Union Budget 2015-16: Did Jaitley make it or break it?

Feb 28, 2015

In this issue:
» The Finance Minister has not quite let us down
» An honest fiscal roadmap
» No direct benefits for the pharma sector
» Infra investments get a boost
» ....and more!

Make or break. This is what a lot of people had chosen to call today's Union Budget. Of course, it was the second budget that the Government was presenting after assuming office. But in many ways it was the first real test of the Modi led NDA and its reputation of being more development oriented than populist.

Now that the proverbial cat is out of the bag, has the Government really ended up walking the talk? Or to use another animal metaphor, has the Finance Minister Jaitley pulled out more reform-rabbits from his hat or were there more parrots of populism?

At the risk of sounding fence sitters, we are of the view that there's just enough for everybody in this budget and is therefore likely to keep most parties interested.

For starters, Jaitley has kept his promise on fiscal consolidation albeit the target of taking it to 3% of GDP gets delayed by a year and will now be possible to achieve only by FY18. The current fiscal though is likely to end with the deficit touching 4.1%.

Why this delay you would ask? Well, the Finance Minister has made it clear that he might as well focus on infrastructure investments than try and take the fiscal bull by the horns immediately. And this is certainly not that bad a move we believe.

Nor has Jaitley opted to remain tight fisted when it comes to the rural poor. As a matter of fact for a party that was seen as a staunch opponent to the rural employment guarantee scheme called as MNREGA, the Government's budgetary allocation for the same this year is supposed to be highest ever. There can of course be debates around whether this is the most efficient use of public funds. But at a time when the rural poor are not exactly in the best of health, the outlay may not be such a bad thing after all.

The need for infrastructure investments is certainly not lost upon the Finance Minister. He is only too well aware of its importance if we are to come anywhere close to fulfilling the dream of double digit growth rate. Therefore, it was not surprising to see him mention that everything put together, investments in infrastructure will go up by a significant Rs 700 bn over the previous fiscal.

What was also encouraging was the planned establishment of a National Investment and Infrastructure Fund with an annual flow of Rs 200 bn in it mostly as equity which can then be leveraged many times over.

Proposing ways to monetise India's huge gold reserves was another big positive for us and would result in increased liquidity in the market.

If there's one group that's likely to walk away most happy from the budget it is India Inc we believe. Here, Jaitley not only promised a reduction in the top tax rate to 25% over the next four years but also exuded confidence about a possible roll out of the Goods and Services Tax (GST) by April 2016.

However, whether this will result into more investments and give a boost to the 'Make in India' initiative remains to be seen.

As far the income tax is concerned, there's been no change in the exemption limit however deductions in the form of medical spends, for travel as well as pension savings may not end up entirely disappointing the salaried middle class.

Some of the other notable features according to us were the reforms proposed in the bankruptcy laws and outlining of various stringent measures to deal with the scourge of black money.

Therefore, in summary, while the Union Budget for the year 2015-16 may not exactly be hailed as hugely reformist, it will be fair to say that the finance minister also does not seem to have done a significant harm to his and the current Government's reputation.

In the end though it all boils down to the all important question. Now that the budget is out, should there be a marked change in the way an investor should go about investing? Well, we don't really think so. You see, making macroeconomic projections and getting the big picture right is one thing. However, to really translate them into profitable stock picking decisions is a different ball game altogether.

As a matter of fact, the way our investment process across most of our services works is that we would be happy if the markets react negatively to today's budget. For then our chances of finding bargains will get a boost given how expensive most of the stocks have become.

Please note that events like the budget are barely a blip in the long term intrinsic value of stocks. And therefore, when markets over react to such a situation, the risk reward equation turns in our favour, making stocks an attractive long term proposition.

What are your thoughts on today's Union Budget? Let us know your comments or share your views in the Equitymaster Club.

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  Chart of the day
One of the positives from today's budget was the government's honesty on the fiscal deficit front. The FM acknowledged the serious nature of the problem but chose to do a balancing act. He stated that the deficit could only be brought down at a slow pace given the big public investments lined up. However, he did present a realistic picture of the same. While maintaining this year's fiscal deficit target of 4.1% of GDP, the FM has projected a steady fall through till FY18. The projections (as a % of GDP) do seem to be achievable according to us. It will allow the FM enough headroom to fund large infra projects. At the same time, it will be important to rein in unplanned expenditure if the government is to stick to the targets.

Steadily improving deficit numbers

Realty sector has always been the heart of every budget speech. And this time too the focus on infrastructure sector was quite evident. However, unlike last many budgets which focused on earmarking money for specific sectors, this one is constructive in nature. It focuses more on execution rather than allocation. As an example, the government plans to create National Investment and Infrastructure Fund (NIIF) and shall ensure annual money flow into the trust.

The trust in turn would invest in other infrastructure finance companies which will enable them to lend more and leverage the inflow of funds. Though funds are involved in the said strategy, its ultimate aim is to kick start lending which shall result in better execution. Further, the budget has also laid down steps to reduce the ease of doing business in India, another step towards improving execution. Launch of e-Biz portal is one such example.

With regards to investment targets, the government is planning to increase the total investment in infrastructure by Rs 700 bn in the next fiscal!

To be quite honest, we do not get excited by this number game. In the past, all the numbers announced in the budget have more or less remained just on paper. However, considering that the thrust this time is on execution our hopes are high. If PM Modi is indeed successful in ensuring timely execution, then India's dream to reach 8-10% GDP growth shall soon become a reality.

The government's broader goals for the power sector remain intact - that of providing power for all. 2020 has been set as the target for electrification of the remaining 20,000 villages. Further, with year 2022 (75th year of independence) being set as the target for providing housing for all, the FM reiterated the need to provide quality power (24/7) to each household by then.

Further, the government proposed to allocate Rs 1 trillion for 5 new UMPPs of 4,000 MW each in the 'plug and play' mode. Under the latter, all the clearances and linkages will be provided before the auctions begin. Given that this was one of the key worries while led to the concerns surrounding the recently failed auctions, this is definitely a welcome step. The government has allowed additional depreciation at 20% on units engaged in generation and distribution of power.

For the capital goods sector, while there was no specific measures announced for the same in this budget, a point that could benefit the sector is the proposed rise in capex by public sector units; the figure that has been cited is Rs 800 bn (higher by a third on a YoY basis) as compared to the previous year, thereby raising the total estimated capex to almost Rs 3.2 trillion. How much of this materializes is another matter altogether; nevertheless, this step is expected to provide some support to the overall need of restarting the capex cycle in the country.

FMCG companies and consumer durable companies did not receive any major benefits from the Budget. The education cess, secondary and higher education cess levied on excisable goods has been exempted. Resultantly, the basic excise duty has been increased from 12% to 12.5% across the board with some exceptions.

Footwear manufacturers had some reason to cheer after the government cut the excise duty on footwear with uppers made from leather and retailed at price of more than Rs 1,000 per pair. The duty has been reduced from 12% to 6%. This is likely to benefit footwear companies such as Bata, Mirza International and Liberty Shoes.

Even consumer durable industry received some benefits in form of reduction in import duty on inputs used for the manufacture of LCD/LED televisions. The black light unit module used in the manufacture of LCD/LED TV panels has been exempted compared to a duty of 10% earlier. The duty on Organic LED (OLED) TV panels has been slashed from 10% to Nil. These measures are likely to aid consumer electronic companies such as Videocon International, Mirc Electronics. Even the digital still image video camera and is components have been exempted from customs duty in the budget.

Cigarette companies will bear the brunt of higher excise duty for the fourth year in a row. In the Union Budget 2015, the excise duty on cigarettes of length not exceeding 65 mm (micro segment) has been increased by 25%. The duty on the other cigarette segments has been increased by 15%. The excise duty on cigars, cheroots and cigarillos has been raised by the same amount. Although cigarette companies such as ITC, VST Industries and Godfrey Phillips were able to pass on the hikes earlier, the continuous price increase is beginning to impact their offtake.

While pharma industry had been looking forward to some major path breaking announcements from the Budget, particularly on the research and development front, the industry hardly found any mention in the Finance Minister's 1.5 hour long speech. The Budget offered no direct benefits to the Indian pharma industry, though there were some positives for the healthcare sector.

There were no major announcements which could provide some boost to the Indian pharmaceutical market, except the reduction of the corporate tax to 25% over four years. This industry was expecting better tax incentives for its R&D activities. The other hopes from the Budget were; extend the relief from MAT for pharma SEZs, changes in patent laws, giving tax incentives for doing R&D outside India and drug filings done in international markets. The Indian pharma companies are already facing increasing costs due to regulatory challenges from various global regulators. Hence, incentives on the R&D front could have eased some pressure.

After remaining volatile during the post noon trading session, the indices finally managed to close in the positive with the Sensex ending higher by 141 points for the day. The sectoral indices traded mixed with stocks in the Healthcare and Banking space leading the gains. However, stocks in the FMCG and consumer durables segment ended weak.

 Weekend investing mantra
"Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested." - Walter Schloss

This edition of The 5 Minute WrapUp is authored by Rahul Shah.

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4 Responses to "Union Budget 2015-16: Did Jaitley make it or break it?"

lata pall

Mar 1, 2015

Every FM has become a vampire, a blood sucker. All this talk and huge allocations, we all know where the money actually goes, it never goes to the beneficiary. There is nothing in the budget for the middle class. Everything is criminally expensive and this service tax increase will break our back. Thanms for nothing!

Like (3)

Prof. N K Jain

Mar 1, 2015

This budget is no path breaking. The rise in excise and service tax across the board is going to contribute to general price hike that means inflation. To add fuel to inflation the government has raised price of petrol and diesel. THIS IS LIKELY TO HAVE A DOMINO EFFECT ON PRICES OF GOODS AND SERVICES. I have my doubts if RBI Governor will not see thru this.
The government has also assumed as if the crude price haS come down permanently. A rise in crude price will toss our economy out of gear.
You can take benefit of increased tax deduction if you have increased income. The average house hold budget for a middle class family is to shoot up between 5k to 10k per month.

Like (3)

G S Apte

Feb 28, 2015

Overall, this is a balanced budget, where corporate community has received some relief in tax, where as salaried individuals have received some additional options to save tax.

Also, higher allocation to MNREGA should encourage rural Indians.

There are some good moves such as, removal of wealth tax, and measures to increase tax paying people.

If infrastructure investments can be realized through support of practical land acquisition act, and if the education related investments can be actually done in next one year, it would be a huge bonus for young Indians who have high aspirations.

Overall, this is an excellent balancing act by Finance Minister.

Like (2)


Feb 28, 2015

The Prime Minister Narendra Modi ought to remember the poor millions and ought to be seen as taking actions which directly alleviate their poverty. These are the people who look up to him as their saviour and do not understand the economics but direct communications and events. Remember the former CM of Andhra Pradesh conducting his election campaign in helicopters visavis the bycycle riding Y V Rajsekhar Reddy. Finally late Shri Reddy brought to end , the 10 year old rule of Shri Chandrababu Naidu in AP.

Like (2)
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