Sunday, March 1, 2015

Highlights and Analysis of the Indian Union Budget 2015

On the back of a 9 month bull-run and an energized economy which was becoming more popular among foreign investors, the Finance Minister of India Mr. Jaitley had the enviable task of presenting the Indian Union Budget for the financial year 2015-16. With all opposition parties and expert critics closely watching his every move, this budget had a ton of expectations. A few days back I had written an article titled “My Expectations from theIndian Union Budget 2015”.

With the budget presented in the parliament (and to the public) its high time we stopped talking about expectations and get into the details of the “Actuals” from the budget.

Before We Begin: Disclaimer

This article is purely a representation of the facts from the Indian Union Budget 2015. The views in this article are entirely mine and do not endorse/condone/criticize/support any political party whatsoever.

Overall Revenues and Expenditures – Budget 2015-16

In this coming financial year, the finance minister has estimated that the overall revenue of the government will increase by about 14.49 lakh crores. This is about 15.8% higher than the government’s revenue from the previous financial year (2014-15). The Overall expenditure is expected to be around 17.7 lakh crores.

It is also estimated that the share given to the states would go up by a massive 50% in the coming fiscal year. This means, state governments will get about 5.24 lakh crores in funds as against the 3.48 lakh crores they got in 2014-15.

One key point worth mentioning here is that, our defense spending alone would amount to 2.47 lakh crores which is considerably higher than last fiscal year.

The following are some key highlights of our Budget.

Highlight No. 1: Focus on Economic Growth and Infrastructure Development Across India

If one thing was clear from this years budget, it was the fact that the government is serious about bringing our economic growth back on track as against the sluggish pace at which we were growing over the past decade or so. Some of the key highlights of this budget that would aid Economic Growth and Infrastructure Development across India are:
  • Public Private Partnerships (PPP) projects proposed to kick-start numerous infra projects totaling to about 70,000 crore rupees
  • A National Investment Infrastructure Fund is proposed to be set up
  • Tax Free Infra Bonds are proposed to fund new rail, road and irrigation projects in our country
  • Approximately 1 lakh kms of roads expected to be built
  • 5 ultra mega power projects with capacity of 4000 MW each proposed
  • Green Energy Sources (Renewable Energy) projects get a big push. About 1.75 lakh MW Green Energy planned to be generated this year of which 1 lakh MW from Solar 60,000 MW from Wind 10,000 MW from bio-mass and 5000 MW from small hydro power plants
  • Expected Economic Growth In India to be around 8.1% to 8.5%
  • Corporate Tax for companies will be reduced from 30% to 25% over the next 4 years
  • To enhance the start of and doing business in India, an expert committee would be set up. The aim is to bring India from its 142nd Rank (among 189) to the top 50 countries in the world to start and run businesses.
  • A comprehensive bankruptcy code which is at par with global standards will be established

My Views:
It is good to see that the government is investing heavily in improving our infrastructure facilities. It is also good to see that a major focus has been placed on renewable/green energy sources. Reduction in Corporate Taxes and improvement in the ease of doing business aspect can very well help make the prime ministers vision of “Make in India” a reality.

Highlight No. 2: Agriculture and Rural Development

Everyone knows that Agriculture is the backbone of the Indian economy but still the farmer is languishing in poverty in spite of strong economic growth in our country. In order to help the farmers, boost agriculture and rural economy the budget proposes the following:

  • Rs. 5,300 crores set aside to support micro irrigation
  • 1 lakh crore set aside under various rural development schemes
  • Rs. 8.5 lakh crores set aside toward lending agriculture credit
  • A Unified National Agriculture Market is proposed to be set up to give the farmer earn a fair chance to sell his produce.
  • A Post Graduate Institute of Horticulture Research & Education proposed to be set up in Amritsar.

My Views: As of now, the end consumer pays an exorbitant price for most produce while the farmer gets only a miniscule portion of it. For ex: Though the cost of good quality rice has exceed Rs. 30 per kilogram, the amount that the farmer who is struggling to produce that rice is less than 25% of it. The remaining 75% gets lost in the shuffle between the farmer and bringing this rice to the consumer (you and me). This National Agri Market will be a welcome boon to the farmer to earn a decent price for his produce.

On top of this, access to credit has been one of the key troubling areas for farmers especially during seasons where monsoon/draught plays spoil sport. The proposed funding of 8.5 lakh crore towards agricultural lending can help our farmers get back on their feet

Highlight No. 3: Focus on Fiscal Consolidation

  • The Government is expected to stick to its fiscal deficit target of 4.1% of the country’s GDP. By the financial year 2016-17 the fiscal deficit is expected to go down to 3.5% and by 2017-18 the government plans to reduce the fiscal deficit to 3% of our GDP.
  • The Government is also planning to raise about 41,000 crore rupees by selling its stake from various government owned public sector companies.
  • A Gold Monetization Scheme proposed to keep our Current Account Deficit at around the 1% mark.
  • Inflation Rate expected to be around the 5%-6% range

My Views:With the governmental spending being much higher than the proposed revenue, it is going to be difficult for the government to meet its fiscal deficit target for this year. The good news is that our retail inflation has come down considerably but this is not entirely due to the governments steps. A big chunk of this reduction in retail inflation is due to international crude oil prices coming down as well as reduction in commodity prices. If crude prices start hiking up again, then it would be really difficult to stick to the proposed retail inflation % range.

With numerous infrastructure projects already “In Progress”, it would be a tough act for our government to maintain balance between the existing projects and new proposed launches. With focus on renewable energy, our power deficit may be fixed once and for all but this is a long term vision. Renewable energy will not be up and running like traditional sources. With the proposed launch of 4 ultra mega power plants, the deficit can be curbed but these power plans will need undisturbed access to Coal which may be a problem. How can a power plant generate power if it cant get enough coal? Lets hope that our government has plans to address this situation and keep our infrastructure growth on its feet running rather than slow down…

Highlight No. 4: Impact on End Consumers

Coming to the crucial part of the budget – the one that impacts the common working class population of our country.

The government is proposing to increase the present service tax + education cesses rate from 12.36% to 14%. This is definitely bad news for consumers because – almost every service comes under the ambit of service tax and we the consumer would have to shell out this additional 1.64% on those services.
Excise duty on Aerated Drinks, Cigarettes and Tobacco has been hiked once again which will make it even more costlier to people who use them.

Customs Import Duty on 22 items have been reduced in order to give a push to actually manufacture many products in India rather than just import the end product for consumption.

My Views:This hike in Service Tax is going to impact us on a daily basis. Almost everything is going to be costlier by about 1.6%. The government has plans to spend humongous amounts on infrastructure and development projects and hiking taxes is obviously the easiest way to increase the revenue. However, I was expecting a simplified GST type system which will be not on transparent but also easy to comprehend and implement.

The good news though is the hike in excise duty on tobacco products and aerated drinks. With international cola makers setting up shop in our country and pampering our sweet tooth with sugar loaded drinks which are making us fat, this hike in excise duty will actually help us reduce this bad habit. No comments on tobacco excise duty hike because – this is one of the standard practices for every government. This not only helps the government make some extra income but also makes smoking & using tobacco products that much costly. This will help people quit this bad had and refrain people from taking up this habit owing to its costliness.

Focus on Manufacturing the product in India by reducing import duty on raw materials rather than importing the finished goods is a good way to boost our manufacturing as well as reduce our Current Account Deficit.

Some Last Words

Some might say that this budget has been disappointing. Though I am slightly disappointed with some of the aspects of this budget (like leaving the tax slabs as is, or increase in service tax etc) I am also glad to see the hike in infrastructure and agricultural spending. Hike in Defense will also improve our capabilities to defend our motherland. If the proposed fiscal deficit, economic growth and inflation numbers can be achieved, I would call this budget a Success…

Before we wrap up, you may be wondering why I haven’t covered anything related to individual income tax. That is because, this article has already exceeded 4+ pages and I don’t want to add on more. Individual Income Tax will be covered in a separate article.

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