The document provides a summary and analysis of the Union Budget of India for 2014. It discusses the major announcements including a focus on infrastructure growth, fiscal consolidation, and measures to contain inflation. It analyzes the implications for various sectors and provides investment strategies. Execution will be critical to the success of the budget's goals of turning around economic growth, according to the document.

1. Review Note
of
Union Budget - 2014
&&
Investment Strategy
- Your life-time investment advisor -
12jul14

2. Execution is key . . .
We have been maintaining that Union Budget has lost its significance in last
decade, while comparing that of 1990s, as economy has opened up and also,
reform measures need not happen only through Union Budget. We have still
reviewed in this note, implication of recent Budget Announcement to various
stakeholders.
Major announcements –
Strong emphasis on infrastructure growthStrong emphasis on infrastructure growth
Focus on fiscal consolidation
Measures to contain inflation
Recapitalization of PSU Banks
Increase in FDI in insurance and defence
Debt Mutual Funds: Adverse proposal can hit hard
REITs: A definite step towards propelling significant value unlocking
We believe that while these announcements reflect the strong intent to
turnaround economic growth, which has been languishing in last few quarters,
EXECUTION remains critical for its success.
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3. GDP growth for FY 15 projected at 5.4-5.9%.
Tax Revenue growth pegged at 19.7% in FY15.
Inflation remains elevated level with gradual moderation in WPI recently.
CAD to be limited to ~$45bn, 2.1% of GDP in FY15.
Tax/GDP ratio seen at 10.6% in FY15.
Food subsidy pegged at INR 1.15tn in FY15, Fertilizer – INR 729.7bn, Petroleum
INR 634.27bn
FY15 fiscal deficit target pegged at 4.1%. FY16 target at 3.6% and FY17 at 3%.
Budget Highlights
Revenue deficit pegged at 2.9%.
Net government borrowing pegged at INR 4.51tn.
Plan expenditure of INR 5.75tn in FY15.
Disinvestment proceeds budgeted for FY15 at INR 634.25bn.
Solution on GST in the course of this year and approve the legislative scheme
which enables the introduction of GST.
PSU capex pegged at INR 2.47tn in FY15. PSU dividend pegged at INR
278.15bn.
Basel III norms require to infuse INR 2.4tn as equity by 2018 in our banks.
Advance ruling on Tax liability extended to resident taxpayers. Status quo on
retrospective tax laws. High Level Committee on arbitration.
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4. Tax Laws - There was no conclusive announcement on doing away with
retrospective tax laws and it was a major disappointment. Although, the FM said
that a high-level committee will scrutinize retrospective tax cases as the
government is committed to providing a stable tax regime.
GST - The disappointing component of the budget clearly was the fact that
Concerns
overdue reform namely, the need to implement unified goods and service tax
(GST) was only given cursory mention in the budget speech.
Non-Equity MFs Setback - In a blow to the mutual fund industry, the FM doubled
the long-term capital gains tax on Non-Equity mutual funds to 20% from current
10% level, while the holding period has been increased from 12 months to 36
months. Still, we would prefer some more clarity on indexation benefits on debt
funds having invested for more than 36 months.
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5. Personal Income Tax exemption limit to be increased from Rs.200,000 to
Rs.250,000 for individuals and from Rs.250,000 to Rs.300,000 for senior citizens
To encourage domestic investment in long term savings, the investment limit
under section 80C (of IT Act) to be increased from Rs.100,000 to Rs.150,000
The deduction limit on account of interest on loan in respect of self-occupied
house property to be increased from Rs.150,000 to Rs.200,000
To boost savings further, the annual ceiling on PPF has been raised and Kisan
Perspectives on Direct Tax - 1/2
To boost savings further, the annual ceiling on PPF has been raised and Kisan
Vikas Patra and National Savings Certificate with insurance cover are proposed
to be introduced.
To remove tax arbitrage between Debt Funds and Bank FDs, it is proposed on
transfer of non-equity Mutual Funds -
a) rate of tax on long term capital gains increased from 10% to 20%. (w.e.f. AY15-16)
b) the period of holding has been increased from 12 months to 36 month. (w.e.f. AY15-16)
c) Dividend distribution tax maintained at same rate. But, now to be charged on gross
amount distributed, rather than net amount, as of now. (w.e.f. 01oct14)
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6. While we have highlighted probable impact in following table, investors need to
assess the time horizon of their debt portfolio and accordingly can look at
investing long term (> 36 months) debt portion of assets into debt funds, which
shall provide indexation benefits with 20% (earlier 10%) tax rate and same will be
still lower than maximum marginal rate of tax on bank FDs, while taking some
market and credit risk.
Perspectives on Direct Tax - 2/2
IMPACT – Options for Corporates and HNIs for part of debt funds -
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Debt Funds with
BONUS Option
This option can help just postponing tax implication and may reduce tax
impact. (LTCG on Bonus units shall be 20% vs Bank FDs @ max rates and
higher DDTs).
Bank FDs Traditional product. But, early exit may attract penalty.
Arbitrage funds Inconsistent performance in ST. Can not absorb large sum.
Tax-free Bonds Longer duration and hence volatile in ST. Entry and Exit for retail investors
could be a challenge.
Corporate Bonds Need to understand credit risk of issuer of products. Early exit may attract
penalty
Structured
Products
Need to understand credit risk of issuer of products. Early exit may attract
penalty

7. Sectoral Impact – 1/2
Automobiles
- Positive
Increase in tax exemption limit
Capital
Goods --
Positive
Investment linked deduction for semiconductor wafer fabrication
manufacturing.
Investment allowance @ 15% for Rs.0.25bn or more of investment
in plant and machinery
Cement -
Positive
Customs Duty reduced from 6% to 2% (including that on non-
coking coal)
Royalty rates increased, is a negative, but may not be immediate
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Royalty rates increased, is a negative, but may not be immediate
Consumer–
Negative
Cigarette excise duty increase, is a negative, but better than
expected
Import duty reduction for soap inputs, fatty acids, crude palm
stearin and Crude glycerin
Financials-
Positive
Relief (CRR/SLR/PSL) on long-term funds for infrastructure
Home loan interest waiver raised from Rs.150,000 to Rs.200,000
FDI in insurance raised from 26% to 49%
Healthcare–
Neutral

8. Sectoral Impact – 2/2
Media –
Positive
Basic Customs Duty is being exempted on specified parts of LCD and
LED panels for TVs.
Basic Customs Duty on colour picture tubes reduced
Online and mobile advertising will now be liable for service tax
Metals -
Positive
Basic Custom Duty reduced on Coal Tar Pitch,
Basic Custom Duty increased on coking coal, Bauxite export
Oil & Gas-
Positive
15,000 km of gas pipeline to be laid under PPP mode
Custom duty cut on certain petrochemical input
Exemption from Basic Customs Duty is being granted on re-gasified
LNG for supply to Pakistan
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LNG for supply to Pakistan
Real Estate
- Positive
Introduction of pass-through of taxes for REIT
Deduction of interest in respect of self-occupied property increased
Utilities/
Infrastructu
re - Positive
Rs.5 Bn for to augment power supply to the rural areas
Rs.1 Bn is allocated for “Ultra-Modern Super Critical Coal Based
Thermal Power Technology”
Deduction under Section 80 – IA extended to 31Mar17
Rural Infra Dev Fund increased to Rs.250 Bn from Rs.200 Bn
Project award target of 8,500 km for NHAI
16 new projects with focus on port connectivity: Rs.116bn
To reduce custom & excise duty on renewable power equipment

9. The Government has balanced out the Budget with focus on stepping up gas on
Infrastructure projects through the PPP Route, providing tax pass-through for
REITs and Infrastructure Trusts, increasing scope of service taxes, whilst keeping
indirect taxes largely stable.
And accordingly, we continue to believe that:
Equity Strategy
a) Mid-caps will outperform large-caps (but, as a part of discipline, larger
component of portfolio needs to be Large-Caps)
b) Domestic plays will out-perform broader indices
c) Our preferred sectors include Autos, Cement, Banks, Industrials and Energy.
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10. Finance Minister Arun Jaitley said that the fiscal targets are daunting. By sticking
with the previous government’s budget deficit target of 4.1% for the current year.
India’s new finance minister has kept the bar high. Revenues will need to grow
faster than GDP, even by the administration’s own forecasts. That’s a tall order.
We think that a reversal of weak economic trends is likely in India, but it will be
slow and calibrated, rather than immediate and rapid. It is going to be challenging
for Government to maintain a balance between fiscal prudence and growth.
Debt Strategy
This union budget left the FY15, gross borrowings largely unchanged at Rs.6 trn
(net govt. borrowing, at Rs.4958 bn) versus the Rs.5.97 trn announced in the
interim budget. This resulted in some relief rally in G-Sec with yield softening by
around 10 bps. However, we believe that the assumption of 20% growth in gross
tax receipts (Rs.13.64trn) remains too optimistic.
In the very near term, we expect bond yields to remain range bound. Risk
remains around delayed and scanty monsoon.
We suggest investors to remain focused on shorter end of yield curve, with 2-5
years being sweet spot. Accrual products provide limited volatility in performance.
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11. USD-INR was very choppy during the budget announcement and is likely to
remain so, as the market picks through the budget's finer details. INR
depreciated crossing 60 levels, but we believe the optimism surrounding the INR
will remain intact, even though the budget may not have exceeded overall
expectations. It is hard for a new government to roll out a lot of details on reforms
with just seven weeks in office.
Currency Strategy
Considering the direction of policy actions by new government we think money
flow from global institutions shall continue and maintain our stance of range
bound behavior of INR at 58-62 levels in medium term.
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12. Final word . . .
The FY15 Budget has made a bold attempt to re-ignite growth through a bottom-
up approach. The Budget has something in it for all, with primary emphasis on
Bijli, Sadak, Pani and Makaan. There are also tax concessions for ‘Aam Aadmi
class’.
On the whole, the budget is well-balanced, but challenge remains in achieving
fiscal deficit which is estimated at 4.1% in FY15. We believe, this is an ambitious
target and moreover . . .
Execution is key . . .Execution is key . . .
Without strategy,
execution is aimless.
Without execution,
strategy is useless.
- Morris Chong
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13. Contact Us
Capital Advisors
+91-9820296989
mail@capitaladvisors.co.in
www.capitaladvisors.co.in
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- Your life-time investment advisor -

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