The Union Budget 2013-14 aimed to continue focusing on inclusive growth while increasing planned expenditures. Key points included maintaining the fiscal deficit target of 4.8% for 2014, allocating more funds to infrastructure and increasing taxes on individuals and companies earning over Rs. 1 crore and Rs. 10 crore annually. The Budget was seen as not introducing major reforms and equity markets declined in response while bond yields increased due to uncertainty around fiscal consolidation.

1. Union Budget 2013-14
FEBRUARY 28, 2013
A PERSPECTIVE
SALIENT POINTS
• FY13 growth rate pegged at 5% down from 6.2% in the previous year and FY14 growth pegged at 6.1-6.7%
• Inclusive growth remains a key theme, alongside investments
• Planned expenditure stands increased by 29.4% - allocations increased to various programmes including
urban infrastructure, roads, health and education
• Capital Markets: Proposed launch of inflation indexed bonds; RGESS modified to include mutual funds
and investments in three consecutive years; RGESS income limit raised to Rs. 12 lakhs; STT reduced and
introduced commodities transactions tax
• Provided Rs. 14,000 crore for recapitalization of public sector banks
• Infrastructure: Additional 15% investment allowance for companies investing Rs. 100 crore or more on
plant & machinery
• Disinvestment:Target raising Rs. 55,814 crore
• Fiscal Deficit:To be reduced to 4.8% in FY14 from the revised 5.2% in FY13
• Taxation:
- No change in taxation slabs or tax rates
- Tax credit of Rs. 2000 for individuals with total income upto Rs. 5 lakhs
- Surcharge of 10% on individuals with annual taxable income of over Rs. 1 crore
- Surcharge increased to 10% from 5% on companies with annual taxable earnings of over Rs. 10 crore (5%
for foreign companies)
- Surcharge on dividend distribution tax raised to 10% from 5%
The Union Budget was broadly along expected lines (given the constraints/fiscal deficit) and the government
continued to focus on inclusive growth.Whilst there were no big bang populist measures ahead of next year’s elections,
there were no reform oriented measures announced.There were some expectations of directional statements in terms
of expenditure rationalization, boosting of investment activity and curbing of the current account deficit.
Expenditure allocation was raised for various social/development schemes but no new schemes were announced
due to limitations of a high fiscal deficit. The budget arithmetic may however prove to be aggressive as the
economic growth rate remains modest and there seems to an overdependence on tax revenues and divestments.
The additional deduction of interest up to Rs. 1 lakh paid on home loans up to Rs. 25 lakhs could be positive
for the housing sector.With a view to boost savings rate, the government is working with the RBI to introduce
inflation-indexed savings instruments. DTC is expected to be introduced in the current session of the Parliament
and there is a renewed push for GST in the form of allocation towards reimbursements to the states.
On the capital markets front, the focus was on streamlining the procedures applicable to foreign investors -
uniform registration for all categories, risk-based KYC, etc. It was proposed that a broad principle be adopted to
differentiate FDI (Foreign Direct Investment) from FII (Foreign Institutional Investment) – stake of 10% or less
to be treated as FII and above 10% as FDI. There were various measures to boost the depth and activity in the
debt markets.
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2. The government acknowledged the need to boost investments but there were few definite measures. The focus
on building further investment corridors across the country is a positive step. However, we could see measures
outside the Union Budget to boost growth and investment activity. The third quarter GDP growth at 4.5%
underscores the need to spur growth on all fronts. Given the limited room available on the fiscal front, monetary
policy also needs to become accommodative.
Consolidated Fiscal Deficit and Current Account Deficit
12 (% of GDP) CA deficit Consolidated fiscal deficit
Actual Forecast
10
8
6
4
2
0
(2)
(4)
FY91 FY93 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15
Source: CLSA Asia-Pacific Markets, CEIC
EQUITY MARKETS
Lack of big bang reforms and specific measures to address the current issues seem to have weighed on market sentiment
and leading indices lost ground. The hike in exemption limits and increased rural spending gave a boost to FMCG
stocks. Despite the hike in excise duties, auto stocks closed in the positive territory. Indications that RBI will announce
guidelines for issuing banking licenses to private sector players boosted NBFC stocks.Amongst FMCG stocks, ITC was
trading firm as duty hike on cigarettes was lower than market expectations.The reduction in Securities Transaction Tax
(STT) on delivery transactions is a positive for brokerages.
% change From yesterday’s % change From yesterday’s
close close
S&P BSE Sensex -1.52% S&P BSE Realty -2.72%
CNX Nifty -1.79% S&P BSE Power -4.29%
S&P BSE MidCap -2.46% S&P BSE FMCG -0.37%
S&P BSE SmallCap -1.97% S&P BSE IT 0.47%
S&P BSE Bankex -3.59% S&P BSE Healthcare -0.68%
S&P BSE Oil & Gas -1.64% S&P BSE PSU -2.81%
S&P BSE Metals -2.95% S&P BSE CG -3.39%
Lack of new policy initiatives alongside increase in dividend and corporate surcharge led equity markets to reverse early
gains and close in the red.The corporate surcharge is expected to bring down earnings estimates slightly. Power, banking
and capital goods stocks were the top losers – due to lack of major announcements to spur investment.The Budget
proposes 15% deduction for companies investing Rs. 100 crore or more on plant & machinery in 2013-15 and a new
road regulatory authority. To augment finances for infrastructure, the Budget provides for up to Rs. 50,000 crore tax
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3. free infrastructure bonds and encouraged setting up of Infrastructure Development Funds.The Budget reiterated on the
need to adopt a pooled pricing policy for coal and proposed a joint public-private effort to reduce dependence on
imported coal.
The reduction in Securities Transaction Tax is a positive for brokerages.The additional surcharge on high income
individuals and rise in duties of luxury items is unlikely to have a significant impact on consumption. Retail sector
should benefit from lower excise duty on apparels.
DEBT MARKETS
The Union Budget delivered on the fiscal deficit front, but the gross market borrowings were higher than market
expectations (partly due to the buyback).The FY14 targeted fiscal deficit at 4.8% of GDP is to be achieved through
tax revenues and divestments. At the same time, there have been no concrete measures to control expenditure and
this has increased quite sharply (especially planned expenditure at 29% yoy). This means that the achievement of
the fiscal deficit projection would depend on tax revenues and we need to see concrete progress on subsidy
rationalization. Given the expanding current account deficit, a lot depends on the global commodity prices, export
growth and currency movements. Given this uncertainty, debt markets have reacted negatively and yields have
moved up across the curve.
27/2/2013 28/2/2013
1-yr gilt yield (%) 7.88 7.93
5-yr gilt yield (%) 7.80 7.87
10-yr gilt yield (%) 7.80 7.87
5-yr AAA corporate bond yield (%) 8.86 8.90
The announcement of new measures to boost the depth in the debt markets and reiteration of the old measures were
positive –
• Stock exchanges to have a dedicated debt segment and insurance companies, provident funds and pension funds will
be allowed to trade directly.
• FIIs will be allowed to participate in currency derivatives (for their rupee exposure) and also use their bond/gilt
investments collateral
• Debt funds and ABS made eligible securities for Pension and Provident Funds
• Securitisation Trust to be exempted from Income Tax – removes uncertainty
Overall, the sentiment in the debt markets appears to have been impacted by the heightened pre-budget expectations
on the fiscal consolidation front. There has been disappointment over the absence of measures to address the CAD.
Another factor to watch out for the potential flows into tax-free infrastructure bonds, which would impact the overall
liquidity in the debt markets.We continue to remain cautiously optimistic amidst the various uncertainties, but are clear
that interest rates have to move down to support economic growth. RBI’s comfort with the government’s fiscal
consolidation measures will reflect in its monetary policy review measures in the coming months and investors will also
closely watch the reaction of global rating agencies.We would continue to recommend a portfolio of funds that offer
exposure to corporate bonds and have the potential to benefit from any capital gains.
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