The Real Budget Impact - The 5 Minute WrapUp by Equitymaster
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The Real Budget Impact

Jul 10, 2014

In this issue:
» Are the FM's fiscal deficit targets achievable?
» Mixed reactions from the banking sector!
» Infrastructure: The key area of focus for the Modi government
» Many sops for the FMCG, consider durables spaces...
» and more....

One of the major reasons why the BJP led NDA emerged triumphant in the general elections was the reputation of Narendra Modi as being the Vikaas Purush. The nation of more than one billion looked up to him to create jobs and pull the economy out of its worst slowdown of the past decade. However, the performance so far had been more of a mixed bag. Some decisions were certainly laudable. But there were others that had a political rather than an economic angle to them. Nevertheless, the first big test of his reputation was always going to be his Government's maiden budget. Thus, with the same becoming public today, its perhaps time to reach some sort of definitive conclusion.

And conclusion we did reach. We believe that the budget further cements Modi and his Government's reputation as being someone that wants to take the reforms and investments route in order to grow India's economy. And this we believe was certainly the need of the hour. Lack of any significant investments and policy paralysis has dealt a body blow to the country's economy and its financial health over the past few years. Therefore it was imperative that something be done on this front. And in a lot of ways, the new Finance Minister seemed up to the task we believe.

Therefore, there were no big-bang announcements on the social spending front. Most of it anyways does not reach the intended beneficiaries. Instead, most of the time the minister spoke about how he intends to either increase outlays or initiate new programmes that could lead to enhanced productivity, increase investments and remove policy bottlenecks. Efforts towards straightening out some of the ambiguous tax laws were also a welcome move we believe.

What must have also given comfort to a lot of economists and investors out there is the roadmap provided for fiscal consolidation. The FM wants to bring down fiscal deficit to a level of around 3% by FY17 from around 4.1%, the target he has for the current fiscal.

Of course, the execution matters more here. Therefore, it would be interesting to see what kind of steps the minister takes in order to achieve the target. What the markets will certainly not like is the continued sale of trophy assets in order to bridge the gap. There has to be some structural reduction in expenditure somewhere, most of all the subsidies we believe.

The other important announcement as per us was about recapitalisation of the PSU banks and the commitment to rolling out GST by resolving some key issues this year itself. We also like the raising of FDI limits in crucial sectors like defence and insurance. Besides, a huge outlay into improving road infrastructure also gets a thumbs-up from us.

Although we think that the Government could have done more, it should be noted that its hands are tied. It does not have the fiscal room required for some big bang announcement. However, once finances improve, we won't be surprised if any announcement of such sort comes in the next year or two.

In summary, given the circumstances this certainly wasn't a bad budget. What it in fact does is gives us an idea about the route the new Government is going to take in order to bring the economy out of its morass. And we don't think it's a bad approach at all. After all we cannot keep running perpetually high fiscal deficits and spend money on subsidies and activities which do not add to long term growth. Long term growth is only going to be possible if we improve the skill levels of our citizens, encourage more businesses to come up, have unambiguous policies and above all invest in building a robust infrastructure. And therefore from the perspective of all of these points, we like the start the Government has made.

So, given the budget, is there any change an investor should make in his investment strategy? Not really we believe as the bottom up stock picking approach we follow is an ideal one for all seasons. However, what the budget does is focuses on some sectors more than others. As a result, the constituent companies can end up growing much faster than their historical growth rates. Therefore, investors should keep an eye out for fundamentally strong companies from these sectors and invest into them provided they are available at attractive valuations. Few sectors that we think could benefit from this budget are infrastructure, capital goods, banking and power to some extent.

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

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 Chart of the day
High fiscal deficit was one of the chief concerns that plagued the tenure of the erstwhile UPA government. Thus, high hopes were pinned on the new government to bring this down. In terms of figures, the Modi government seems committed to bringing the deficit down. From a deficit of 4.5% of GDP in FY14, the FM has ambitious plans of reducing this to 3.6% and 3% of GDP in FY16 and FY17 respectively. The FM stated that the reduction in deficit over the last couple of years was largely a product of reduction in expenditure rather than increase in revenues. The good part is that it has clearly stated its intention of spending on infrastructure, education and healthcare, which are essential for the long term productivity in an economy. But there is not much clarity on how the issue of non plan expenditure such as subsidies will be addressed. The idea seems to be that a pick up in the Indian economy will translate into a higher revenue base for the government and thereby curtail the deficit. It does seem a daunting challenge. And the first test for the FM is whether the government will be able to take the first step of reducing the deficit to 4.1% of GDP in FY15.

Are the FM's fiscal deficit targets ambitious?

Financial stability is the foundation of a rapid recovery. That's what the Finance Minister claims. And rightly so! Hence, greater emphasis has been laid on strengthening the banking sector in the budget. In this regard, the banks would require Rs 2.4 lakh crore government infusion by 2018. This would help them to be BASEL III compliant as well. Moreover, additional resources are also expected to be raised in order to meet this huge capital requirement. The Budget has clarified that the capital of these banks will be raised by increasing the shareholding of the people through the sale of shares in banks to retail investors. This in turn will help government retain its majority shareholding in banks. The FM has agreed to provide additional autonomy to banks. Now that's the need of the hour, we reckon.

The government has also approved to consider suggestions for consolidation of PSU banks. The budget has also laid out plans to help banks to fulfill the priority sector lending (PSL) targets. Further, taking into account the wide network of bank branches and the low penetration of insurance in the country, the budget spelled out that banks would act as business correspondents to cross-sell insurance products. That the infrastructure and agri credit is also expected to get a major boost is also proposed in the budget. And lastly, the government has also proposed speedy recoveries of stressed assets through set up of debt recovery tribunals. Some of the proposals listed above would certainly have a positive effect on the banking sector.

There was definitely one area which got a lot of focus in today's budget. We are talking about infrastructure. When it came to infrastructure, we saw a series of allocations being made to improve roads, highways, ports, etc. by the FM. For instance, government earmarked Rs 370 bn for development of national highways alone. This coupled with Rs 140 bn allocation for development of village roads took total allocation for enhancing connectivity to about Rs 510 bn. A lot of money was also allocated to expand gas pipeline infrastructure and build smart cities. Sanitation and housing also got a mention. In short, the thrust was on improving ground level infrastructure.

To be quite honest we have been used to such kind of lip service in the past. However, with Mr Modi at helm, execution of this road map is what people are more interested in knowing.

The engineering and capital goods sector forms the back bone of the creation of all fixed assets in the country. Thus it is not surprising that many measures and allocations that were made in the budget will directly or indirectly have a big impact on the momentum in this sector. The emphasis on rural and urban infrastructure development, encouraging the power generation and transmission sectors, resolving issues in public private partnership (PPP) projects etc were some of the issues touched upon in this maiden budget of the new government that will provide a fillip to the sector.

Increasing the cap on FDI in the defence sector to 49% and the big capital expenditure plans of public sector undertakings (PSUs) which amount to Rs 2.5 trillion for this year are some of the other things that the capital goods sector will be happy about. The engineering sector was one of the worst hit by the slowdown of the past few years. It is no surprise then that just how much and how soon these budgetary measures that have been announced translate into actual action on the ground is what will be watched with bated breath by the businesses in this sector.

The FM announced a number of sops for the FMCG and consumer durable sector. The soap sector has been the major beneficiary with customs duty reduction on a number of inputs. To provide incentives for processing capacity expansion, the government also reduced excise duty on food processing and packaging machinery from 10% to 6%. This is likely to benefit food companies that are in the process of increasing scale. However, the tobacco companies have been penalized on growing health concerns. The excise duty on cigarettes and cigars has been raised in the range of 11% to 72%. While cigarette major ITC is likely to pass on the duty hike in the form of price increases, smaller players such as Godfrey Phillips and VST Industries may find it difficult to do so in the short run.

Further, the footwear industry saw some relief as the excise duty on foot wear retailed at Rs 500 to Rs 1000 per pair has been halved to 6%. This is likely to provide some benefit to companies like Bata India in the economy segment. In consumer durables space, the television industry had some reason to cheer. The customs duty on colour pictures tube for Cathode Ray Television has been waived off. Additionally, the import duty on LCD and LED television panels below 19 inches has been slashed from 10% to zero. This is likely to make small screen LCD and LED television cheaper and benefit companies such as Videocon Industries and Mirc Electronics.

The all India thermal plant load factor (PLF) or utilisation rates declined to about 65% in FY14. This was lower by about 5% YoY as compared to the previous year. Given that fuel supply has been a key factor behind the underperformance of the power sector over the past few years, the FM emphasised on ending the impasse on coal supplies to power plants that have been commissioned or will be commissioned by end of the current fiscal. If all goes as planned this would be a positive step for power generation companies in particular especially considering that the incentives are now linked to PLFs as compared to plant availability factor (PAF) - as directed by the regulator CERC.

Further, as compared to extending the tax holidays (80 IA exemptions) every year, the FM extended the same till FY17; this would be a positive for the sector in terms of removing all the uncertainty (related to investment plans of companies) in this regard.

In the meanwhile, the Indian stock markets had a very volatile trading day. At different points in the day, the markets were down as well as up by about 1.5%. Eventually, the BSE-Sensex ended lower by 72 points or 0.3%. Barring metal and FMCG, most sectoral indices ended in the red led by consumer durables, auto and banking stocks. The Asian indices are trading mixed today. The Hong Kong market was leading the gainers while the Japanese markets were trading lower. The European markets have opened the day on a negative note.

 Today's investing mantra
"Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies" - Benjamin Graham

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13 Responses to "The Real Budget Impact"

Andrews W Salim

Jul 14, 2014

Deeply disappointed to see 2014-15 BJP budget, nothing but Chidambaram`s budget with Saffron lipstick.

Foolishly,industrialists, chamber of commerces and several business associations cry foul about agriculture subsidy and fertiliser subsidy? What about interest subsidy? What about duty draw-back, preferrential allotments of land at throw-away prices to industrialists? Why defense personnel are given liquor at subsidised rates even after retirement? Even for serving people, it should be banned, if BJP believes in its fundamental principles.All these subsidies, but poor farmers do not cry foul on those things, because of lack of awareness. Defence canteen service is not subsidy.GST, VAT all these are trying to reduce the total cost burden of various business sectors. In India where land-holdings are mostly marginal, farmers subsidy be given to them directly.Do you know even in US,their rich farmers are also given subsidy. Ear-marking Rs50,000+crore (few of the single largest item)is still a shame even after 60 years of independence, we continue this stupid caste appeasement.



Jul 14, 2014

send me tax implication guide



Jul 11, 2014

The budget has given some sops to salaried/pensioned persons. The effect of the budget can be seen in 2015-16 budget.


Rasikbhai Gandhi

Jul 11, 2014

Rather than budget, the execution of the provision is more important. We have every hope that new government is more honest and non corrupt than previous Congress led UPA govt.. And if our hope comes true India will surely progress in the field of Production and will surely be able to control inflation. Let us hope for the "Achhey Din" in future.

Like (1)


Jul 11, 2014

Budget 14-15 overall it was common budget of 8.5 months. Mr Modi (PM) has promised to do "Acche Din" same not seen in this budget.Service Class are not happy with this budget, Govt could do 3lakh exemption. A normal person has benifited of Rs. 429.16x12=5150/-. Whereas day to day vegetables fruits, milk products etc prices has raised.

Like (1)

kailash thakur

Jul 11, 2014

really within the availibility of economic conditions left by congress govt,the present budget presented by modi-led govt is a welcome step towards winning hearts of all sections of the society,but much expectaions of general people seems to be in wilderness as not much tangible steps have not been taken.
economic displine has become the order of the day to reduce the quantum of fiscal deficit which is eating away our surplus money meant for economic developement utilisation.unproductive expenditure& unpllanned expenditure measures should have been the govt,s main concern.
secondly,all & ministers have to follow /adopt strict control over temptation to acquire illegal earnings & avoid undesirable expenditure on themselves to keep indian econoly healthy.
they must follow chanakya,s principle of using govt resourses on themselve,so much so,they must generate amongst people that they r meant to seve india & indians & not to enjoy the chair in the interest of their family members.
thirdly,to generate public wealth,the govt must endever to create amongst haves to go for proving at 25% of their surplus capital to create a publis large pool to serve the apetite of swadesikaran rather depending more on FDIS who will seldom care for our economic growth.
india big corporate houses should be taken into confidence to make investment in india spread all over states so as to create regional balances.
furthermore,economocally backward states like bihar,orissa,&jharkhand should be given special status bethout further delay so as to aroise confidence amongst people that the present VIKAS PURUS sri modiji is really & sincerly anxious for overall & balanced regional economic & social developement.
for bihar specially patna & bhagalpur must catch the attention of the govt to give immediately railway much awaited & desired fulfilment of pending projects & demands.
bhagalpur being popularly known as silk city need allround care & attention of the govt to make a viable economically attractive city.
honorable jaitely & modi saheb if give few minutes to ponder over mine suggestions will certainly go a long way towards india,economic growth.
furthermore in next provided cherished mine views for considerations by all sections of the society.
thanks & regards
kailash thakur.
ex-university lecturer & retd.joint commissioner.

Like (1)


Jul 11, 2014

The budget speech fell short of expectation on one basic count. RBI Governor won over his juniors and proceeded with firm plans towards his task. But FM could not win his bureaucrats. The speech was more or less the same by congress before Manmohan singh. Long speech and distribution of small small amounts. Basel III and nationalised banks are all not specific. cost of collection of tax was not counted by continuing with existing slab because of fear of short of funds. stress went to agriculture that tied down india rather than service sector that lifted India up which i read it as conventionalism or wit. There was lack of application of economies of large scale, quality and cost in allowing production etc the direction where India should grow. Funny part is as usual all speaks whether they understood or not praise budget like every year. Hopes down on their ability to win over bureaucrats.

Like (1)


Jul 10, 2014

A big setback for debt fund investor is the change in capital gain tax. He could have split this in 2 categories, as institutional and retail investors. Retail portion could have left as it is without change. How the asset allocation can be done with little tax impact. Please provide your thoughts on the subject

Like (1)

Dee Thakkar

Jul 10, 2014

I think, the govt has done a good job in establishing the direction to improve the infrastructure and not shift too much on new programs to take control over the deficit that previous govt left. I think, with the introduction of PPP and the allocation of many health related funding there needs to be some steps towards protecting the funds from corruption which will only shift the corruption from one group of people to another. Should take steps in reducing corruption by taking steps on previous infrastructure process and funding accountability.
I think, the subsidy towards storage infrastructure for food needs closer monitoring to see the benefits expected over direct subsidy.
The plan towards Housing investment is very good as it will create lot more labour jobs which will benefits lower income folks more than middle layer. It will boost the local economy from housing goods, appliance, tiles, colors etc. The additional allowance on Housing interest cost will be recovered thru generating additional economic activities.
All in all, I am in favour of this budget and hope, the govt continues with re-vamping old programs and old dept to raise efficiency in the system while cutting duplication and red-tape processes.

Like (1)

Naval Anklesaria

Jul 10, 2014

As for our high hopes & expectations of the New Government & the Budget,let us be very fair and impartial in giving our opinion - I give 7 /10 points. All these years, since independence, we have not seen any happy days in our lives but now things definitely seems to be changing and changing for the good. We all want to see Vibrant & Strong India at the fag end of our career and life. There is only 1 man who can achieve this and he is none other than our beloved PM Narendra Modi & his team. God bless them and bless us in return. Please dont break our hearts & hopes like Rajiv Gandhi whom we trusted the most. God bless us all. Jaihind.

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