Is Mr Jaitley's fiscal roadmap an illusion?

Jul 11, 2014

In this issue:
» Which critical issue was the budget silent about?
» Debt funds get a tax blow in the budget
» Do we need statues of unity or better infrastructure/sanitation facilities?
» Take away from Infy's 1QFY15 results
» ...and more!

In the run up to the elections, the NDA government had made it amply clear that it would embrace fiscal prudence. And shy away from mindless populism if voted to power. So, when the Finance Minister, Arun Jaitley, geared up to announce his maiden budget yesterday, expectations were high. But after listening to his fiscal road map plans, there was a big disappointment.

Despite challenging situation, the FM did stick to his predecessor's target of curtailing fiscal deficit to 4.1% of GDP for the current year. It also rolled out an ambitious road map to bring the deficit down to about 3% by FY17. However, the mode by which he plans to achieve fiscal consolidation has bemused investors and economists alike.

Quite surprisingly, like his predecessor, he too is relying on disinvestment to fund the deficit. With market conditions improving, he may well achieve his disinvestment target of Rs 434 bn for the fiscal. Another area where he is trying to mirror his predecessor to plug the fiscal gap is by milking PSUs. He is budgeting Rs 278 bn as dividends from PSUs.

So, basically rather than cutting unnecessary expenditures, he too is relying on non-tax revenues as an interim measure. Even if we assume that he is able to milk PSUs dry, divestment is a tricky issue. And thus he could well fall short of his fiscal target.

What further reaffirms our belief that his fiscal math is a pipe dream is the fact that subsidies are pegged marginally higher than last year. He has also given a tax relief to individual tax payers thereby resulting in loss of revenue. Apart from that, he has allocated higher amount to plan and non-plan expenditure than in the interim budget.

With all expenditure heads rising and revenues being axed due to tax relief measures, we believe that the fiscal road map of the government is ambitious. Or rather ambiguous should we say.

While the fiscal policy statement highlighted that the focus will be on revenue side and the tax/GDP ratio should be improved, FM has done exactly the opposite. Perhaps he is banking on tax reforms like GST and gradual deregulation of diesel to boost his finances in later years.

While rationalization of tax structure via GST can improve finances it may take some time. Also, a lot more needs to be done on the expenditure side so as to curtail subsidies. However, fertilizer and food subsidies are aimed at farmers and poorer sections of the society. Hence, it would be interesting to see whether the government is ready to bite this bullet in order to meet its fiscal targets.

Do you think Mr Jaitley's fiscal targets can be achieved or are they a mere pipe dream?Let us know in the Equitymaster Club or share your comments below.

--- Advertisement ---
3 Small Caps That Pay Regular Dividend Too...

Most investors believe that only Blue Chip stocks pay regular dividends...

However, we have zeroed in on 3 "Rare" Small Caps which hold strong growth potential PLUS they pay regular dividends to their investors too.

In fact, one of these has paid dividends regularly for more than 100 years now!

Sounds unbelievable?

Just click here for full details...

 Chart of the day
Huge subsidies, be it on fuel, food, fertilizer and so on, have been a key culprit behind the mess in the Indian economy. As the chart suggests, the subsidy burden alone accounted for 2.54% of GDP in FY13. This compares to a share of 2.23% in FY11. Not only have these subsidies failed to target the intended beneficiaries, but have also resulted in price distortions in the market. The sorry state of some of the key sectors in India is due to irrational subsidies.

It has not been easy for the Governments in the past to get rid of these because of the populist pressure. However, to meet the Budget target to bring down fiscal deficit to 3% FY17, we think the new Government will need to cut down subsidies. And now that the sentiments seem positive, this could be the right time to substitute wasteful Government expenditure by better policies. However, this won't be as easy as it sounds. This is because in a high inflation scenario, withdrawing support or hiking prices could backfire. Factors like poor monsoons and Iraq crisis could further delay reforms in this regards. In the backdrop of all this, the Budget Estimate to bring down subsidy to 2.02 in FY15 could be quite daunting.

Will the subsidy era ever come to an end?
RE= Revised Estimates; BE= Budget Estimates

Even the harshest critics of the Government would agree that there was very little in term of populism in yesterday's budget. However, what rankled most people was the budgetary allocation of Rs 2 bn towards the 'Statue of Unity'. The statue, which is to come up in the state of Gujarat will by far be the tallest statue in the world. It will no doubt be a matter of pride for the country's citizens. But given the circumstances, is it the best use of the taxpayers' money? To put things in perspective, a leading daily has highlighted how an issue as important as women safety has been allocated just half the amount allocated towards the statue's construction. Well, this comparison is being a little harsh on the Government we think. First of all, it will be very difficult to quantify the money spent on women safety. And secondly, the Rs 1 bn allocated to it is not the only money given for the cause. Having said that, we do agree that in view of the difficult financial times we are going through, tax payer money should be spent as judiciously as possible

The verdict on the Budget is unanimous. Though not the 'Super Budget' that it was widely expected to be, it was certainly a balanced one. However, one needs to recognize the fact that the disappointing takeaways from the Budget were almost as many as the enthusing ones. Now we understand that the government's hands are tied when it comes to making big ticket investments in infrastructure etc. However, the bitter pills that it had promised to take to accelerate fiscal consolidation were clearly missing. What shocked us most is the fact that there was no mention whatsoever about its stance on wasteful subsidies. Yesterday's budget remained conspicuously silent on the issue of fuel subsidy burden. And that makes us wonder if the NDA government too does not want to hazard the political risk of taking tough decisions on subsidies. Well, one can give them the benefit of doubt since the government is just 45 days old. However, if the targets of fiscal consolidation are not taken seriously enough, the government may face more brickbats that its predecessor!

When it comes to debt investments, debt mutual funds were giving fixed deposits a run for their money. But this could change. In yesterday's Budget, the FM announced increasing the long term capital gains tax on non-equity mutual funds from 10 to 20%. Not just that, the definition of long term has also been extended. So while earlier anything more than 12 months was termed long term, now this has been redefined to 36 months. The category that is likely to be impacted the most is fixed maturity plans (FMPs). This is because FMPs were providing stiff competition to bank deposits by providing tax free returns of 8-9%. FMPs account for 15% of the industry's assets. If you are a long term investor, there is no need to completely abandon debt mutual funds. At the same time, these cannot be a substitute for fixed deposits either because they are certainly riskier than FDs. Ultimately, it is important to have a well diversified portfolio by following an asset allocation approach that suits you the best. This would be a function of your return expectation, risk profile and age.

The first quarter results season for FY15 has got under way. India's second largest IT firm, Infosys declared its 1QFY15 results. The results were in line with our expectations. The company continues on its path of recovery. The topline performance was decent. Revenues in US dollar terms grew by 2% QoQ. This on the back of a strong deal pipeline and five new large deal wins in the quarter is a sign that the company will slowly return to an industry level growth rate. This transition has not been easy for Infosys. The cost control and internal restructuring measures that were put in place last year has led to a huge exodus of employees. Even at the senior management level, the company has lost many key personnel in the last twelve months. Infosys has managed compensate for this by rapidly promoting high performers and recruiting freshers in large numbers. This has resulted in improved margins and profitability.

Going forward, all eyes will be on the new CEO Dr. Vishal Sikka who will take charge on 1st August. The vision and leadership that he will provide will be crucial for the firm at this time. The top challenges that he will face will be improving the topline performance and controlling attrition. We believed that Infosys was responding to these challenges in a proactive manner. Thus, despite the troubles that the company was up against, we were probably the only research house to have a positive view on Infosys before Dr. Sikka's appointment. We had written about the same in The 5 Minute Wrapup Premium the May 29th 2014.

In the meanwhile, the Indian stock markets further slipped in the red in the post noon trading session. At the time of writing, the BSE-Sensex was trading lower by 152 points or 0.6%. Barring IT, FMCG and pharma, all the sectoral indices were trading in the red. Power and realty stocks were the biggest losers. Majority of the Asian indices were trading in the red led by Indonesia and Taiwan. China and Singapore were the only markets trading in the green. European markets have opened the day on a strong note.

 Today's investing mantra
"Buy businesses that can be run by idiots" - Warren Buffett

Today's Premium Edition.

Railway stocks continue to derail... what to do?

Has the sharp correction in railway stocks made them good buys now?
Read On...Get Access

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Is Mr Jaitley's fiscal roadmap an illusion?". Click here!

11 Responses to "Is Mr Jaitley's fiscal roadmap an illusion?"

Manoj Kumar Mondal

Jul 13, 2014

Today's investing mantra
"Buy businesses that can be run by idiots" - Warren Buffett
I would say this comment is highly unexpected of a successful investor such as Buffett. If a business can be run by "idiots" it will have too many competitors. Whatever way one looks at it, profit from a business has to be earned and it will not come walking. The more intelligent the business the more is the rewards. The art of the business is to match the knowledge that it warrants.



Jul 12, 2014

The quote is wrongly attributed to Warren Buffet. It was in fact Peter Lynch who said " Find a business that any idiot can run because ultimately an idiot will have to run it"


Raghvinder Joshi

Jul 12, 2014

One thing this FM is doing is what all governments in the past have been doing, NOT WIDENING THE TAX NET.

I am a middle class salaried person and pay all my taxes diligently. In most parts of India, part of payments to land developers, builders and real estate dealers are made in cash. The rated value of properties for payment of Stamp Duty and Registration in some part of our country is half of the market value. Most of self employed engineers, CAs, doctors, owners of small stores do not reflect their true incomes and evade taxes. There is no attempt made by any government to devise ways to improve tax compliance. All the burden is borne by honest tax payers.

The declared net worth of most of the politicians has grown exponentially without any plausible business income. This government has no plans to stem the rot of un-accounted money. In such a scenario, even a tax-amnesty scheme would be better than no action at all.



Jul 11, 2014

Mr Jaitley's budget is a pro growth budget, wherein he has improved the living standards of the common man. While also giving impetus to long term sustenance of Infra Projects, by boosting the morale of Mutual Funds which in turn can help develop projects with lower yields and gradual developmental return on operation and maintenance before transfer on MCA projects. Also by reducing Excise in prime products the domestic goods market can be strengthened and help build competiveness. Besides opening up efforts in boosting exports related revenue generation by relaxation of taxes on revenues generated by foreign projects and encourage foreign subsidiaries participation.


Rasikbhai Gandhi

Jul 11, 2014

The erection of statue of Unity has the two sides. Manufacturing of it is for social cause. And social cause is equally important in the life of a nation which should be taken care of. Rs. 200 crores which will be spent for the manufacturing and erection of statue will surely create job opportunites for different type of skilled and labour class people.

Like (1)

Rasikbhai Gandhi

Jul 11, 2014

I have no doubt regarding execution of the provision made in budget. Last government has left the empty treasury with the new Government. How it has become empty that every body knows. UPA led by the Corrupt Congress indeed has looted the country like anything. Let us hope that new govt. will show its non corrupt skill in time to come.

Like (1)


Jul 11, 2014

Agree with most of your observations,there is disincentive for investing inMF'S for long term .minimum bracket tax payee will do well to pay short term cap gain tax@10% instead of debt investments for 3 years and also pay tax @20%.Budget is good overall.

Like (1)


Jul 11, 2014

Comments:The government's business is to govern; not run businesses. It was ok in 1947, when India was newly independent; and a planned development was needed. The Russian model of 5 year plans was adopted; every one is aware of the positive and (more)negative outcome of this. Scandals there were even in 1940s; but retribution was there however slow.Instead of people owning the "modern temples of India" indirectly, what is the objection if they own it directly? What direct benefit does he get by the indirect ownership? And they are sitting on piles of cash - unproductive wealth. In the even why object to disinvestment?
2. Spending taxpayer's money for a mammoth statue:- you consider a waste. This is similar to the claim of waste of money on the building of Eiffel Tower. The same people who criticised it claim it to be an attraction. Does the construction of such a structure not contribute to employment generation, in addition to creating a tourist attraction. On that score, all the past monuments which we are proud of today, should be considered a waste of money; be they the temples, palaces etc.
You may not agree; but agree that there is another view as well.

Like (1)

Ashok Kumar Sethi

Jul 11, 2014

Honorable Finance Minister Mr Arun Jaitely was overwhelmed and over enthusiastic while presenting the National Fiscal Budget for the year 2014-15. His speech runs to more than 20 pages. It is for the first time that any Finance Minister requested the Madam Speaker to grant 5 minutes break in between his presentation and he drank the water many times to quench his thirst in between. What all these indicate that his firmness was loosing stamina and he was in mood to finish the speech in hurriedly manner. As our ex-PM Sardar Manmohan Singh commented on the Budget to have no road map, I also feel that the financial directions and acumen-ship in handling the issues were lacking. In my very earlier tweet, I commented that the interim Budget of UPA before election presented by Mr P Chiddambaram would be very difficult to be followed by any Govt. coming to power.The whole episode of our National Budgetary allocation and achievements moves around GDP, NDP, WPI, CPI, inflation, deficit and Growth ratios. When the resources are limited and the population is increasing,the agriculture produce is diminishing and the Capitalists are churning and minting money, the powerful corporate lobbies have joined hands together to dominate the politicians, how one can expect the Budget to the real taste of poor people and make the exchequers strong and build the Nation self-sufficient.I doubt that the dominance of Gujarat should not eat away the BJP and also effect the Nation to great set-back. It looked as if the Budget of Gujarat State was being presented at the national level.

Like (1)

Ramesh Menon

Jul 11, 2014

The FM did mention in his budget speech that achieving a fiscal deficit of 4.1% was a challenge given the current state of affairs of the economy. We shouldnt worry too much if we do not meet the target this year. What the FM has done in his budget is to lay the ground for creation of an investment favorable climate which will bring in substantial inflows in the coming years. Also, we shouldnt forget that this budget is an interim one. Next year's budget will be the one to watch. I am sure with the issues being addressed in this budget, the ground would be laid to revamp subsidies, curtail government spending and other such unnecessary burden on the exchequer in the 2015-16 budget.

Like (1)
Equitymaster requests your view! Post a comment on "Is Mr Jaitley's fiscal roadmap an illusion?". Click here!