The fiscal policy of 2013-14 has been calibratedwith two fold objectives - first, to aid economy in growthrevival; and second, to bring down the deficit from2012-13 level so as to leave space for private sectorcredit as the investment cycle picks up.mes nearly six times more energy than an average bus, while two-wheelers consume about 2.5 times and three-wheelers consume 4.7 times more energy in terms of per passenger km.
real estate is linked to about 250 ancillary industries like cement, brick and steel through backward and forward linkages. Consequently, a unit increase in expenditure in this sector has the capacity to generate income as high as five timesIn order to mobilize funds for an estimated Rs 55 trillion worth of investments in the infrastructure sector during the Twelfth Five-Year Plan, the Union Budget encourages setting up of more IDFs. IDFs will offer take-out finance, credit enhancements and other innovative means to provide long-term low-cost debt for infrastructure projects.
Budget analysis beyond numbers
ECONOMIC OUTLOOK, BUDGET TERMINOLOGY, KEY HIGHLIGHTS, IMPACT ANALYSIS Prepared by: Satish N, Deepan L and Sinjana 3/21/2013 Ghosh
WHAT ARE THEPROBLEMS INDIANECONOMY IS FACINGRIGHT NOW?
Main problems Slowdown in growth High Inflation (recently moderated still above RBI comfort zone of 4-6%) Worsening twin deficits (High CAD & Fiscal deficit) Low IIP High interest rates Looming credit rating downgrade
Macro economic indicators Inflation (WPI vs. CPI, Core Inflation vs. Headline Inflation, Cost-push vs. Demand pull inflation) IIP(Index of Industrial Production) Mining -- 14.16% Manufacturing -- 75.53% Electricity -- 10.32%IIP (Use based calculation) (Basic – Capital—Intermediate– Durable -- Non Durable ) Fiscal deficit – Current account deficit – Relation between two Why RBI can’t reduce rates when there is high CAD?
When is data released? What are supply side constraints? Effect of high interest rates on economy GDP – Importance of it for removal of property Importance of savings rate, investment rate Consumption driven economy vs. Investment driven economy Importance of these parameters in framing fiscal and monetary policy
Small story about IndianEconomy(2009-13) Recession –> Fiscal stimulus –> High growth 2009-10, 2010-11 –> Mainly consumption driven –> Low investment in production capacities –> Supply side constraints –> High Inflation –> RBI rate hikes –> Low private investment –> low consumer spending –> Low growth –> Less taxes –> High fiscal deficit (crowding out of private investment) --> current account deficit
Key takeaways from Economicsurvey Three objectives for Indian Economy 1. To revive growth 2. India needs to shift from Consumption to Investment 3. Macro-economic stabilization conflicting and having commonalities Shifting spending from consumption to investment decreasing borrowing rate and increasing real returnson savings for people Structural reforms: moving people from low productivityjobs and high productivity jobs
Budget Income/Receipt ExpenditureRevenue Receipt Capital Receipt Plan Non Plan Expenditure Expenditure Tax Non Tax Plan Plan Revenue Capital Expenditure Expenditure Non Plan Non Plan Revenue Capital Debt Non Debt Expenditure Expenditure
Budget specific terms: Capital receipts – receipts which entails sale of assets. eg: disinvestments, sale of bonds Revenue receipts – do not entail sale of assets. Capital expense – expenditure to create assets. Revenue expense – other expenses. Plan Expenditure – Developmental spending. Non plan expenditure – Consumption spending
Receipts: Revenue Receipts & Capital receipts Revenue receipts: 12.56 lakh Cr. Tax: 8.89Lakh Cr = 12.36 lakh Cr- 3.47 lakh Cr(States share) Tax on income and expenditure- corporate tax, income tax Tax on property and capital transaction-taxes on wealth, STT, TDS Tax on commodity and services-customs, sales tax, service tax Agenda : major sources, when economy is good tax revenue is more, surcharge-20,000Cr additional, TDS for property valued more than 50Lakhs. Govt loses 20,000Cr in each of customs, excise and corporate tax but inc. tax more than BE.
Receipts: Non-Tax: 1.72lakh Cr Interest receipts, profits and dividend : Interest – 17,000 Cr Dividends and Profits – 73,866 Cr. ( 42% of non tax revenue ) From PSUs , PSBs and RBI Agenda : PSUs sitting on cash piles give out more divided which increases non tax receipts. Effect of disinvestment in PSUs on dividends and profits, Over 75% (previously 50%) of Dividends and profit expected to come from banking sector, so its progress is very important. General services - defence, police, public service commission. Social and community services – Medical and public health. Economic services - power, petroleum, industries, roads and bridges, communication services, postal services, railway revenue, R&D.
Receipts: Capital Receipts: 6.1lakh Cr. Debt receipts – 5.4 lakh Cr. market loans, treasury bills, internal debts and public accounts, external debt. Market loans – 4.84 lakh Cr. Short term borrowings – 19844 Cr. Agenda : Importance of credit ratings. Non Debt receipts – 66000 Cr Recoveries of loans and advances – 10,000Cr State govt., union territories, foreign govt. Agenda : over the years, recoveries are more than BE. So healthy sign. Misc. capital receipts- 56000 Cr disinvestment , disinvestment from non govt. companies. Disinvestment receipts – 40,000 Cr.
Discuss: Agenda : difficulty in achieving disinvestment target, Govt. lose stake in holding cos. So decreasing share of profit and dividends, public unrest, one time revenue generators, cannot keep this as a practise. Valuation degrade if auctions are not successful (depends on mkt sentiments as well) not an healthy sign to the co.
Expenditure: Plan: 5.5 lakh Cr. – developmental expenditure: health, infra, social goals, education. Non-plan: 11.10 lakh Cr. – consumption expenditure: defence, salaries, subsidies, pensions. Non Plan Revenue Exp: Interest payments and debt servicing.-3.7 lakh Cr. ( 33% of total non plan ) Grants to state govt. Pensions Subsidy - 2.2lakh Cr– food, oil, fertilizer (19.8% of total non plan) Police Grants to foreign govt. Transport. There is also non planned allocation for some sectors like agriculture, welfare & education, infra, transport, research etc. Agenda : effects of increase in non plan expenditure.
Expenditure: Non Plan Capital Exp: Defence - 2 lakh Cr. Plan Capital Exp: Energy – power, nuclear power, petroleum, coal . Industry and minerals – iron and steel, non ferrous, mining , fertilizer, MSMI, Transport Infrastructure IT Space research and other scientific research Agenda : These are the sectors which are contributing for major part of returns. Any decrease in spending on these will affect the income in long run.
Expenditure: Plan Revenue Exp: Social services – education; higher education, technical education( IITs(2400Cr) , IIMs(350Cr)). Social goals - housing; rural housing, urban development. -welfare; welfare of SCs, Tribal welfare. Agricultural (40,000 Cr)- various schemes and yojanas, animal and crop husbandry. Rural development ( 74,429Cr) – MGNREGA Irrigation and flood control (development of water resources information system, hydro project)
Discuss: Agenda : Effect of widening fiscal deficit : Trend of Indian expenditure: plan expenditure always less than budget estimate. So, any increase in fiscal deficit is due to increase in non-plan expenditure. Decreasing PE but widening fiscal deficit increasing non plan expenditure. (No growth of assets) India achieves the fiscal deficit by decrease spending on plan exp.- easier way. Revenue deficit = excess of revenue expenditure(plan + non plan) over revenue receipt. Ideal condition : revenue deficit=0, then all the borrowings ( adding to fiscal deficit) are for generating assets.
Trends: In Rs.Lakh Cr. BE ( 2013-14 ) BE ( 2012-13 ) RE ( 2012-13 ) Tax Revenue 8.84 7.72 7.42Non Tax Revenue 1.72 1.64 1.29 Plan Exp 5.5 5.21 4.29 (17.6% dec) Non Plan Exp 11.10 9.69 10.01 (11% inc) SUBSIDIES BE ( 2013-14 ) BE ( 2012-13 ) RE ( 2012-13 ) Oil 65000 43580 97000 Petrol+food+fe 2.2 1.79 2.48 ( 38% rtilizer higher )
Key Highlights Plan Expenditure:“I dare to say I have provided sufficient funds to each ministry or department consistent with their capacity to spend the funds. Now it is over to ministries and departments to deliver the outcomes through good governance, prudent cash management, close monitoring and timely implementation” 6.6% increase over “budgeted estimates” and 29.6% increase over the “revised estimates” of current financial year . Rs 14,873 crores allocated to Jawaharlal Nehru Urban Renewal Mission (JNNURM) in budget estimate 2013-14.Major part will be for purchase of 10000 buses. investment allowance at the rate of 15 percent to a manufacturing company that invests more than `100 crore in plant and machinery during the period 1.4.2013 to 31.3.2015 Capital infusion of 140 billion to banks social sector schemes such as Bharat Nirman, the Mahatma Gandhi National Rural Employment Guarantee Act and the National Rural Health Mission.
Key Highlights Non-plan Expenditure Budgeted at Rs. 11,09,975 crore, it is 14.5 per cent higher than the budget estimate of Rs. 9,69,900 crore and 10.81% higher than the revised estimate for FY2012-13. Food Security Bill – Rs. 10,000 crores Petroleum subsidies: Rs. 65,000 crores. Tax Revenue:“ I believe in stable tax rates. However I must concede that there is an argument, underline the word argument, that when the economy requires, government requires more resources, the very rich willingly should pay a little more" 10 per cent surcharge on persons (other than complanies) with taxable income exceeding Rs 1 crores. Proposal for service tax on all air conditioned restaurants Large unexpected hikes on excise duty and customs duty of SUVs and high-end motor vehicles Increase in surcharge from 5 to 10 per cent on domestic companies whose taxable income exceeds Rs 10 crores.
Key Highlights Tax Revenue: Tax credit of Rs 2,000 to every person with total income up to Rs 5 lakh Duty-free limit on gold raised to Rs 50,000 in case of males and Rs 100,000 in case of females Proposal for service tax on all air conditioned restaurants. Rs.419520 crores have been estimated as income from corporate taxes, 12% above previous year. Budgeted revenue from income tax is Rs.247639 crores compared to Rs.195786 crores estimated last year. Total tax revenue is estimated at Rs.8,84,078.32 crores, 14% above previous year’s budget estimate. The budget estimate of FY2012-13 has already seen an upward revision. Increase in income tax surcharge for corporates from 5 per cent to 10 per cent, surcharge on dividend distribution tax from 5 per cent to 10 per cent, and increase in rate of tax on royalty and fees for technical services to non-residents from 10 per cent to 25 per cent will adversely affect corporate profitability
Key Highlights Non Tax Revenue Total interest payable by railways is budgeted at Rs.6249 crores, 17.04% higher than revised estimates of current fiscal but lower than the budgeted estimate, Rs.6676 crores last year. Net interest receipts Rs.17764.39 crores is budgeted compared to budgeted estimates of Rs.19230.68 crores and revised estimates of Rs.16594.87 crores in FY2012-2013 Revenue generated from dividends are estimated at Rs.73866.36 which is well above that last year’s estimate of Rs.50152.55 crores. Net-revenue from Railway services was budgeted at Rs.78634.19 crores last year but was revised to Rs. 40644.09 crores. For FY2013- 2014 it has been budgeted at Rs.62972.64crores. Total non-tax revenue is budgeted at Rs.172252.38 crores while it was Rs.164613.61crores
Sector wise impact analysis Infrastructure This sector has high forward and backward effects on other sectors namely, automobiles, realty, metal and cement. Government will allow some institutions to raise tax-free bonds up to 50,000 crore India Infrastructure Finance Corporation (IIFC), in partnership with ADB, will help infrastructure companies access the bond market to tap long-term funds Infrastructure Debt Fund- to provide long-term low cost debt Pradhan Mantri Gramin Saadhan Yojana(PMGSY-I and PMGSY-II) JNNURM-Rs.14,873 crores Regulatory authority for the roads sector Hike in freight costs will offset the benefits of IDF and housing development fund in cement sector.
Sector wise impact analysis Realty FM proposed to levy 1 per cent tax deducted at source, or TDS, on properties sold for over Rs 50 lakh. Anybody selling a home for Rs 50 lakh will have to pay Rs 50,000 to the government as TDS. This led to a sharp fall in realty index post budget. Rate of abatement reduced on flats with a carpet area of 2,000 sq.ft. or more or of a value of `1 crore or more from 75% to 70%. Real estate developers who were paying 12.5% service tax on 25% of the value will now have to pay for 30% of the value. Additional interest subvention granted for 1st time buyers for property worth not exceeding Rs.40lakhs, will have positive effect. An amount of Rs 20 billion allocated towards a proposed Urban Housing Fund to be set up by the National Housing Bank(NHB) can be seen as a welcome move for the housing finance sector Sales of affordable segment (tier-1 and tier-2 cities) may go up by 15%-20%, however metros will not be affected much.
Sector wise impact analysis Automobiles Excise duties on SUVs, which have been labeled as fuel guzzlers, has been raised by 3% to 30% came as a blow to the ailing auto industry which banked on SUV sales this year. Customs duty on high-end motor vehicles has been raised steeply to 100%, 75% and 25% respectively. JNNURM will boost the bus segment. Reduction in petroleum and diesel subsidies has led to SIAM reducing its growth forecasts for passenger vehicles this year to 0-1%. Announcements to increase investment expected to have a positive impact on the automobile sector in months to come. 15% investment allowance on direct tax side is a welcome move for capex, increase in surcharge on income-tax for corporate could be a slight dampener SIDBI’s refinancing capability being doubled to Rs.100 billion per anum will help the small and medium scale auto component manufacturing firms.
Sector wise impact analysis Banking and Financial Sector The prime focus of the government with respect to financial sector has been (i) Financial inclusion and (ii) Conformance to BASEL accords Recapitalization of Public Sector Banks Priority sector: All SCBs are directed to lend Rs 7000 billion to the agriculture sector The move to allow banks to sell insurance products of multiple companies will give a supplementary fee income for the banks while increasing insurance penetration. Women’s bank Rs.44000 crores to be received as dividend from RBI, nationalised banks and financial institutions which is 73% higher than revised estimates last year. An additional tax deduction of Rs 100,000 on interest paid towards home loans upto Rs 25 lakh availed in 2013-14 by first- timehome buyers (over and above the existing Rs 150,000 deduction)
Sector wise impact analysis Power sector: Funding availability for the sector will improve with issuance of tax-free bonds of Rs 500 billion and credit enhancement through IIFCL. Customs duty on imported coal, which was previously exempt, has been increased to 2 per cent, while CVD has been increased by 1 per cent. Further, as per the Railway Budget 2013-14, freight rates have been hiked by 5.8 per cent. Weak financials of the power distribution sector a pose a major challenge. Accumulated losses of state distribution utilities are estimated at around Rs 2.4 trillion in 2011-12, due to lack of tariff hikes, high aggregate technical and commercial (AT&C) losses and delays in disbursal of state government subsidies Incentives for renewable power sources: investment in wind energy and capacity additions in solar power.
What’s there for Equity markets Equity Market reduction in Securities Transaction Tax (STT) [0.001% for mutual funds] Extension of Rajiv Gandhi Equity Savings Scheme (RGESS) 50 per cent tax deduction for investment in mutual funds and listed shares for three successive years allowing FIIs to participate in exchange-traded currency derivative segment use their investment in corporate bonds/government securities for margin requirement are expected to increase FII inflows in the markets pension funds and provident funds will now be allowed to invest in exchange-traded funds, debt mutual funds and asset backed securities FII inflow should improve and there will be more investment options for savings schemes
The way forward Combating the deficit Widening CAD:The only way to financethis is through FII, FDI.. Reform process has to continue We should pay heed to FDI(long term) flows than to FII(short term) Pension Fund Regulatory and Development Authority Bil(foreign investment ceiling to 26%) Insurance Laws (Amendment) Bill (increase foreign equity cap to 45%)
The way forward Delay in project development: Speedy approval and avoiding bottlenecks for Projects: 1. Delays in approval 2. Land acquisition problems 3. permits on access to natural resourcesEg: realty project need nearly 58 approvals and takes 2 years for the process Quality of government spending (Increasing plan expenditure, well targeted subsidies effective execution of welfare programmes) Timeline for the implementation of GST: Will make tax administration effective, compliance easy and evasion difficult.
References http://indiabudget.nic.in www.firstpost.com www.livemint.com Budget Analysis Report of CRISIL Business Standard Economic Times RBI monetary review reports