Overview of the Economy
1.
The
slowdown in the Indian economy is seen in the context of a global slowdown.
Only China and Indonesia has grown faster than India. Growth has therefore
fallen to 5%. Getting back to the potential growth rate of 8% is going to be a
challenge. GDP growth this year is expected to be between 6.1% - 6.7%.
2.
WPI
inflation is at 7% and core inflation has gone down to 4.2%. Food inflation is
a worry, but steps are taken to increase supply side.
3.
Fiscal
deficit will be at the planned level of 5.2% in the current year, and will go
down to 4.8% next fiscal. The FM has pledged to reduce the fiscal deficit to 3%
by 2016-17.
4.
Net
market borrowing has been pegged at Rs. 484,000 crores. This is higher than
what was expected. Gross borrowing is at Rs. 629,000 crores out of which Rs.
50,000 crores will be borrowed to buy back bonds maturing later, to smooth out
the maturity profile. Hence gross borrowing is at Rs. 579,000 crores against
Rs. 558,000 crores in the current year.
5.
Expenditure
is expected to grow at 16.7% YOY, up from 9.7% in FY 13
6.
Gross
Tax Revenues are budgeted to grow at 19.1% in FY14, up from 16.7% this year.
This could disappoint unless growth picks up.
Total estimated receipts are up 23% from this year, which could be a
stretch.
7.
Disinvestment
target of Rs. 40,000 crores targeted.
Key Focus Area
of the Budget
1.
Women:
to stand in solidarity with the girl children and women. Pledge to do
everything possible to empower them and to keep them safe and secure.
2.
Youth:
to be motivated to voluntarily join skill development programmes.
3.
Poor:
to benefit from the direct transfer scheme: this will be rolled out throughout
the country.
Budget proposals, which will directly affect the
Investor
1.
There
is no change on Slab rates for personal income tax. However:
(a)
Tax credit of Rs. 2000 to be provided to every
person having an income upto Rs. 5 lakhs.
(b)
Surcharge
of 10% for individuals whose taxable income is over Rs. 1crore.
2.
Surcharge
increased to 10% from 5% on companies with a taxable income of over Rs. 1
crore. (5% for foreign companies). This increase is for 1 year only.
3.
Surcharge
on Dividend Distribution Tax raised to 10% from 5%
4.
Direct
Tax Code to be introduced in Parliament the current parliamentary session.
5.
First
housing loan of Rs 25 lacs (value of property Rs. 40 lacs) would get an
additional deduction of interest upto Rs. 1 lakh. This deduction can be claimed
for a maximum of 2 years.
6.
TDS
at 1% payable on the value of transfer of immovable property where the
consideration exceeds Rs. 50 lakhs.
7.
Securities
Transaction Tax has reduced for Mutual funds, equities, ETFs and Futures.
However there will be a Commodities Transaction Tax on non-agricultural
commodities.
8.
Rajiv
Gandhi Equity Saving Scheme to include mutual funds as well. Further it will be
applicable to those first time investors having an income upto Rs. 12 lakhs and
will be applicable for 3 years.
9.
Inflation
Indexed Bonds will be launched.
10.
Tax
free bonds allowed upto Rs. 50,000 crores in 2013-14 based strictly on the
capacity to raise funds in the market.
11.
Biggest
blow to the debt mutual funds is the Dividend Distribution Tax of 25% +
surcharge which comes to a total of 28.325%. Hence holding investment for a
year and paying capital gains, would be the tax efficient way to invest in debt
funds going forward.
Impact on the
Equity Markets
As
there were such high expectations from the Budget, the initial impact was
negative. There were no specific steps to spur growth in the economy. After
years of high fiscal deficit, it has become inevitable that the economy would
need to go through a phase of fiscal consolidation.
Going
forward equity investors would have to focus on earnings growth, and the global
news flow. Rate cuts and continued FII inflows would help spur on the equity
market.
Impact on the
Debt Markets
The
RBI should be pleased with the measures in the budget as it makes the right
moves to tackle the Current Account situation and also addresses inflationary
pressures. Hopefully, it can undertake monetary easing with a greater degree of
confidence.
As
most of the borrowing programme is normally front loaded, Open Market
Operations are likely to continue as a theme. Interest rate cuts to the tune of
at least 75 bps are expected this year, and hence a duration call can continue.
