Union Budget 2014-15: No bitter pills! - Views on News from Equitymaster

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Union Budget 2014-15: No bitter pills!

Jul 10, 2014

The Finance Minister seemed to be bang on when it came to diagnosing the key ailments for India's poor fiscal and economic health. He even spelt it out in as many words ...saying that increasing India's tax to GDP ratio was pertinent to meet the growth and investment aspirations. However, when it came to bold reforms on the taxation front, the Budget measures hardly offered the 'bitter pills' to cure the ailments.

The Union Budget 2014-15 just offered some cues with regard to the government's focus areas in terms of investments and expenses. Here are the key takeaways:

Key positives

Stress on fiscal prudence - The Finance Minister not just stuck to the ambitious target of bringing the fiscal deficit to 4.1% of GDP this year, but also laid out targets for next two years. The deficit targets of 3.6% and 3.1% for FY16 and FY17, highlight the government's focus on fiscal prudence and can certainly boost investor confidence.

FDI in defense and insurance - By raising the FDI cap from 26% to 49% for these two sectors, the Budget at least indicated the government's determination to attract long term foreign funds in key sectors.

Equity dilution in PSU banks - By committing to recapitalize PSU banks by selling shares to retail investors, the government achieved two objectives. One it distanced itself from the obligation to fund banks with taxpayer money. Secondly by selling shares to retail investors and offering some autonomy to PSU banks, the government may make these entities more answerable to minority shareholders. Eventually this should lead to improvement in efficiency and asset quality of PSU banks.

Facilitation of infra investments through long term funds - By committing to allow banks to raise long term money for infrastructure funding with minimal burden of reserves (CRR, SLR), the Budget did open up plenty of avenues for funding infra projects.

Investment in educational and healthcare institutions - 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.

Single KYC and demat accounts - In order to bring in transparency in financial sector, the proposal for single KYC and demat accounts could also encourage investments in financial products.

Thrust on increasing household savings and investment - The higher tax exemption limit (upto Rs 2.5 lacs) and higher deduction (under section 80C upto Rs 1.5 lacs) offer enough headroom for the savings to GDP ratio in the country to move up from the 30% levels that it has fallen to in recent years.

Key negatives

Meek attempt to increase tax to GDP ratio - What was most disappointing about this Budget was that it made no attempts whatsoever in tapping the sections of the population that enjoy perpetual tax holidays! With India's tax to GDP ratio lurking at just about 10-12% (one of the lowest in the world), the Budget could have been a great platform for Mr Modi to bridge the gap and cure India's fiscal ailments.

Not enough clarity on retrospective taxation - The litigation on retrospective taxation (wrt. tax demands on Vodafone) was a critical concern for foreign investors. However, this Budget continued to maintain the vague stance on the issue, thus leaving foreign investors edgy and vulnerable to changes in this stance.

Not enough clarity on investment by PSUs - The Budget cited that the PSUs will invest through capital investment a total sum of ` 2,47,941 crores in the current financial year.

No mention of reforms for the power sector - The Power sector was at least one key infrastructure sector that was expected to get a special mention in the Budget, particularly in terms of policy reforms etc. However, the measures cited in the Budget clearly fell short of expectations. Further while the Budget stated that PSUs will invest through capital investment a total sum of Rs 2.5 trillion in the current fiscal, there was no clarity on the area of investments.

No bold reform on oil and fertilizer subsidies - Oil and fertilizer subsidies that were the bane of contention and key reason for the previous government's poor performance on the fiscal front, hardly found enough redressal in the latest Budget.

Implementation of NREGA remains doubtful - Despite very discouraging results from the previous government's spend on the NREGA, the NDA Budget made no substantial changes to the nature and quantum of outlay on the scheme!

Overall, while avoiding the tag of being a 'populist Budget', the Union Budget 2014-15 seems to be largely relying on excellent execution rather than great planning. Faltering on execution could therefore have a very negative impact on the perception of the government and investor sentiments.

Investors would do well to keep an eye on sectors and stocks that offer fundamental stability and long term value.

Tanushree Banerjee

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and, ValuePro Equitymaster's oldest recommendation services. She is also the editor of Equitymaster's most popular newsletter read by over 300,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks and scrutinising RBI policies. Over the last decade, she developed Equitymaster's research processes that helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham, and Joel Greenblatt.


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