The budget is an annual statement of accounts. But within it lie stated and unstated intentions. The FM has been focused on balancing the need for spending more (eying the general election) and worrying about a possible downgrade from the international credit rating agencies. That was his balancing act: tight-rope walking.

Precursor

The FM confined the fiscal deficit to 5.2% in FY13 and as expected, this arithmetic achievement is in line with his topmost agenda of averting a country rating downgrade. This transient appeasement of rating agencies, however, is the result of substantial Plan expenditure cuts across ministries in the last few months, a by‐product of which is slower GDP growth in second half of FY13. No wonder, the Q3 FY13 GDP growth figure just released stands at a dismal 4.5%.

Whether justified or not, Union Budgets have always generated excitement in India and ahead of the 2014 general elections, Union Budget 2013-14 was one of the most anticipated budgets. Not just taxpayers, but analysts and economists were expecting a bonanza from the FM ahead of the general election. Excitement was more than usual as it was presented by a man with a reputation for big bang budgets. And thus people were keen to know how populist it could possibly be? Especially against the backdrop of stubbornly high inflation and bloated Govt. finances.

Pandora Box Opened Up

And when the verdict came out, our FM appeared to have played very safe. There certainly wasn’t any big bang announcements and only minor tweaking here and there. The Budget could be termed prudent as it has not turned out to be outright populist. But the threat of bigger demons, including the YoY unchecked expenditure upsurge, continues to thwart us.

Like always, customary concerns over double-edged sword of deficit were expressed followed by an apt customary resolution to put the same under check. The Fiscal deficit for the current year has been contained at 5.2% of GDP and for the year 2013-14 is estimated at 4.8%. By 2016-17 fiscal deficit is targeted to be brought down to 3%.

However, committing to fiscal prudence is one thing; and sticking to the target entirely another. Thus, questions have been raised about how exactly the FM and his team would manage to bring down the deficit to below 5% in the next fiscal? For, while the expenditure has been raised substantially, very little has been done by way of increasing revenues. And the budget failed to provide any answer to the question.

In what ways the government planned to earn the pennies?

When activity on the equity market was taxed, eyeballs and capital moved to commodities trading. Commodity futures trading has grown by 3.5 times after 2008, while equities activity has stagnated. For long, lobbying market stakeholders were divided in two different sections; one demanded the removal of STT and the other demanded the equivalent taxation of transactions in equity as well as commodity market.

1. The FM proposed to levy Commodities Transaction Tax (CTT), a tax levied on exchange-traded commodity derivatives in India, of 0.01% on all non-agri commodity trades such as gold, silver, non-ferrous metals and crude oil. However, agricultural commodities will be exempted from this tax.
2. Partly meeting the demands of a vast section of market participants, the FM reduced STT on equity futures from 0.017% to 0.01% and for mutual funds and exchange-traded funds (ETFs), the STT component has been cut from 0.25% to 0.001%. Finally, for the sale or purchase of Mutual Fund units or ETFs on the stock exchange platform, the levy has been reduced from 0.1% to 0.001% and will be borne only by the seller.

The dividend distribution tax (DDT), a tax levied by the Indian Government on companies according to the dividend paid to a company’s investors, has been raised from 12.5% to 25% (plus surcharge and cess) across the board for debt funds.

The FM has also decided to tap the ‘super rich’ category in the country to collect more taxes. This category, classified as those with taxable income above Rs. 10 mn, would be contributing more this year in order to fund the necessary expenditures. However, the relief for them is that the surcharge of 10% would be valid only for a year.

A Tax Deducted at Source (TDS) of 1% has been introduced for land deals of more than Rs. 50 Lakhs. This is however not applicable on agricultural land deals.

Import duty on set top boxes, raw silk and mobile phones has been increased. Excise duty on cigarettes, Sports Utility Vehicles (SUV) and marble has been increased. Service tax would be applicable on all AC restaurants at the rate of 12%.

While the Disinvestment target hinges on stock market sentiment, the high and mighty Rs. 400 bn expectation from Communication Services is likely to be way off‐target. On the direct tax front, Income tax and Wealth tax estimates appear reasonable but corporate taxation growth pegged at 16.9% appears a tad on the higher side, given the slackening GDP growth and subdued corporate earnings.

Talking of indirect tax, excise and customs duty figures look achievable, but service tax projections seem heavily overstated at 35.8% YoY growth. Last year, this level of growth was possible only through increase in rates (from 10% to 12%) and inclusion of most services in the net. The same growth in FY14 on a high FY13 base is a difficult proposition.

And where the government would distribute these pennies?

The interesting aspect in the Union Budget was the increase in overall expenditure. Despite the need to curb the growing fiscal deficit, the FM has increased the overall expenditure to Rs. 16.65 trillion in 2013-14 (higher by 11.7% YoY).

A large part of this expenditure would continue to be made towards populist measures like increasing allocation to the NREGS scheme, PMGSY scheme for rural development, increasing allocation for minorities and scheduled castes etc. it was estimated that under these schemes total spending would be Rs. 55,000 crore before the end of the current year and it was proposed to allocate Rs 80,194 crore in 2013-14, marking an increase of 46%. MGNREGS will get Rs. 33,000 crore.

It is also interesting to note that the non‐plan expenditure is most likely to balloon on account of underreported subsidies. The target of a 10.3% YoY fall in subsidies looks far‐fetched in a pre‐election year. The assumed drop in petroleum subsidy depends on wishful eventualities – crude oil price levels remain unchanged, INR doesn’t depreciate and gradual diesel prices deregulation continues.

Despite the imminent implementation of the food security bill, the government has budgeted for Rs. 100 bn increase in food subsidy. Furthermore, rise in diesel will inflate food costs, procurement will be higher in the election year and minimum support prices can go up as well.

What’s in the store for AAM AADMI?

All the expectations of some new measures to boost savings, especially in the context of channeling long-term savings into equity have come pretty much to naught. In times of falling savings rate, the need was a substantial increase to Section 80C. This would have also made gold relatively unattractive. Instead, the budget only offered an additional interest deduction up to Rs. 1 lac for those first‐time home loan takers up to Rs. 25 lacs, besides Rs. 2,000 tax credit to income brackets up to Rs. 5 lacs.

Under RGESS, one of the most anticipated topics of this season, it was announced that a first-time investor can now invest in mutual funds as well as listed shares for three successive years, from earlier one year. Also the income limit for RGESS investor has been raised from Rs. 10 lakh to Rs. 12 lakh.

To increase the reach of the mutual fund industry, the FM allowed mutual fund distributors to leverage the stock exchange network. Therefore, MF distributors can now get access to the MF segment of stock exchanges. Though MFs have been available on stock exchange platforms since December 2009, now it’s going to be easier for both investor and the MF distributor.

The one glimmer of something new in the budget was the promise of some kind of inflation-linked savings instrument. The FM said, “In consultation with RBI, I propose to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes. These could be Inflation Indexed Bonds or Inflation Indexed National Security Certificates.”

• Globally, wherever inflation-linked bonds are issued, there are certain standard practices, but the key issue in India is which inflation rate is used. Since these new instruments are supposed to be specially targeted at low and medium-income savers, one could justifiably assume that consumer inflation would be the measure.
• ·         In recent months, there’s been a lot of noise about declining wholesale inflation and the pundits have generally opined that consumer inflation will inevitably follow. Unfortunately, there is little evidence of this happening yet. Real inflation suffered by low and medium-income savers is even higher than the stated consumer inflation and it will be a travesty if these new bonds will be linked to wholesale price inflation.

Concluding thoughts

The Budget was largely silent on measures to attract FDI and increase exports so as to curtail deficits. The measures to boost investments in capital markets too were non committal. Overall the Budget was a lackluster one. All eyes were on the FM in the hope that Budget measures would look at reducing the fiscal deficit. Though he has pegged the fiscal deficit at 4.8% of GDP this year, he has also increased the expenditures. However, ratings agencies have already stated that there is not much impact of this budget on the sovereign ratings.

Given the constraints of limited resources, the Budget promises to kick‐start the investment cycle but the key lies in execution, which is still suspect. All in all, we feel that the FM has made his arithmetic work in the Budget. Whether the economy responds or not, remains to be seen.

In the end, however, it turned out to be short on facts, leaving everyone confused as to how the FM will add up the giveaways while creating growth. A confused stock market, unable to add up the contradictory facts highlighted by the FM, did the best thing it could under the available circumstance – sell.