Feb 28, 2015|
Union Budget 2015-16: Key takeaways
There were considerable expectations from the Finance Minister Arun Jaitley to deliver some big bang reforms in the Union Budget 2015-16. While corporates had something to cheer about, the overall Budget seemed average at best. Here are the key takeaways:
Stress on maintaining fiscal prudence: In the last Budget, the FM had set a target of reducing the fiscal deficit to 3% of GDP by FY17. This target has now been extended by a year. In other words, the new targets for reducing the deficit now stand at 3.9% by FY16, 3.5% by FY17 and 3% by FY18. Whether the government will be able to stick to these targets or whether there will be a revision once again remains to be seen.
Focus on housing: 'Housing for all' to be completed by 2022 which would mean building 2 crore houses in urban areas and 4 crore houses in rural areas. Further, each house would also be provided with 24 hour power supply, access to clean drinking water, toilet and connection to a road. While this is a certainly a step in the right direction, execution will remain a challenge.
Focus on education and healthcare: Upgrading secondary schools, setting up of IITs, IIMs and AIIMS in more states were an indication that the focus will remain on skill building and ensuring better healthcare.
Focus on farm credit and rural development: Realising the importance of improving farm incomes, the FM announced outlays for irrigation and better productivity, rural infrastructure development and providing farm credit to farmers.
Introduction of a bankruptcy law: The SICA (Sick Industrial Companies Act) and the BIFR (Bureau for Industrial and Financial Reconstruction) have failed to achieve their objectives of reviving sick units effectively. Thus, the FM intends to bring in a comprehensive Bankruptcy Code in FY16 that will meet global standards.
Improving the social security net: The FM focused on improving the pension schemes in the country. These include accident insurance, utilizing unclaimed deposits in the PPF and EPF towards creation of a Senior Citizen Welfare Fund among others.
Setting up of 5 new UMPPs: 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 which led to the concerns surrounding the recently failed auctions, this is definitely a welcome step.
Gold monetization scheme: This will replace both the present Gold Deposit and Gold metal Loan Schemes. The new scheme will allow the depositors of gold to earn interest in their metal accounts and the jewelers to obtain loans in their metal account. This is given that the large stocks of gold in the country is neither traded nor utilized.
Tax reforms: Introducing a new law for curbing black money abroad and stricter measures for those evading tax. As far as domestic black money is concerned, a new and more comprehensive Benami Transactions (Prohibition) Bill to be introduced in the current session of the Parliament. Abolishing wealth tax as it was not really adding much to government finances. The FM intends to replace wealth tax with a 2% surcharge on those having an income of Rs 1 crore and more.
No bold reform on subsidies: Subsidies that were the bane of contention as far as economic growth is concerned, hardly found enough redressal in the latest Budget. Infact, rather than reducing the subsidy expenditure, the FM focused more on plugging the loopholes in terms of ensuring that the subsidy reaches the intended beneficiary. Hence, the focus on direct transfer schemes. But these need to be properly implemented.
Not enough clarity on retrospective taxation: The litigation on retrospective taxation (wrt. tax demands on Vodafone) was a critical concern for foreign investors. However, as was the case in the last Budget, this Budget continued to maintain a vague stance on the issue, thus leaving foreign investors edgy and vulnerable to changes in this stance.
Not much clarity on MNREGA: Although the allocation to this scheme was increased, not much clarity was given on improving the effectiveness of the same. This then remains a grey area given the discouraging performance of the erstwhile UPA government with respect to this scheme.
Although this Budget was not as populist as those by the erstwhile UPA government have been, the good thing of the Budget was that it emphasized on the importance of infrastructure, rural development, education and healthcare to drive economic growth. But emphasizing is one thing. Execution is another matter altogether. With respect to the latter, a lot of work still needs to be done. Indeed, as we have mentioned before, faltering on execution could therefore have a very negative impact on the perception of the government and investor sentiments.
We have never believed in the concept of 'budget investing' and so we continue to re-iterate our stance of investing in good quality companies that have solid businesses and are available at reasonable valuations that can add to the long term wealth of shareholders.
||Radhika Pandit (Research Analyst), is one of our senior analysts with more than a decade-long stint in the field of equity research. She has helped build our pharmaceutical sector research from scratch and has a firm grasp of the Indian automobile industry. Being an ardent follower of Warren Buffett's value investing philosophy, she believes in investing in solid businesses for the long haul.
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