revenue from advertisements in broadcast media, is being extended to cover such sales on other segments like online and mobile advertising. Negative for all the companies
Sale of space for advertisements in print media however would remain excluded from service tax Positive for print media companies like Jagran Prakashan
Community Radio Stations to be increased from 400 to 600 Positive for radio broadcasting companies like Entertainment Network

Metals & Mining
Key Announcement Impact
Rationalisation of customs duty on Met Coal. Reduced CVD from 6% to 2% and increase BCD from nil to 2.5% Positive for steel manufacturers like Tata Steel, SAIL, JSW Steel and JSPL
Rationalisation of customs duty on thermal Coal. CVD maintained at 2% and increase BCD from 2% to 2.5% Will be marginally negative for players like HZL, Hindalco, NALCO
BCD on stainless steel flat products to increase from 5% to 7.5% Positive for players like Jindal Stainless
Export duty on bauxite increased from 10% to 20% Positive for Sesa Sterlite, Negative for GMDC, Ashapura Minechem
BCD on coal tar pitch reduced from 10% to 5%. Marginally positive for aluminium producers like SSLT, Hindalco, NALCO
Clean Energy Cess levied on coal, lignite and peat increased from Rs50/ton to Rs100/ton. Will be marginally negative for players like HZL, Hindalco, NALCO, HZL
Royalty rates to be increased through MMDR Act  which has been pending since 2012 Negative for all players
Large allocation to road construction Positive for the sector
Concessional rate of tax of 15% on dividend received by an Indian company from its foreign subsidiary proposed to continue without any sunset date Positive for Hindalco

Oil & Gas
Key Announcement Impact
Production and exploitation of Coal Bed Methane reserves will be accelerated Positive for RIL, ONGC
Allocation of Rs634bn for petroleum subsidy Looks reasonable if the announced reforms on diesel price de-regulation continue to be implemented
Usage of PNG to be rapidly scaled up in a Mission mode Positive for IGL, Guj Gas
Basic Customs duty on reformate is being reduced from 10% to 2.5%. Basic Customs duty on propane, ethane, ethylene, propylene, butadiene is being reduced from 5% to 2.5% Marginally positive for RIL
Proposal to develop pipelines using appropriate PPP models Positive for GAIL, GSPL
Removal of customs and excise duties on LPG for non-domestic exempted category Prices to come down for non subsidized cylinders, Impact is neutral for the sector

Real Estate
Key Announcement Impact
Incentivising REITs and granting tax
pass-through status to avoid double taxation
Positive for DLF, Peninsula Land, Sobha Dev, Phoenix Mills
Allocation of Rs40bn for National Housing Bank to provide affordable housing Positive for low cost housing
developers like HDIL, Unitech, Puravankara
Deduction limit on interest on housing loan raised from Rs150,000 to Rs 200,000 Positive for all realty players
Developing one hundred smart cities Positive for all realty players

Telecom
Key Announcement Impact
Govt has budgeted Rs455bn in FY15 Communications receipts of which we estimate ~Rs265bn is from one time  fee and spectrum auctions Idea has already issued fresh equity to amass funds for upcoming auctions; it is likely to incur the highest renewal payouts compared to peers while Bharti is relatively protected from near term license renewals 

Travel & Tourism
Key Announcement Impact
Introduction of e-Visa policy in phased manner at nine airports within next 6 months To further facilitate visa on arrival policy; +ve for tour operators like Cox & Kings, Thomas Cook
Development of new airports under PPP in Tier 2 and 3 cities
 

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