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Analysis of the Union Budget of India 2014

Posted in Finance Articles, Total Reads: 2130 , Published on October 31, 2014

The union budget 2014-15 presented by Finance Minister Arun Jaitley in the month of July was the most awaited as it was the first budget presented by Narendra Modi led BJP government which was voted to power in May 2014 in the hope of the dream “ache din aane wale hain”. It is indeed way too early to gauge the performance of the government which has been working for just over 2 months, but the proposals made can be analyzed to understand what government intends to do in order to make people live the dream they have been harboring all this while.

Image Courtesy: freedigitalphotos.net, Stuart Miles

Steps taken FM and the expected consequences of the same-

1. Income tax exemption. The tax slab was raised from 2lac to 2.5lac and from 2.5lac to 3lac for senior citizens. It indeed was a welcome move as the lower middle class of India was in burden because of rising inflationary pressures. Raising the income tax slab will give middle class families extra disposable income which they can utilize for their personal benefit offsetting the inflation which left them with low disposable income. But the issue arises how government will compensate for the revenue losses which it will have to bear after raising tax slabs. Arun Jaitley decided to not reduce the surcharge on the HNIs, HUFs, thus making up for the losses to some extent. Moreover, the extra disposable income given to middle class will help generate revenue for Indian businesses, in turn, increasing the indirect revenues for the government. Thus, the move to reduce income tax burden was a win-win move for middle class people and at the same time Indian economy as well.

2. Changes in FDI policies - The composite cap in the insurance sector was raised up to 49 percent from 26 per cent with full Indian management and control through the FIPB route. The move is expected to bring 40,000 to 60,000 crore of foreign funds, thus increasing the foreign investments in India. It’s a positive move as the insurance sector is in moribund state and needs strong capital investments to reboot itself. Along with this, the move is expected to boost pension sector as well as FDI cap in pension has been linked to insurance.

For the rural healthcare increment in FDI limit for healthcare implies increased affordability of options like Tele-medicine which would improve accessibility of qualified doctors

FDI policy requirements regarding built up area and minimum capital norms to be reduced from 50,000 square meters to 20,000 square meters and USD 10 million to USD 5 million respectively, with a three year post completion lock-in.

3. Developing smart cities. With around 70% of the population in rural areas and overpopulated existing urban metropolitan centers, India needs many new cities that have the potential to drive up the economy, and the government has cashed in on this potential by apportioning a hefty sum of money to develop smart cities. India, like other developed nations, surely needs many urban centers which can provide habitation and job opportunities, and at the same time generate investment by attracting corporate to locate their offices, factories in the proposed smart cities. Hence, for a country with a large demographic dividend, and earning potential, it’s a move that needs to be expedited in order to reap gains. Such proposals would bring together stakeholders, including urban planners, city administrators and industry, to create sustainable models for new cities.

4. One Rank One Pay (OROP). OROP, which will directly affect 1Cr. Army personnel and family members, was the long standing demand of Indian Armed Forces which was deferred indefinitely until previous UPA government gave its nod to just before the elections. With the average age of retirement being in the class of 52-55 as compared to 60-62 in other services, it was noted that an armed personnel was unable to meet his obligations when he retired and needed incentives. Moreover, more incentives were needed to lure people to get into armed forces, hence this has been a good move and should be implemented on priority.

5. Incentives for Real Estate Investment Trusts (REITs). Tax incentives are provided to investors for investing in REITs to boost the real estate and infrastructure segment. Stricken by poor infrastructure, India is in a dire need to boost its infrastructure sector to help economy grow. Moreover, with BJP government’s aim to provide home to all by 2021, this sector becomes even more important and providing tax incentives to generate capital for investments for this sector is indeed a commendable move.

6. Technology Development Fund for Defence. 100cr. was apportioned to set up a technology development fund for defence. With enormous potential to develop military equipments and become self-reliant, India imports a large portion of military requirements which leads to considerably outflow of foreign funds. A sufficient fund of 100cr has been apportioned for nurturing R&D in defence in India which will help public and private companies, including small and medium enterprises develop military requirements and help India become self-reliant.

7. Agriculture and Food security.  

• Restructuring FCI. India’s food scarcity problem, and its vulnerability to El Nino effect has less to do with production, but more to do with the mismanagement and poor distribution system of the Food Corporation of India. With leakage being noticed at every step, Narendra Modi proposed breaking FCI into 3 parts of which one would deal with the procurement; another with storage and the third with distribution breaking the FCI will not only plug the loopholes but bring in greater transparency as well which was a debated topic all this while. Over 44 million tonnes of wheat was expected to be procured once the procurement season would begin officially from April. As on March 1, Food Corporation of India was holding 62.8 million tonnes of grains – 27.1 million tonnes of wheat and 35.7 million tonnes of rice – good enough to meet the country’s food requirement for another year. Storing an additional 44 million tonnes was simply going to be a nightmare.

• Kisan TV. Proposals such as Kisan TV would be an effective information channel regarding new farming techniques, water conservation, and organic farming.

• Establishment of private markets. The central and state government would co-operate to revamp the agricultural produce market committee (APMC) and establish private markets.

8. Changes in investments held in non-equity schemes. Earlier investments in non-equity schemes were considered for long term gains for the investments of over 3 years which has now been changed to 1 year which means any investment made for more than 1 year in non-equity scheme would qualify for long term gains. Moreover, earlier the investors were allowed double indexation benefits which they no longer will have. If the proposal gets implemented, the current investors will be heavily hit and in broader picture, the Fixed Maturity Plans (FMPs) will lose the attraction it previously enjoyed.

9. Positive impacts on Foreign Trade. Changes in basic duty structure. Domestic producers for categories like laundry, detergents, and personal care items like toothpaste, soap bars, shower cream and shampoos would finally have a level playing field due to the reduced duties on the raw materials like fatty acids and industrial grade crude oil.

Trade Facilitation and Special Economic Zones(SEZs). Besides giving a commitment on revival of SEZs provision of 24 by 7 customs clearing facility to 13 more airports and 14 more sea ports and a proposal to implement Indian customs single window project to reduce transaction costs incurred during clearance of documents are welcome changes to facilitate trade. Infrastructure development such as new airports in Tier-I and Tier-II Cities, and an investment of Rs. 37,880 crores in development and maintenance of highways and state roads are also very welcome steps.

10. Impact on Consumer goods. With the indicated reduction in the prices of consumer electronics like Mobile phones, LCDs, LEDs and computers, precious stones and diamonds the average Indian consumer has high probability of realizing his dream of “ache din”.

11. Boost to entrepreneurship. Resolving the issue of capital by allocating a sum of Rs 10000 Cr. Venture Capital gives the assurance to the startups especially in technology sector. Setting up of national incubators and accelerators would provide the required fillip to innovation and the much needed support to develop new business models. Focusing on the rural sector, Start-up Village Entrepreneurship scheme of Rs. 100 Cr and a fund of Rs 200 Cr. for SC entrepreneurs who aspire to be in the “neo middle class” are positive steps in the same direction. Manufacturers no longer need extra approval to use e-commerce as a selling channel which is sure to improve sales for various SMEs.

12. Banking. For licensing small banks and other differentiated banks the RBI shall be creating a framework. Six new debt recovery tribunals are to be set up for the revival of stressed assets of public sector banks, and to improve on the NPA figures. Banks are encouraged to extend long term loans to the infrastructure sector with flexible structuring. Banks are to be permitted to raise long term funds for lending to the infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and priority sector lending.

13. Energy and Mining. Proposals for distributed solar generation are set to attract domestic and foreign players in making affordable power accessible to the rural households. Addressing shortages in coal supplies in the short-term by channeling coal supplies to projects, would improve the operational viability of thermal power plants, and make cheap power accessible.

With increase in tax slabs, changes in FDI policies, and previous anti-populist move to increase railway fares, BJP government has taken off on the right track, which to some extent looks well poised to convert the dreams of ‘ache din’ into reality. The government, with its well though upon moves, can revive the Indian economy if it continues to take prudent actions for the larger interest of people and not merely to satisfy a section of India.

This article has been authored by from Dushyant Singh Chauhan and Vaibhav Arya from IIFT Delhi

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