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Budget 2014 Analysis: Deficit Skepticism Is Justified, Big Targets for 8 months (Premium)


Budget 2014 Analysis: Deficit Skepticism Is Justified, Big Targets for 8 months (Premium)

Budget 2014-15 has, to markets at least, been a bit of a disappointment. However, that is more about mismatched expectations, rather than a botched budget. What the government’s doing, at least on paper, is to bring the fiscal deficit down to 4.1% of GDP by changing things here and there.


Revenues Need to Grow 16%

Let’s look first at how the government expects to earn it’s money. We expect to see the government earn revenues of 11.9 lakh crore (Rs. trillion). This is a 16% higher number than the previous year.

Budget 2014 Analysis: Deficit Skepticism Is Justified, Big Targets for 8 months (Premium)

Now this is not unachievable – remember, last year, we did get a revenue hike of 17% when the GDP growth was less than 5%.

However, in this, gross tax revenues went up just 12%, which was 76,000 cr. less than budgeted. In return, the center transferred Rs. 29,000 cr. less to states. Disinvestment was less than half of the 55,000 cr. estimated, but big gains in dividend payments by the likes of Coal India covered things up a little (15,000 cr. more).

We are expecting a rosy year ahead, with every element (except Personal taxes) growing more than last year. Corporates better make a heck of a lot more more – they’re expected to pay income taxes at a higher growth rate than the last four years. Indirect taxes need to see a lot more growth, especially excise and customs duty.

Budget 2014 Analysis: Deficit Skepticism Is Justified, Big Targets for 8 months (Premium)

On the disinvestment front, the government wants to earn 58,000 cr. of which Rs. 15,000 cr. will be from disinvestment in non-public companies (through sales of the SU-UTI, we imagine).

This is aggressive on the revenue front. There are just 8 months left and the exact amount of disinvestment earned till now is: zero.

Expenditure goes up only 12%

The lower deficit number comes from a much lower expenditure number. We expect to spend a lot lesser on a lot of things. The biggest single ticket line item are interest payments, which are now over Rs. 427,000 cr. (24% of all expenditure) and Subsidies, which add up to 261,000 cr.

Budget 2014 Analysis: Deficit Skepticism Is Justified, Big Targets for 8 months (Premium)

Plan Expenditure, an amalgamation of items spent by the Center and States on the five year plans, is 32% of our bill. This has remained steady.

The issue really is of how one could achieve the lower subsidy number (to 261,000 cr.) , considering the last government decided to move a lot of subsidy to this year. And there’s a drought in the offing, which will increase food and interest subsidies. And petrol prices have spiked up 10%. And the Food Security Act adds a 60,000 cr. to this bill (included in the number above)

How are we split?

Budget 2014 Analysis: Deficit Skepticism Is Justified, Big Targets for 8 months (Premium)

Fiscal Deficit

The deficit increases in absolute terms to 5.31 lakh crore, but that’s a lower percentage of GDP which is estimated to be Rs. 130 lakh cr.

Budget 2014 Analysis: Deficit Skepticism Is Justified, Big Targets for 8 months (Premium)

The GDP goes up by Rs. 15 lakh crore, which is a 13% increase, and about 8% of that increase is: inflation. In a lot of ways we are just inflating away our deficit.

Capital Mind’s Budget Analysis

We’ve written a lot about the budget. In a day or so, we will compile this into a book (“Budgetonomics”) and present it to all Capital Mind Premium subscribers for free*. And there’s more coming!

* Trial subscribers can purchase it separately

Our Take on the Budget: What Just Happened?

There’s always things to like and dislike about budgets and governments. How could they do this? What about that? These are considerations, sometimes petty and sometimes facepalm material, and will keep media houses busy for ages. But let’s step back a bit.

What did Jaitley really do? He didn’t cut taxes. At Capital Mind, we didn’t expect him to. It’s better done in a full year budget, and this one will only last eight more months. He did give a small tax benefit by raising slabs, but what we really want is a better, less exemption heavy Direct Tax Code.

He didn’t really address the fiscal deficit. It’s big, they say. But a good portion of it is interest costs and subsidies. Subsidies aren’t changing right now. Nothing that we heard long ago – about how we can cut subsidies to zero, about how inefficients they are – have resulted in policy action. We only got a promise that they will fix things by a more focussed Food and Fuel subsidy. We must wait for these details.

He also promised to fix Food Inflation by reforming the FCI and the Public Distribution System. This is very tough in a good year (like 2013). In a drought year like 2014, will he be able to? We sure hope so, but hope is different from a budget. There are no budgeted costs for contingency, for what the reform will cost, or for a drought that will impact finances. (It’s not conjecture – the monsoon is 43% below normal right now).

The NREGA issue – of how come we “guarantee” employment by paying people for doing very little – has been addressed only by saying that the money will be spent but for “more productive, asset creating and linked to agriculture”. This needs a lot more clarity.

He tinkered with taxes. Much of this has to do with tax litigation. They moving of things around is to reduce the messy cases that are stuck in courts. There is also a lot more clarity on taxation, the due process and penalties. He’s also promised single-window-customs clearance, which should ease regulatory pain for importers. And better tax assessment, including advance rulings and defined committees for settlement. Will this be a game-changer or will it just become another hampering layer? We’ll hope for the former.

Jaitley’s allocations surprise us. Rs. 100 cr. for the Metro in Lucknow. For that to be useful, you will need a lot of luck, and now.  And then, they want to spend Rs. 500 in training elementary school teachers; but to set up Five IITs and Five IIMs the allocation is: Rs. 500 cr. Many large things have been given allocations like Rs. 100 cr. and it’s not apparent how any of this will be enough.

What the budget did do, was provide some clarity on the way forward. Easing the tax litigation process is good, and creating single window clearances for stuff is good. There is also a single government portal planned by December 31, where you’ll be able to get all the clearances you need to run a business, and pay fees online.They want to create a bankruptcy law for small companies which can shut down faster. They will create a shipping policy for inland and coastal shipping encouragement. The goal is to reduce friction in doing business, and these are good directional steps.

But at the same time there was no clarify on asset sa
. They want to disinvest Rs. 43,000 cr. in the year, and then another 15,000 cr. from their ownership of non government companies. The last government managed to do only 40% of their targets last year, despite a roaring market after December. It’s not apparent how this government will do it, when they have just 8 months to go.

On the downside, while they want stable tax regimes, they’re reintroduced taxes on mutual funds held for a year, creating confusion in an industry that manages more than Rs. 700,000 cr. They have added more exemptions and tinkered with duty changes. These seem incongruent to the election promises that brought them to power.

There are a lot of built in promises, and while we should give the government the benefit of doubt, they definitely didn’t meet the high expectations we had. Maybe we expect too much of governments. It’s probably time they just stood still, so the rest of us can do greater things.



Budget 2014 Eases Taxes Marginally

What you really want to know about the budget: How it affects your taxes. So here goes: Base Slab Upped by 50K to 250K Your income upto Rs. 250,000 is exempt. (Earlier, Rs. 200,000). If you’re above 60 years of age, the exempt limit is 300,000. Above that, in a progressive manner: 250K (or 300K) to 500K is 10% 500K …

Read more….

Budget 2014 Direct Tax Summary: Almost Like There Was No New Government

The Budget Highlights are here, in a quick summary. We’ll warn you: it’s almost like there was no new government. We’ve seen some minor changes. What you care about Your taxes go down because of an increase of the base slab of 250K versus 200K (another 50K for senior citizens) An increased 80C limit on investments upto Rs. 1.5 lakh …

Read more….

The Murder of the Debt Mutual Fund By Closing a Tax Loophole


  Invested in an FMP? Bought a Liquid Fund And Stuck around for a Year? Bought Debt Funds for the “Inflation Indexation”? You’re going to hate Arun Jaitley.   Let’s start with the basics. You can invest in a fixed deposit with banks. Which pays you interest. The interest is added to your income, and taxed at the highest rate …

Read more….

Cheaper Kindles, Chappals and Soaps, Pay More for Radio Taxis and Coke

We have seen indirect taxes change with the Budget, and here are the key changes: Consumer Goods Soaps get cheaper as customs duty on input chemicals is cut (Helps the FMCG companies like Godrej Consumer Products, HUL, Jyothy Labs) Lower end TVs (19” LCD or less, or CRT) will get even cheaper as input customs duties are exempted. (Mirc Electronics …

Read more….

Go Healthy: Tobacco Duty Hike of Upto 72%, Coke and Pepsi Get a 5% Tax


It’s going to cost you a lot more to light up. The excise duty on cigarettes is up 72% for cigarettes less than 65 mm, and 11% to 21% on other cigarettes. Chewing Tobacco and Gutkha see rates go up 60% to 70%. Pan masala too goes up. This should have hit ITC hard, but the stock didn’t hurt much, …

Read more….

You Can Buy Only One House To Offset Capital Gains: Budget 2014

You can only buy one residential house with the capital gains you make, says the Finance Ministry, in the Budget. If you have capital gains from selling a house, you can now invest in only one house in India to avoid capital gains (only the amount invested in the house is exempt). If you have capital gains from any source …

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Capital Gains Bond Investment Loophole Plugged: Only 50 Lakhs Allowed to Offset Gains

One more tax loophole in Capital Gains has been bridged. Now, you can only invest your long term capital gain in certain bonds (54EC, like NHAI bonds) upto Rs. 50 lakh. Earlier, if you sold a house in, say November, you had six months to buy these bonds. Every financial year, you could only buy Rs. 50 lakh worth of …

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The 80CCD Confusion: Do You Get Another 100,000 Deduction?

There are many conflicting views on the budget. A certain section – 80 CCD – has been amended, clarifying that it is available to private sector employees as well. This has been taken many to believe that private sector employees can get an additional Rs. 100,000 if they invest in the New Pension Scheme (NPS). This is incorrect. I believe …

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Scathing Review, Cursed MF: Capital Mind’s Budget Pieces Elsewhere

Two of our articles have been published in Qz and Outlook. Here is some link love: Outlook: “Strong Mandate, Weak Budget” – a scathing review of the budget and the market’s response to it. Arun Jaitley’s first budget sends mixed signals to financial markets, and one strong message: this is not a dream budget. The dream budget, if you heard …

Read more….



Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material
given above, or may involve a direction derived from independent analysis.


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