Union Budget FY2014-15- Impact of Budget Announcements

GOOD

   

For economy

1.       Focus on fiscal consolidation as Finance Minister sticks to the Interim Budget fiscal target of 4.1% of GDP; aiming for 3.6% in 2015-16 and 3% in 2016-17

2.       Aims for 7-8% GDP growth over 3-4 years through managing Current Account Deficit (CAD) and lowering inflation through controlling food inflation. Introduce measures to improve finance and productivity in agriculture and supply chain management (warehouse, storage, logistics) in food sector.

3.       Boosts investment and domestic production, government has reduced basic customs duty on various items used as raw materials, reduce dependence of imports in electronics and Special Additional Duty on various products shall help lower the retail price paid by the customers. Reduction in excise duty for retail footwear shall boost consumer goods. Increase in excise duty on tobacco products shall impact the sector adversely.

4.       Infrastructure development and boost real estate through developing 100 smart cities budgeted at Rs. 7, 060 cr. Development of transportation through development of Airports in Tier I and Tier II cities and expansion of gas pipe line through PPP model. De-bottlenecking the road clearances and aims to increase the investment in roads sector. Increase in investment in renewable and solar energy. 10-year holiday extended to power generation, transmission and distribution through boost the manufacturing sector. Introduction of e-Visas at nine airports shall boost tourism. Improve the financing in Micro, Small and Medium enterprises (MSMEs) sector shall assist in overall economic growth. Licensing of small and differentiated banks shall improve financial inclusion. Increase FDI in real estate (low cost housing projects) , insurance, defense.      

5.       Various initiatives, schemes and policies aimed for proper sanitation, irrigation, clean environment, education and sports. Encourage entrepreneurship and development of industrial corridors shall boost economic development.

6.       Operates all the financial products through demat account. Uniformity of the KYC norms increases operational efficiency.       

For individuals

7.       Basic threshold level for individuals increased from 2L to2.5L and resident senior citizens increased from Rs.2.5L to Rs.3L

8.       Maximum deduction limit for home loan interest payment increased, in case of ‘self-occupied property’ raised from Rs.1.5L to Rs.2L (if completed within 3 years*). It will boost real estate and home loans from banks.

9.       Annual limit for investment in PPF to be increased from 1L to 1.5L. Moreover, increase of tax savings u/s80C from 1L to 1.5L shall boost the household savings.

For foreign investors

10.    Income from Foreign Portfolio Investors (FPIs) from transaction in securities shall be treated as capital gains. Foreign dividends continue to be taxed at concessional rate of 15%.

BAD

For economy

1.       Retrospective taxation not completely eradicated through GAAR (General Anti-Avoidance Rules)

2.       Expenses like Sardar Patel Statue in Gujarat might adverse impact the fiscal deficit. Disinvestment in PSUs shall assist the government to finance the fiscal deficit. However, the privatization of PSUs shall improve the profitability of the sector. Non-plan expenditure to increase on subsidies like Fertilizers, Food and Capital expenditure on Armed Forces might widen the deficit.

For individuals

3.       Expectations of increasing health insurance rebate for senior citizens from Rs.15,000 to reduce cost of living remains untouched

4.       Education cess and Secondary & Higher introduced in imported electronics goods making them expensive

5.       Increase in jewelry prices as customs duty on half-cut or broken diamonds to be increased to 2.5% and basic customs duty on cut & polished diamonds and colored gemstones from 2% to 2.5%. Moreover, utensils to be increased in value as Customs duty on stainless steel flat products rose to 7.5% from 5%.

UGLY

For economy

1.       Net Effect of the direct tax proposals to result in revenue loss of Rs. 22,200cr shall adversely impact revenue and fiscal deficit

For individuals

2.       Debt mutual funds lose the sheen as long-term capital gains tax period increase from 12 months to 36 months and tax rate increased from 10% to 20%. However, makes FMPs and Banks FDs as attractive investment avenue

3.       Dividend Distribution Tax (DDT) to be taxed at gross distributable income reduces the dividend income received by investor.

	Debt	Equity	Gold
Positives	Duration-based strategy (income funds) is preferred due to taxation impact and aim of RBI to target inflation of 6% by January’16 shall reduce the interest rates and increase the value of long-term debt funds. With the prospective tax regime, FMPs above 3 years horizon and Banks FDs regain the sheen as investment avenues.	Hold for long-term horizon of 5 years and above focused on sectors like Infrastructure, Real Estate, Manufacturing, Financials, Agriculture, Construction, Transportation, Consumer Goods and Capital Goods. Systematic Investment Plans (SIPs) preferred mode of investment.	As an investment asset it can form as hedge against any adversity in domestic and international economy. However, holding as personal asset (jewelry) it is an expensive affair, if bill passes as it. Tax regime in debt mutual funds shall impact gold funds as well.
Negatives	Accrual-based strategy (liquid funds, ultra-short term, short-term debt mutual funds) look unattractive because of taxation effect and prospective outlook on inflation and interest rates.	Tobacco industry, Imported Electronics Goods, Aerated drinks, FMCG goods  and  Jewelry sector are adversely impacted by the budget policy announcement	Positive economic revival across world make Gold loses its shine as investment. Import duty was held at 10% makes the gold trade at premium to international prices. As global uncertainty and low and monetary/ fiscal levels manageable at domestic level.
Recommendations	Hold duration-based strategy with horizon of 2 ½ - 3 years horizon. However, for the shorter-term, dynamic debt mutual funds can be invested in. Additionally, to increase liquidity in the debt portfolio, arbitrage funds can be held. Alternatively, Real Estate Investment Trusts and Infrastructure Investment Trusts can be invested in for long-term.	Hold large cap funds with moderate allocation to mid & small cap with long-term horizon (5 years and above). Sector funds focused on infrastructure, transportation and Financial sectors seem attractive. Diversified funds can be invested in for 3 years and above horizon.	Invest as hedge to the portfolio with investment in gold funds or e-gold rather than utility asset. Small proportion is suggested as investment.

Budget is essentially focused on infrastructure, employment generation and improving savings rate; which shall positively impact the economic development, increase the savings, investment, capacity utilization and personal consumption. Thus, prime aim of the budget is to regain the economic growth focusing on execution, expansion of infrastructure and improve the human resource capability.

However, domestic risk of increase in fiscal deficit and adverse impact of El Niño Impact on Agriculture shall weaken the currency, increase the inflation as Current Account Deficit might be increase. Increase in inflation shall directly impact the interest rates impacting the investment. Widening of fiscal deficit might increase market borrowing, which will hit the debt market and decrease the yields on the same.  Geo-political risks in Iraq crisis, US Fed tapering, and Euro zone default risk shall lead to economic stagflation in international markets. However, over longer term horizon, economy shall witness higher economic growth and stability, the returns on investment shall higher.  Hence, long-term scenario is more positive than short-to-medium term conditions risked by inflation, interest rates, global liquidity and economic growth.

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