02 March 2015

Union Budget 2015-16

The Union Budget 2015-16 is a good effort to rejuvenate and revive the economy. Though there are no big-bang reforms as was expected by some sections of the market, the finance minister has managed to meet the key expectation of a substantial increase in the allocation (up by 0.5% of the GDP) for capital spending in the infrastructure segments, namely roads, railways and irrigation. We view this as the biggest positive of the budget (which is also in sync with the higher capital spending envisaged by the railway minister in the rail budget earlier) since it is essential to revive industrial activity and investment cycle, and put the economy on a virtuous growth cycle.

On the other hand, the target to achieve a fiscal deficit of 3% of the GDP by FY2017 has instead been extended by one year to FY2018 which is negative in terms of influencing the pace of monetary easing by the RBI. However, it needs to be viewed in the light of the fact that the finance minister had limited fiscal space. Budget net tax revenues are increasing by a tepid 1.4% due to a surge of ~50% in the share of the revenue kitty to be transferred to the state governments as per the Finance Commission’s recommendations.

Overall, it is a well balanced budget with focus on boosting economic growth through higher capital spending, easing regulations for businesses and attracting private participation. At the same time, the allocations for the social schemes have been either retained or increased in some cases including NREGA. New proposals have been suggested to widen the social security net through schemes to provide health insurance, life insurance and pension schemes at nominal rates. Keeping with the tradition, the finance minister has also outlined the long-term policy priorities of the Narendra Modi government that encompass housing, power and water for all by the 75th year of India’s independence, ie 2022.

From the capital market perspective, the budget is positive in terms of favourable tax proposals related to the removal of tax on offshore funds managed from India and clarity on GAAR, which has been postponed by two years and would be effective for prospective transactions. The budget also proposes measures to increase financial savings through gold monetisation products and tax-free bonds aimed at funding capital investments in the railways, roads and other infrastructure projects. On the flip side, the higher effective tax rate (an effective tax rate of 34.6% with levy of additional surcharge) for corporates in FY2016 could marginally bring down the consensus earnings estimates for FY 2015-16.