Friday, July 11, 2014

The 2014 Indian Budget Review – The Not So Great Aspects

Dear all, yesterday I posted an article covering the “Highlights” of the Indian Budget that was presented yesterday in the Parliament. It was more like a News Coverage kind of article and did not contain any detailed analysis about the points raised in our Budget. As I promised yesterday, this article is going to review the Budget and help you understand things that categorically…

Bad News First:

As with any budget, this budget too has its flaws but considering the magnitude of the Good News that will follow shortly, I think we can ignore these as minor hiccups from a new Government. Anyways, lets complete the bad news part so that we can cover the Good News Part in great detail in the next article…

Bad News No. 1: Not Much Increase in Tax Revenue

As you might be aware, Tax Revenue is the biggest contributor to the Governments Budget or the Khazana as we commonly call it. With a low-growth situation, high fiscal deficit and a need to revive the economy, tax reforms were expected in this budget. However, the FM just mentioned that the new Goods and Services Tax or GST will be finalized and introduced towards the end of this year. This new GST could potentially boost tax revenue for the Government. For the time being – the tax rates were left unchanged and so, the Tax Revenue will remain flat.

Category: BAD

Justification: With the Government Keen on Economic Reforms and Reducing the Fiscal Deficit, higher Tax Revenues were Imminent. Considering the fact that the Government is just 2 months old and the fact that they are working on finalizing the new GST, the category is just BAD.

Bad News No. 2: GAAR Left Untouched

The General Anti-Avoidance Rules or GAAR as they are commonly called has been a topic of confusion and distrust for Investors. Since it got introduced in the 2012-13 budget by the previous regime, it has caused nothing but pain and distress amongst investors. In fact, the BJP too had criticized the same. However, this budget has done nothing to either Scrap it or make things easier for the Investors.

GAAR is a concept which generally empowers the Revenue Authorities in a country to deny the tax benefits of transactions or arrangements which do not have any commercial substance or consideration other than achieving the tax benefit. GAAR is intended to target tax evaders, especially Indian companies and investors trying to route investments through Mauritius or other tax havens in order to avoid taxes. GAAR provides discretionary powers to revenue authorities to tax impermissible avoidance arrangements. The arrangements as a whole or aim part may be disregarded and tax benefit denied.

However, the only saving grace is the fact that, the government has now said that it will be forming a Committee that will oversee the cases that are under litigation due to retrospective amendments.

Category: BAD

Justification: From a Government that had promised to provide an Investment-Friendly Economy, these kind of misses can turn out to be costly. If the committee had not been appointed, I would’ve categorized this as “Very Bad or Horrible” but this is actually a step in the right direction towards boosting investor confidence and hence classifies as just Bad.

Bad News No. 3: Continuing Subsidies

The previous regime had started out many subsidy schemes that were aimed at targeting the votebank of our nation. These subsidies were a huge drain on the countrys financial resources and were a key impediment in our progress towards growth. I am a firm believer in “No Free Food” concept. All Schemes that help the poor are to be welcomed but at the same time, they shouldn’t turn into charitable schemes where people just get freebies all the time and lose the drive to actually work or earn.

With the new government targeting prudent spending, one of the key expectations was that, it would curtail expenditure and cut-down on expensive subsidy programs. The FM did not say announce any major decisions about this sensitive topic. He just said that the Government will review the Food and Fuel subsidies and a committee is being formed to do so.  In fact, marginal rise in subsidies for fertilizer and defense equipment has also been announced.

Category: VERY BAD

Justification: Subsidies are a huge drain on our resources and one of the highest contributing factors to our current Financial Mess. By not addressing this during the budget, the government has essentially delayed the decision on subsidies. Everyone (including me) wanted the government to bring down subsidies. Lets hope such schemes are reviewed and scrapped to help our country develop faster.

Bad News No. 4: Sardar Patel statue

Except Gandhi and Nehru, almost all national leaders have been forgotten and am actually glad that one of the country’s strong icons and our first Home Minister is getting a statue. However, at a time when our government is taking steps to curtain expenditure and help boost the economy, such a huge allocation does not sound right.

Category: Very Bad

Justification: Though I am a big Sardar Patel fan, 200 crores in this kind of economic situation sounds overkill. They could have allocated a smaller amount or plan installing a smaller statue and divert the rest of the funds towards other schemes like “Women Safety” or “Infrastructure Growth”.

Bad News No. 4: Disinvestment of PSU Entities

Disinvestment of PSU Entities is one huge source of Non-Tax Revenue for the Government. Though the previous regime did come up with a few such decisions, they were not widely implemented due to the fact that such decisions were termed unpopular and against voter sentiment. Most Economic Experts expected the Mr. Modi led government to come up with a huge scheme that would raise at least 70,000 crores or maybe even more. However, the FM did not touch this topic at all in the budget.

Category: Very Bad

Justification: With the government tightly placed for cash, disinvestment of PSU Co’s could’ve helped infuse a lot of capital into the coffers. Yes, this will be an unpopular decision because most employee unions will be against such decision in fear of losing their “Government Jobs”. But, the government isn’t going to sell these companies. They are only going to sell a small % of their stake to raise capital which will be used to fuel the nations growth. I was personally expecting cracker declarations to come-up in our budget but it hasn’t. Hence the categorization as “Very Bad”.

Some Last Words:

Personally, I was expecting fireworks in this budget. However, realistically speaking, years and years worth of mismanagement cannot be fixed overnight in a single budget. The next article will cover all the “Good News” from this budget and that will definitely bring cheer to you. It will also reinforce the fact that, this budget is the first among the many to come in future to take india forward.

Hoping for the best!!!

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