Immediately after the Finance Minister Mr. Arun Jaitley completed his Budget speech, the dissection of the same started, as usual. The undeniable fact is that, those who are under compulsion to oppose the budget just for the sake of it, are not being able to dump the Budget abruptly. From FIIs to salaried Middle Class, from large corporates to a shopkeeper, everyone was expecting a lot from the Budget; and the Finance Minister has been able to, more or less, please them all which was an extremely difficult task for him.

Some expected Big Bang announcements; they have got disappointed to some extent. Some are also saying that there is no big reform in the budget. We need to keep in mind that this Government is focused on long term planning. So, although the speed of Government activities has been geared up radically, but they do not want to take any hasty step which might not sustain, rather they want to fully utilize their tenure with long term planning. We need to keep in mind that last Saturday was not the last day of this Government to show their capability; rather it is just the beginning. Majority of the planning will unfold gradually. We just wanted a signal from this Budget that – “Achhe din” is truly coming or more precisely, they have intention to bring “Achhe din” or was it just a campaigning gimmick. Yes, we have got a strong signal, for which we were waiting. Let us now discuss the announcements in the budget.

Looking for Reforms? Pan your telescope

Finance Minister started his Budget speech emphasizing on the Centre-State fiscal relationship, which makes this Budget transformational and unprecedented. Budget has proposed to hike the State’s share of net central taxes from 32% to 42%, which is a welcome step and would empower the states with more resources. Government accepted the recommendations of Finance Commission and has put in place a new paradigm for Federal Polity. Mr. Jaitley said that the devolution to the States would be of the order of Rs. 5.24 lakh crores in 2015-16 as against Rs. 3.38 lakh crores as per revised estimates of 2014-15. Another Rs. 3.04 lakh crores would be transferred by way of grants and plan transfers. Thus, total transfer to the States will be about 62% of the total tax receipts of the country. This is a transformational move. We would see its effect in the longer term when growth of the country would be orchestrated by Centre and States.

Social Security Reforms

Clearly this Budget has focused on developing a robust Social Security System, as in the US, which has been untouched in our country till date. Very wisely, government has decided to go for Social Reforms before any block buster Industrial Reforms – which would form the foundation of true development and growth of the nation. We would not see the effect of Social Security on Monday’s Stock Market, but it will have sustained effect in the longer time frame. FM has announced:

  • Pradhan Mantri Suraksha Bima Yojna: It will cover accidental death risk of Rs 2 lakhs for a nominal premium of Rs 12 per year.
  • Atal Pension Yojana: The scheme will provide defined pension to individuals depending upon the amount and period of contribution. In order to encourage more people to opt for this scheme, the government has proposed to contribute 50% of beneficiaries” premium limited to Rs 1,000 each year, up to five years, in new accounts opened before 31 December 2015.
  • Pradhan Mantri Jeevan Jyoti Bima Yojana: This scheme will cover natural and accidental death risk of Rs 2 lakh. The yearly premium will be Rs 330 (less than one rupee per day) for age group 18-50.
  • The FM has proposed to create a senior citizen welfare fund by utilizing unclaimed PPF and EPF deposits.
  • Small savings scheme for welfare of girl child: Investments in Sukanya Samriddhi Account Scheme are eligible for deduction under Section 80C of the Income Tax Act 1961 (“the Act”).

The existing limit of Rs 1,00,000 for deduction on account of contribution towards LIC or other pension funds under Section 80CCC has been increased to Rs 1,50,000. Additionally, the limit of deduction of Rs 1,00,000 on account of employee”s contribution towards the NPS (New Pension System) under Section 80CCD of the Act has been omitted; the same will now be limited to 10% of total salary or 10% of total income, subject to an overall limit of Rs 1,50,000 prescribed for Section 80C, 80CCC and 80CCD(1). Further, an additional deduction of Rs 50,000 has been proposed towards the NPS.

It is proposed to give employees an option to choose either Employee Provident Fund (EPF) or NPS, and employees with income below a certain level will be given an option to contribute to EPF. The employee will also have an option of choosing either the ESI or a health insurance product recognized by the Insurance Regulatory Development Authority.

Beneficiaries: MAX, Exide, Reliance Capital, HDFC, SBI, Fortis, Apollo Hospital

Skill Development: Foundation of Make in India

The Budget made a distinct push for skill development, giving an impetus to Prime Minister Narendra Modi’s ‘Make in India’ pitch. This is another example of a well thought-out long term planning.

FM set aside Rs 1,500 crores for the Deen Dayal Upadhyay Gramin Kaushal Yojana to help rural youth develop job skills. Disbursement will be through a digital voucher directly to a qualified student’s bank account.

Budget has also proposed launching of a National Skills Mission to consolidate skill initiatives across several ministries, a move that was hailed by the industry as a welcome step to address the demographic dividend in the country.

FM announced that the Government will launch All India Institute of Medical Sciences (AIIMS) in J&K, Punjab, Tamil Nadu, Himachal Pradesh and Assam in the fiscal year 2015-16. Similarly, to augment Medical Sciences in Bihar, another AIIMS like Institute is proposed to be set in the State. In his Budget Speech, the Finance Minister also proposed to set up an IIT in Karnataka, and upgrade Indian School of Mines, Dhanbad into a fully fledged IIT. IIMs will be set up in J&K and Andhra Pradesh, the Minister added. Three new National Institutes of Pharmaceuticals Education and Research are proposed to be set up in Maharashtra, Rajasthan and Chhattisgarh along with Institutes of Science and Education Research in Nagaland and Odisha.

Beneficiaries: Engineers India, SPARC, NIIT Ltd.

Monetizing Gold

FM introduced a Gold Monetization Scheme, which will replace both the present Gold Deposit and Gold metal Loan Schemes, in order to discard fanatical buying of Gold and to reduce the import of Gold. The new scheme will allow the depositors of gold to earn interest in their metal accounts and the jewelers to obtain loans in their metal account. Banks/other dealers would also be able to monetize this gold.

A Sovereign Gold Bond was also announced to be introduced as an alternative to purchasing physical gold. The bond or financial instrument will carry a fixed rate of interest and when investors sell the bond they will get the value of the gold. The details of the Sovereign Gold Bond scheme have not been announced yet.

The beauty of this instrument is that when the price of gold goes up the value of the bond price also goes up by the same amount. These gold bonds will also offer a fixed rate of interest. These gold bonds are designed to appeal to people buying gold for purely investment purposes. All these steps could attract trillions of rupees in the near future.

Other hidden reforms

Thrust on consumer protection in Financial Markets

Budget has proposed to create a task force to establish a sector-neutral Financial Redressal Agency (FRA) that will address grievances against all financial service providers. He also assured that Indian Financial Code (IFC) will soon be introduced in the Parliament for consideration. These steps will surely plug the regulatory loopholes in the financial markets and the confidence of the Investor Community would be re-established. This is a positive step for financial markets.

Another very crucial announcement is Anti-Black Money Regulations. It is proposed to introduce new bill in the current budget session to specifically deal with black money stashed abroad.

  • Concealment and/or non-disclosure in IT return of foreign assets will be liable to rigorous imprisonment
  • Penalty at 300% of tax on concealed income
  • Benami Transactions (Prohibition) Bill to enable confiscation of benami property especially in real estate
  • Quoting of PAN mandatory for any purchase or sale exceeding Rs1 lakh.
  • New measures to incentivize credit or debit card transactions, and disincentivise cash transactions

Budget on Financial Markets

It is true that Budget is silent on STT or any big bang announcements which could push up Stock markets instantly. However, FIIs, the major market movers, do have reasons to cheer in the budget.

Foreign Institutional Investors, the biggest movers of Indian stocks, got what they wanted in this Budget. FM postponed implementation of the widely disliked General Anti Avoidance Rules of taxation (GAAR), and announced that offshore investors do not have to pay minimum alternate tax (MAT). FIIs have also been allowed to invest in private equity funds, also called alternative investment funds (AIFs).

Budget also relaxed rules allowing FIIs to set up shop in the country.  The government has made it easier for foreign fund managers to set up base in India by tweaking the permanent establishment (PE) norms. PE refers to a situation where a non-resident entity becomes liable to pay taxes just by having an office or a fund manager in that jurisdiction. Mr. Jaitley said that PE would not apply to foreign institutions whose fund managers are located in India. Earlier, funds would have a contrived arrangement with their India managers to operate otherwise their gains would be treated as profits and taxed accordingly. With the new arrangement, the FPIs returns would be treated as capital gains. Therefore, Foreign Fund Managers, who are unable to establish office in India, shall now get interest to locate in India.

Another big announcement, although much expected, is to merge FMC with SEBI. This is a welcome step, which would help our Commodity Markets immensely.

To further simplify the procedures for Indian Companies to attract foreign investments, FM proposed to do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps. Those sectors which are already on a 100% automatic route would not be affected.

While private banks are likely to be the biggest gainers from the proposal to club the foreign direct investment (FDI) and foreign portfolio investment (FPI), other sectors such as commodity and power exchanges will also benefit from the same. Credit information companies (CICs), infrastructure companies in securities market (such as stock exchanges, depositories and clearing corporations) and asset reconstruction companies (ARCs) will also gain. The current norms limit options for companies to raise foreign investment as these sectors have separate sub-caps for FDI and FII/FPI within the aggregate foreign investment ceiling. This major step would surely attract larger foreign investment.

Beneficiary: MCX, Private Banks, all companies where Foreign Investment Cap is higher but FII holding is much less as on date

Budget on Banking & NBFC

  • Setting up of Micro Units Development Refinance Agency or Mudra Bank with a corpus of 20,000 Crores.
  • NBFC”s with more than Rs 500 crores to come under SARFAESI Act
  • Total Investment in Infrastructure to go up by 70,000 Crores.
  • Budget has proposed to introduce a comprehensive Bankruptcy Code in current Fiscal

Apart from the above, lot more Banking Reforms are expected in short term.

Beneficiary: SKS Micro, IDFC, SREI, Bajaj Fin, LT Fin, SBI, Axis Bank, ICICI Bank, PNB, Bank of Baroda.

Budget on Infra and Capex

Road: Completing 1 lakh km of roads currently under construction plus sanctioning and building another 1 lakh km of road is of topmost priority. Consequently, an outlay of 29,420 crores to NHAI, 14,291 crore to PMGSY and 4,000 crores towards Special Accelerated Road Development Programme for the North Eastern region has been allotted for FY16BE. Increase in road cess from 2/litre to 4/litre on petrol and diesel would lead to an additional sum of Rs. 40,000 crores being available for roads and other infrastructure.

Power: Proposal to launch five UMPPs with a capex of 100,000 crore subject to receipt of key clearances, to enhance renewable energy capacity of 175 GW (solar – 100 GW, wind – 60 GW, biomass – 10 GW and 5 GW small hydro) from current level of 40 GW, Total 4,500 crores allocated to Deen Dayal Upadhyay Gram Jyoti Yojana that will augment power supply to rural areas.

Others: Total 6,000 crores allocated to Urban Rejuvenation Mission to provide 500 habitation & mission for development of 100 smart cities, Total 8,385 crores towards equity investment in Metro Rail Projects, Total 1,200 crores for grants to the Delhi Mumbai Industrial Corridor Project, Total 5,300 crores to PMKSY for development of micro irrigation & IWD program.

Public contract dispute resolution Act to be introduced – aimed at reducing litigations/disputes in infra projects, to introduce a regulatory reform law to amend the regulatory frame work across sectors of infrastructure, revitalize PPP mode of infrastructure development with major part of risk assigned to government, corporatization of major ports to leverage land resources and attract private investment.

Beneficiaries: LT, BHEL, Siemens, Kalpataru, Sunil Hitech, IRB, NCC, Srei, EPC India, other midcap infra companies

Quick check – Stock Specific

  1. Entertainment sector brought under the service tax net
    • Negative: PVR, Inox Leisure, Eros, Dish TV, Hathway
  2. Clean energy cess on coal from 100/tonne to 200/tonne
    • Negative Neutral: Hindalco, Sesa Sterlite / NTPC, Tata power, CESC
  3. Proposal to launch 5 UMPP subject to receipt of key clearances
    • Positive: Bhel, L&T, Thermax, NTPC, Tata Power, Siemens
  4. Proposal to set up 1,75,000 MW renewable capacity
    • Positive: Tata Power, Power Grid, Kalpataru, Swelect, Green Power
  5. Reduction of excise duty on manufacture of footwear from 12% to 6% (on retail price exceeding 1000/pair)
    • Positive: Bata India, Liberty Shoes, Relaxo Footwear
  6. Comprehensive Bankruptcy Code to be brought in FY15-16
    • Positive: All Banks
  7. NBFCs to be considered ‘Financial Institution’ for SARFAESI Act
    • Positive: HDFC, IDFC
  8. Forward Markets commission (FMC) to be merged with
    • SEBI Positive: Kotak Mahindra Bank, MCX
  9. Increase in deduction limit for health insurance premium
    • Positive: Reliance Capital, Max India and HDFC Ltd
  10. Distinction between different types of foreign investments, especially between FPI & FDI has been done away with
    • Positive: Axis bank, Indusind Bank
  11. Government to infuse 7940 crores in PSU banks during FY16
    • Neutral/Negative: PNB, BoI, Syndicate Bank, Dena Bank
  12. Increase in credit to agricultural sector at 8.5 lakh crores
    • Positive: Rallis India, EPC Industrie, KSB Pumps, Escorts, Honda Power, UPL Negative: for PSU Banks, especially PNB
  13. Allocation of 5300 crores to support various irrigation schemes
    • Positive: EPC Industrie, KSB Pumps, Jain Irrigation
  14. Completing 1 lakh km of roads currently under construction and sanctioning and building another 1 lakh km. Increased outlays on roads by 14,031 crore
    • Positive: LT, Ashoka Buildcon, IRB Infrastructure, Simplex Infrastruture, NCC, ILFS Engg
  15. Increase in road cess from 2 per litre to 4 per litre on petrol and diesel
    • Positive: Ashoka Buildcon, IRB Infrastructure, Simplex Infrastruture, NCC & L&T
  16. Establishment of National Investment and Infrastructure Fund (NIIF) with an initial annual flow of 20,000 crore
    • Positive: Ashoka Buildcon, IRB Infrastructure, Simplex Infrastruture, NCC & L&T
  17. Rationalization of capital gains regime for sponsors and tax pass through status for REITs
    • Positive Oberoi Realty, all Realty
  18. Government to increase visa on arrival facilities to 150 countries from 43 at present. Further, the government to invest in 22 world heritage sites to promote tourism
    • Positive: Hotels, Cox & Kings, ITHL
  19. Government committed to rationalise subsidies
    • Positive: Oil India, HPCL, IOC, Gail
  20. Thrust on Rural Development
    • Positive: Hindustan Lever, Britannia, REC, PFC
  21. Housing for All/ Electricity for all/ Drinking water for all
    • Positive: NBCC, Ceramic companies, Housing Finance companies, Paints, Sanitary ware companies

Although there was room for more reforms and the proposed Swachh Bharat cess could raise the cost of services further, Finance Minister has delivered a well balanced Budget, where reforms start from the grass root level. Clearly, this is only Volume I of the entire book and we hope that the rest of the part would show us more courage, intention and growth orientation. However, it is worth mentioning that besides the Budget, other crucial Bills which are scheduled to be placed in the current Budget Session are of equal importance.

Add a Comment

Your email address will not be published.