An analysis of the Indian Budget of 2014 presented to the Parliament by the Finance Minister, Mr. Arun Jaitley on July 10, 2014 -Dr. Bobby Srinivasan, Distinguished Chair Professor of Finance & Trading, Great Lakes Institute of Management

July 24, 2014 | Posted by bobbysrinivasan << back to blog

FOREWORD

The idea to summarize and analyze critically the budget data of FY 14-15 was first mooted by our Founder and Dean, Dr. Bala Balachandran. It was his intention that every college student, regardless of which discipline he or she is pursuing, should conduct themselves as a stakeholder and understand the country’s annual budget. His intention resulted in this manual. It is not possible to cover all the details in the budget. However, the important aspects are brought to the readers’ attention.

We personally would like to thank Prof. Bala for the interest he has evinced in the preparation of the manual. This is the first time GLIM has prepared this document and we hope to improve on this, especially in the format of presentation in the years to come. Have a happy reading.

PREFACE

“I believe that life is constantly testing us for our level of commitment and life’s greatest rewards are reserved for those who demonstrate a never-ending commitment to act until they achieve. The level of resolve can move mountains, but must stay constant and consistent. As simplistic as this may sound, it is still the common denominator, separating those who live their dreams from those who live in regret”

-Anthony Robbins

When the Indian budget was presented recently, I wanted to check the citizen’s commitment to the economic welfare of the country and asked a number of people, both young and old, as to whether they saw the delivery of the budget and understood the contents. The responses I received both amused and angered me. These are some of the sample responses:

“It is boring. It is not worth listening to.”

“I am a student with a bank loan and I have no income and so I am not concerned.”

“Nothing changes here, same old story repeated yearly.”

“The finance ministers always favor the rich people. They say it is an aam aadmi budget, but there is nothing in it for them.”

All these and other remarks reflected the citizen’s cynicism, indifference and desperation. If a citizen refuses to know what is contained in the budget, it basically means that he doesn’t feel like a stakeholder and that the budget is only for the other people. I am sure they will not feel this way if it is their own house budget for the year and will take responsibility and act as a stakeholder.

What does a stakeholder mean? In simple terms, when you buy a share of a company and it makes profits, you have the right to have your share of dividends and capital gains. When this concept is applied to the national budget, every Indian is a stakeholder. When a country has a budget surplus, it is like retained earnings of a company and all the shareholders have a right to share the surplus.

Next, when the country’s budget is in a deficit, the shortage of revenue must be paid by us, one way or the other. If the present government manages to postpone the liability, the future generation will have to take the responsibility to pay the debt (accumulated deficit with interest is called debt) and there is no way to renege it. In this budget, there is so much at stake and every individual must recognize this. Without understanding what this budget has for an individual and to conclude that it is irrelevant is myopic.

This manual is prepared with the intention to create awareness among our citizens that the budget, when implemented will have consequences, directly or indirectly, in their lives.

Remarks:

I believe that a golden day will come when all the citizens of our country think and act as stakeholders, a new beginning has eventually been made and soon there won’t be any need to talk about social inclusiveness.

The report is prepared using questions and answers. All the analyses are presented in simple style. This is not a source document but a user-friendly manual. It can possibly be used for a possible half a day course and taught in colleges across India to promote the awareness about the budget and its consequences.

Before you proceed to read this manual, let me tell you a story. This is about a boy, whom I met 10 years ago in the U.S. when he was 12 years old. His parents bought him 10 shares of IBM for his birthday. The father explained to him that IBM is one of the best computer companies in the world and having these 10 shares gives him a right to participate in the voting the board members and to receive dividends as and when it is declared. He also taught the son as to how to read the daily stock price that appeared in the local paper. When I met the boy later, he told me about his stake holding in IBM and that he is proud about it. He said that every morning when he opened the financial page of the paper, he looked for IBM’s share price and for any write up on the company. After many years, he has become a knowledgeable investor and a very proud stakeholder. I asked him as to how does one become a stakeholder. He replied “think like a stakeholder, you will get there eventually”. So if you read this manual, you will learn to think as a stakeholder in the Indian growth and participate in its prosperity.

Happy reading.

PROLOGUE

It is in the best wisdom of a Finance Minister of a country to announce a set of policies along with the courses of action to achieve the desired objective. Such objectives will generally be promises made during the election campaign. The objectives are and with specific targets as follows:

Sl. No.	Objectives	Budget Proposal
	To keep the inflation (CPI and WPI) under control and below a specified target	8% for FY 15 and 6% for FY 16
	To achieve an economic growth rate consistent with the availability of resources	5.4% for FY 14
	To attract adequate FDI to achieve the economic growth rate	FDI limits increased from 26% to 49% in defense and insurance
	To create jobs to meet young people’s aspirations	Atleast 10 lakh jobs in the first year.
	To control the Current Account Deficit	around 2-3% of GDP
	To provide adequate liquidity	FY 15 budget outlay is Rs.17.9 trillion as against FY 14 budget outlay is Rs.15.90 trillion, an increase of 13-14%
	To keep the government borrowing at a manageable level	24% of the FY 15 budget outlay is borrowed money
	To keep the taxes at and to raise the duties to appropriate levels and to maintain or to reduce the budget deficit.	Tax concessions are given for individuals (men, women and senior citizens) but duties have been pushed up significantly. Expected revenues from customs and excise duties and service taxes will substantially be higher.
	Disinvestments of PSUs to raise money to pay for the budget inadequacies	The government hopes to raise nearly Rs.45,000 crores by this scheme
	To reduce NPA in PSU banks and to recapitalize them to meet the future Basel III requirements	Rs.2.4 lakh crore is required to meet the Basel III requirements. Part of this requirement will be met by selling the PSU shares.

These objectives must be translated into action and the results arising should help our economy to grow with minimal constraints. Mr. Jaitley’s commitment to these objectives (vision) will lead to creating a plan of action with milestones to be reached (mission). How strong is his commitment and how likely he will succeed will be discussed in this manual.

THE INDIAN BUDGET OF 2014-15

INTRODUCTION:

The Indian budget for the financial year was presented to the parliament on 10^th of July 2014 by our Finance Minister, Mr. Arun Jaitley. It is a very detailed document that covers all the aspects of our economy. Reading the budget in its entirety may not be an easy exercise for someone who is not oriented towards reading such verbose document. Instead, we have tried to present the content of the budget in the form of questions and answers which will explain in the simplest of language possible and can be easily read by all individuals with interest. A question may arise in the reader’s mind as to why one should read about the budget. The answer is simple. It affects every aspect of one’s financial life and not knowing what the government plans are, is a serious mistake. So, simply ask the question, “what is in it for me?” and then read it. You will find the budget totally relevant to you.

Before you start reading the contents of the budget, remember what a well-known economist, Frederic Bastiat, of Austrian school of thought said, and I quote,

“Whence it follows that the bad economist pursues a small present good (populism) that will be followed by a great evil to come (high inflation rate) while the good economist pursues a great good (conservatism) to come, at the risk of small present evil (budget tightening).

Translated, he says that it is better to have a conservative budget, which may cause some pain to the individuals now but benefit them in the long run, than to have a budget that is nice and dandy now, but may cause pain later. Mr. Jaitley has definitely not chosen populism. Instead, he is preparing a road map to bring the economy back to normalcy before worrying about achieving higher growth rates.

CHAPTER 1

Basic knowledge about government budgeting

The reader knowledgeable about the budget terminologies can skip this section and move on to the chapter 2.

Question 1: What is Gross Domestic Product?

Gross Domestic Product measures the total income of everyone in the economy and, equivalently, the total expenditure on the economy’s output of goods and services. Gross Domestic Product is often considered the best measure of how well the economy is performing.

Question 2: What is a ‘Budget’?

The ‘budget’ is a general list of all planned expenses and revenues. It is a plan for saving and spending. It may also be defined as “a financial document used to project future income and expenses”. As the word suggests, it is at best an estimate and so deviations from the estimate either positive or negative are possible.

Question 3: What is budget deficit?

A ‘budget deficit” is a common economic phenomenon. Budget deficit occurs when the spending of a government exceeds that of its revenue. It may also be referred as fiscal deficit.

Question 4: What are the revenue sources for the government?

The critical revenue sources of the government are:

Direct taxes: E.g. Income Tax, corporate tax, etc.
Indirect taxes: E.g. Sales Tax, customs and excise duties
Income from public enterprises
Grants
Deficit financing: the government borrowings to tide over the shortages of revenue.

Question 5: What is a ‘direct tax’?

The term ‘direct tax’, generally, means a tax paid directly to the government by the persons on whom it is imposed. Income tax, wealth tax and gift tax are direct taxes. In India, all the direct tax related matters are taken care by the Central Board of Direct Taxes (CBDT), which is a division of the Department of Revenue, Ministry of Finance and Government of India.

Question 6: What is an ‘indirect tax’?

An ‘indirect tax’ is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax (such as the customer). An indirect tax will add up to the price of a good. Consumers are actually paying the indirect tax by paying more for the products. Excise duty, customs duty, sales tax, service taxes are all indirect taxes. A direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be.

Question 7: What is Divestment?

Divestment is the process by which government sells a part of its stake in a public sector undertaking. The money raised is then used to meet various government expenditures.

Question 8: What are the planned and non-planned expenditures in the budget?

There are two components of expenditure – planned and non-planned. Of these, planned expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission. Non-planned revenue expenditure is accounted for by interest payments, subsidies (mainly on food and fertilizers), wage and salary payments to government employees, grants to States and Union territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments. Non-plan capital expenditure mainly includes defense, loans to public enterprises, loans to States, union territories and foreign government.

Question 9: What is the Finance bill?

It is, basically, the government proposals for levying of new taxes, changes in the present tax structure or continuance of the current tax structure beyond the period approved by the Parliament. These are presented to the parliament in the form of a finance bill. The parliament may approve the Finance bill for a period of one year at a time, which then becomes the Finance Act. Sometimes, if the bill is rejected, there is a possibility that the government in power may not survive.

Question 10: What impact does the budget have on the market and on the economy?

The budget impacts the economy, the interest rate and the stock markets. How the Finance minister spends and invests money affects the fiscal deficit. The extent of the deficit and the means of financing it influence the money supply and the interest rate in the economy. High interest rates mean higher cost of capital, lower profits and, hence, lower stock prices for the industry.

The fiscal measures undertaken by the government affect public expenditure. For instance, an increase in direct taxes would decrease disposable income, thus, reducing demand for goods. This decrease in demand will translate into a decrease in production, therefore, affecting economic growth.

Similarly, an increase in indirect taxes would also decrease demand. This is because indirect taxes are often partially or completely passed on to consumers in the form of higher prices. Higher prices imply a reduction in demand and this, in turn, would reduce profit margins of companies, thus, slowing down production and growth. Non-plan expenditure like subsidies and defense also affect the economy as limited government resources are used for non-productive purposes.

Question 11: How much of the current budget revenue goes towards meeting the past expenses?

If the government had incurred debt in the past years and had issued treasury bonds to raise the funds, interest payments must be made on a regular basis. Currently, more than 20 paise for every rupee collected as tax has to be paid as interest. This is not good and it is basically hypothecating the future generation and may result in a debt trap.

Question 12: What is Monetary Policy?

The quantity of money available in an economy is called money supply. In an economy that uses fiat money, the government controls the supply of money. Legal restrictions give the government a monopoly on the printing of money. The control over money supply is called monetary policy. Monetary policy is delegated to a partially independent institution called Reserve Bank of India. The primary way in which the Central bank controls the supply of money is through open market operations. When the Central bank wants to increase the money supply, it buys government bonds, thus, increasing the quantity of money in circulation. When it wants to decrease the money supply, it sells government bonds, thus, decreasing money supply.

Question 13: What is the relationship between the budget and the monetary policy?

In the process of building the financial strength of a country, in this case, GDP, monetary policy is the core instrument. Wrong monetary policy can drive the economy either into a recession or to a hyperinflation. When we talk about growth rate of an economy, it is always adjusted for inflation (GDP deflator as it is called). Higher the inflation, greater must be the nominal growth rate. So the budget should have either minimum or no deficit to ensure low inflation.

Question 14: How is the monetary policy derived for our economy?

The monetary policy of a country is based upon a host of indicators. As a part of this approach, a host of quantity variables such as money, credit, output, trade, capital flows and fiscal position, as well as rates of return in different markets. Inflation rate and exchange rates are analyzed for drawing monetary policy perspectives.

Based on these and other factors, RBI gives projection for broad money (M3) which serves as an important information variable, so as to make the resource balance in the economy consistent with the credit needs of the government and the private sector.

Question 15: What is monetization of a loan?

The government borrows money by issuing bonds and incurs a budget deficit. This deficit, in reality, is never repaid. The interest on the security will be paid but new loan will be issued to cover the payment of the old loan. Interest on government bonds is generally lesser than the prevailing inflation rates. Thus, the lender is never adequately compensated for the inflation and so, the government can get away with this. For example, the US budget deficit and debt keeps on increasing indefinitely and the interest rate on government debt is always lower than the real inflation rate. This process of monetization destroys the purchasing power of our money.

Question 16: Is there anything called Fiscally prudent? Does it exist?

A financially prudent government will take the necessary steps to ensure that the annual budget is balanced. Some governments are lucky because they have more revenue than expenses and so they end up building surpluses. Most of the countries, however, would end up spending more than it receives as tax revenue and this causes the deficit. There are several ways in which this deficit is paid for with namely:

a) Borrow money from a trade surplus country (Ex. US governments borrowing are partly financed by China, who buy their government bonds and this gives the money for the budget.

b) Request their central bank to issue bonds and sell it to raise the money needed

c) Increase taxes and duties to cover the deficit

d) Sell government assets like selling the public sector undertakings and realize cash

e) Borrow money from international agencies like the World Bank, IMF, etc.

f) Just print money and make it available through the banking system.

Thus, very rarely fiscal prudent exists.

CHAPTER 2

THE BUDGET OF 2014-15 AND ITS CONTENTS

Question 17: What is source and use of funds?

For an individual, his source of income may be his salary, interest from fixed deposits, dividend from stocks, rent from property, capital gains from stock market, etc. For the government, it encompasses all forms of revenue, which will include income from income-tax, corporate tax, customs duties, excise duties, general sales tax, etc.

The use of funds for an individual is how he allocates his source, namely, on what he likes to spend his money on. It could be, for example, rent payment, mortgage payment, car loan, food and clothing, entertainment, children school fees, etc. In the case of government, the money would be allotted towards administrative expenses, expenditure on various developmental activities, education, social security measures, interest payment on previous borrowing, defense expenditure, subsidies, assistance to the states and union territories, etc.

In the case of an individual, the surplus resulting from excess of income over expenses is the savings which he or she will then invest. He or she cannot afford to have continued deficits or shortfalls, which implies that they will have to borrow to meet these expenses. In the case of the country, the budget can be deficit or surplus. If it is a shortfall, it is called budget deficit and similarly if it is a surplus, it is referred to as budget surplus.

Question 18: Give me the break-up of Union budget revenue in terms of percentages (sources of funds) for the financial year 2014-15

Sl. No.	Item	Estimates
	Corporate tax	21%
	Income tax	13%
	Non-tax revenue	10%
	Customs	9%
	Service tax & other taxes	10%
	Union excise duties	10%
	Non-debt capital receipt	3%
	Borrowings and other liabilities	24%
	Total	100%

Source: Budget speech 2014-15 on July 10, 2014

Observation 1: Corporate tax continues to be the major contributors to the exchequers. But in continuation with the last couple of years, the forthcoming year budget also expects major share of its revenue will come from borrowing.

Observation 2:

Kindly note that only 76 paise out of every rupee they plan to spend, is received as tax revenue by the government. The remaining 24 paise is borrowed from the market. This is too high and cannot sustain for long. Some form of consolidation is called for.

Observation 3:

The expected income tax to be collected amounts 13 paise. This is a paltry sum, given that our government wants to spend almost the same amount of money on subsidies. It is very clear that in future, the income tax collection should be increased to a significantly higher rate. Alternately, indirect taxes must increase substantially.

Observation 4:

Non-tax revenue is supposed to bring in Rs.10. this includes sale of PSU assets. An amount of this size will crowd out the money available for other activities. For example, if the PSU bank shares were sold, and assuming that an investor has bought these shares, he may not have the money to buy a share, say, in the manufacturing sector. This will have an impact in the financial market.

Comment:

When Goods & Service tax is introduced in the future, it is more likely that the income tax may be reduced significantly or abolished.

Question 19: Give me the break-up of the budget expenses for the financial year 2014-15

Sl. No.	Item	Percentage
	Interest payment	20%
	Defense	10%
	Subsidies	12%
	Other non-plan expenditure	11%
	State’s share of taxed & duties	18%
	Non-plan assistance to State & UT govts.	3%
	State & UT plan assistance	15%
	Central plan	11%
	Total	100%

Source: Budget 2014-15 documents

Observation:

Interest payment on the previously borrowed money eats away Rs.20 out of every Rs.100 spent.
The subsidies are excruciatingly high. This must come down rapidly over the years.
Between the interest payment on the previously borrowed monies and the subsidy Rs.32 out of every Rs.100 spent is eaten away with nothing to show.
The size of non-planned expenditure should be held at this level in order that the government will have more money for the planned expenditure. It is only the planned expenditure when well employed will add up to the permanent growth in the economy. Non-planned expenditure makes up over 68% of the total expenditure and increase. As it increases, it becomes more difficult to keep the fiscal deficit under control. The following table will give the details:

	April-May (actual)	Full year (estimated)	10 months (required)
Non-plan expenditure (Rs. crore)
2014-15	2,20,730	12,19,892	9,99,162
2013-14	1,49,046	11,14,902	9,66,856
Growth (%)	48.1	9.4	3.4
Plan expenditure (Rs. Crore)
2014-15	59,609	5,75,000	5,15,391
2013-14	68,309	4,75,532	4,07,223
Growth (%)	-12.7	20.9	26.6
Total expenditure (Rs. Crore)
2014-15	2,80,339	17,94,892	15,14,553
2013-14	2,17,355	15,90,434	13,73,079
Growth (%)	29	12.9	10.3

The allocation of funds to the 28 states is going to be a serious challenge. Practically, every state is starved for money and they are expecting Mr. Jaitley to give them more.

Comment:

Finance Minister Jaitley’s hands are tied. Besides, he had to prepare a budget within 45 days of election. Also, because of UPA’s previous allocation of a large percentage to subsidies, Mr. Jaitley could not change it immediately. Also, the Brent crude oil price continues to go up. It is, currently, around $115 a barrel and this will affect the subsidy for diesel and kerosene.

Question 20: What is the forecasted fiscal deficit and how does it compare with previous years’ estimates?

Fiscal deficit is an economic phenomenon, where the government’s total expenditure exceeds the total revenue generated. It is the combination of revenue deficit and capital expenditure. When compared to the previous years, we are in a difficult position. The fiscal deficit is expected to be 4.1% of GDP for the current year. But the economic recovery process is still not yet in place though there are positive signals from the industry which is evidenced by increased manufacturing activity. By considering the current state of affairs and alarming levels of fiscal deficit, the Finance Minister of India has taken some bold measures to contain the fiscal deficit to 4.1% of GDP in the forthcoming year. This is going to be one big challenge because of the failing monsoon.

Question 21: What will happen to the deficit if the projected GDP is not achieved for the current year?

It is obvious that the government will fail to achieve the target of curtailing down the fiscal deficit to 4.1% if it was not able to reach the GDP target set for the forthcoming year 2014-15. But, meeting the target of fiscal deficit is necessary. However, if the GDP target growth is not achieved, the tax money and other duties collected may not be enough and so they will need to borrow more money.

Comments:

This is a highly optimistic expectation and this amount of revenue will be hard to come by, given the economic growth is expected to be sub 5%.

Question 22: What are the finance minister’s projection of expected revenue from the customs excise duties and service tax?

Tax	2013-14 (Rs. Crores)	Revised (Rs. Crores)	2014-15 (Rs. Crores)	Increase by
Custom	1,87,308	1,75,056	2,01,819	(15.29%)
Excise duties	1,97,554	1,79,537	2,07,110	(15.35%)
Service tax	1,80,141	1,64,927	2,15,973	(30.95%)

Question 23: What is the current income tax rate?

Up to 2.5 lacs	0
2.5 lacs – 5 lacs	10%
5 lacs – 10 lacs	20%
Above 10 lacs	30%

For the women, the exemption will be Rs.2.75 lacs

For the senior citizen, the exemption will be Rs.3 lacs.

Access of 3% will be added to the tax amount.

Comment: Thanks Mr. Finance Minister

Question 24: How do we then achieve the desired growth rate of 5%or more?

It requires strong political will on the part of the government to cut all the wasteful expenditure and to prune and reduce the subsidies.

Currently, subsidies are there on oil, food and fertilizers. Touching any one of them is a very sensitive matter. For example, subsidy in cooking gas is Rs.454 and kerosene is around Rs.40 per liter.

At the moment, there is no road map to take this action forward. The lack of political will to take drastic steps to cut expenses and subsidies will only make our deficits grow bigger and bigger.

Question 25: What is the expectation of the Finance Commission with regard to debt (all deficits over the years when added is called debt) to GDP ratio in the future years. The current debt to GDP ratio is around 70% and the government wants to bring it down by growing faster.

First, given the revenue and expenses growth of years, this is next to impossibility. Studies show a greater concern will come when the ratio of debt of GDP exceeds 90%, which will have a major impact on the growth rates. Greece, currently, has debt to GDP ratio of 180% and is facing the stark prospects of negative economic growth. Japan has debt to GDP ratio of 200% and the economy is stagnant for the last 20 years.

Question 26: What do the RBI figures show regarding government debt in the country?

For the financial year:

Domestic debt	56.6%
Foreign debt	23.4%
Miscellaneous	20%

This does not include FII and FDI inflows.

Since, most of the loan is raised within the country, there is no threat of foreigners selling our bonds.

Question 27: Can the country achieve a higher level of growth given the level of debt?

The government thinks it is possible, but the higher levels of debt will always be a dent in the growth rate.

Question 28: What are the total expenditures for the FY 14-15?

Non-Planned expenditure	Rs.12,19,892 crores
Planned expenditure	Rs.575000 crores
Total	Rs.17,94,892 crores

Observation:

The budget projects a year on year expenditure to grow at 12.9%
It assumes a nominal economic growth of 13% (before inflation)
After adjusted for inflation, the government expects the growth rate to be around 5.4%

Question 29: What is the total revenue estimates?

Tax revenue (income and corporate taxes)	Rs.9,77,258 Crores
Non-tax revenue (customs, excise duties and service taxes)	Rs.2,12,505 Crores
Capital receipts other than borrowing	Rs.73,952 Crores
Total	Rs.12,63,715 Crores

Observation:

This involves a big assumption about the prospects of selling the PSUs.
If past projection and actuals are any indication, the revenue expectation is greatly exaggerated. For example, last year our government was continuing on Rs.40,000 Crores by selling PSU shares but realized only Rs.14,000 Crores.
Similarly, the expenditure expectation is grossly understated.

Question 30: What is the expected fiscal deficit budget?

Rs.5.31 lakh Crores, which will be 4.1% of GDP and estimated redemption of Rs.1.39 lakh Crores.

Observation:

Again, this is only the expected target.
To keep it at 4.1% of GDP is based upon most optimistic expectation.

Question 31: What is the amount of money the government is expected to borrow in FY 14-15?

The government plans to borrow Rs.6 lakh Crores.

Observation:

The cash drawn down is budgeted at Rs.17,200 Crores.
The opening cash balance is at Rs.1.30 lakh Crores.
There is adequate cushion as of moment.

Question 32: What is the expected government growth rate projection in the next 3-4 years?

A sustained growth of 7-8% is expected.

Observation:

The government’s expectation is highly unrealistic.
We have slipped out of the growth path. We need large sums of money to put it on track. Borrowing heavily from China and from New Development Bank is a real possibility
If this is done, there is a possibility of getting back on the growth path.

Question 33: What is the expected future government deficit?

2015-16	3.6%
2016-17	3%

Observation:

If this has to become true, the subsidies that are currently around 12% of the budget will drop to 7-8% or the tax revenue must increase substantially. Maybe, Swiss bank money, by then, would have returned.

Question 34: Is the government planning to generate more money through indirect taxes?

Yes. This is what the government is planning in FY 14-15:

To cut the basic customs duty on some petrochemicals
10% customs duty on telecom products
Cut customs duty on LED, LCD panels sub 19 inch
To rationalize customs duty on all grades of coal to 2.5%
To cut excise duty on food processing to 6%
To hike excise duty on cigarettes by 11-12%
Excise duty on Gutka revised to 70% from 60%
Export duty on bauxite upped from 10% to 20%
Finally, indirect tax proposal to add 7525 Crores to government treasury.

Question 35: How about direct taxes?

No change in corporate surcharge
Investment allowance of 15% on an investment of more than 25 Crores in manufacturing
Propose to extend 10% tax holiday for power sector.
All income arising out of overseas investment by Indians will be treated as capital gains.
Continue the present concessional 15% tax rate on dividends received from foreign subsidiaries.
Extension of eligible date of borrowing in foreign currency at a tax rate of 5%.
FII’s income from short term capital gains 15% and 0% for long-term capital gains. The period for long-term capital gains is extended to 36 months.
Non-deduction of TDS will a disallowance of 30% expenditure made.
The result of all these tax amendment will result in a loss of Rs.22,200 crores.

Observation:

Inspite of huge budget deficit, the Finance minister is kind enough to give Rs.22,200 crores worth of tax benefits to the corporate sector.

Question 36: What is the expected relationship between tax and GDP?

For the year 2013-14, it was 10%. Now, it is expected to go up to 10.6%

Observation:

The government is hopeful, given that the GDP is expected to grow by 5.4%, that they will be able to collect more taxes. Of course, if the growth level does not pick up, it will increase the deficit.

Question 37: What is the government’s disinvestment target?

They have set it at Rs.43,425 Crores.

Observation:

This is a tough task. The government raised only Rs.16,000 Crores in the 2013-14 budget. This implies that the 4.1% of GDP fiscal deficit is not easy to achieve.

Question 38: What will be the expected net borrowing for 2014-15?

A fiscal deficit at 4.1% means the gross market borrowing will be Rs.6 lakh Crores. The net borrowing will be Rs.4.6 lakh Crore rupees, given that they have comfortable cash balance of Rs.1.4 lakh Crores.

Observation:

This borrowing may not have a big impact on the interest rates (repo rates) as the government borrowing will remain more or less like last year. So, one can expect the 10-year government security to be traded with a yield of 8.6-8.8%. However, the borrowing costs will not necessarily come down, given the high rate of inflation.

Question 39: What is the budget mean for you?

The basic exemption has been raised for men from 2 lakh to 2.5 lakhs, for women from 2.25 lakhs to 2.75 lakhs and for senior citizens, from 2.5 lakhs to 3 lakhs. This will give a tax savings of Rs.5000.

Home loan interest deduction is raised from Rs.1,50,000 to Rs.2,00,000.

Section 80C allows investment of 1.5 lakh from 1 lakh.

Question 40: The government debt to GDP is climbing higher and higher and each year the deficit as a proportion of GDP is going up. The current debt to GDP is approximately 70%. Will it come down in the future?

It can come down either if the deficit comes down or the GDP goes up or both.

Predicting the GDP is a challenging job. You have to study different sectors’ contribution namely agriculture industry and services and their weightage.

For example, when Mr. Pranab Mukherjee was our finance minister, he predicted a growth rate of 7.6 ± 0.25% for that financial year. It finally turned out to be 5.9%. Given the present commitment to subsidies, interest payment on previously borrowed money, it is unlikely that the deficit will come down. On the other hand, there is a high probability that it may go up higher.

Question 41: Can a country achieve a high level of growth, given the level of debt?

Impossible. Look at the US, it has a debt of $18 trillion plus. Best growth rate possible is less than 2% in the years ahead.

Look at the Euro zone, many countries have more than 100% of GDP as debt. The growth rate is less than 1%. Going forward, it looks like becoming negative.

Look at Japan, their debt level is staggering above 200% of GDP. It is in recession since 1989.

Barring some luck, Indian economy to achieve a 5% growth in FY 14-15 will only be a dream.

Question 42: How to achieve higher growth?

All the money in the economy should be available for activities which will help in its growth. Right now, a large part of the savings is moving towards gold and real assets. Sooner or later, the savings rate will decline rapidly. We need more capital and debt, either from within or outside the country (FDI), to achieve higher growth.

Question 43: Is the money moving into government bonds?

Not really. Look at the data.

Annual growth in government bond investment

FY 07	10.7%
FY 08	23.5%
FY 09	20.6%
FY 10	19.3%
FY 11	8.6%
FY 12	15.9%
FY 13	15.5%
FY 14	10.7%

As you can see, it is clearly decreasing. The government should be under pressure to push up the interest rates to attract new funds. But, currently, the bonds are over-subscribed and hence, no issue.

Question 44: where then is the money heading?

Some into real assets.

Some into gold.

Recently, into equities.

Some into tax cheating activities like betting on IPL outcome, etc.

Some leaving the shores to the Swiss bank and other to tax in the world.

Question 45: What is the plan in the budget with regards to FDI?

The NDA government will allow FDI in defense and insurance to go up from 26% to 49%.

Whether they will hit the target remains to be seen.

Question 46: The PSU banks are under significant stress because of Non-Performing Assets and restructuring? What should the government be doing to protect the public?

Sooner or later, the government will have to use the public money to bail them out. Let us look at the data:

Year	Non-Performing Assets as a percentage of all advances
2011	2.32%
2012	3.17%
2013	3.34%
2014	4.44%

The banks have lent very large amounts of money to a few selected companies and they are delaying, dodging repayment claiming business failure and inadequate cash flows.

Question 47: Are citizens shifting to physical assets instead of keeping it as bank deposit?

Yes. Take a look at the annual growth in deposits.

Annual growth in deposits (%)

FY 07	23.8%
FY 08	22.4%
FY 09	19.9%
FY 10	17.2%
FY 11	15.9%
FY 12	13.5%
FY 13	14.2%
FY 14	14.6%

The banks have so far got away with offering low and inadequate interest rates which is not even covering the inflation rate. Sooner or later, they will realize that this cannot continue. Those who are familiar with the Q legislation in the US will know what happened to the savings and loan banks.

Question 48: Is the budget people friendly?

Yes, of course. Look at the following:

For senior citizens, the basic exemption has moved from 2.5 lakhs to 3 lakhs.

Basic income tax exemption hiked from2 lakh to 2.5 lakh for ordinary tax payers.

Rs.2000 relief for those earning up to 5 lakhs a year.

10% surcharge on income over Rs.1 crore.

80C deduction from 1 lakh to 1.5 lakh.

Annual investment limit in the PPF enhanced from 1 lakh to 1.5 lakhs. Interest on housing loan deduction increased by Rs.50,000.

CHAPTER 3

General observations on the budget and conclusion

Observation 1:

The budget shows the borrowing and other liabilities at 24% (It is similar to a home that plans to spend Rs.100 and needs Rs.24 of borrowed money). This means that the collections are through income, corporate taxes, non-tax revenue, customs duties, excise duties, etc. are not adequate. The government could very well have increased the taxes substantially to reduce the borrowing. If they had done, the borrowings would have come down but would have hurt the consumption and savings rate of citizens. However, this size of borrowing to spend is like walking on a thin ice. In future budgets, the government should try to reduce the borrowings substantially. But, the way it stands, it will remain only as a dream. Why? Because:

a) The global economy has entered into a deflation. Euro zone, US, Japanese economies are struggling with growth of less than 1 %.

b) The government is desperately trying to decrease the expenditure but the inflation (both imported domestic) rate is refusing to come down.

Given the expected expenditure and revenue, it is almost certain that our economy will not achieve a growth rate of more than 4.5%. Expecting 5.4% is highly optimistic. Of course, we can always dream.

Observation 2:

If we look at the interest payment, our government has allocated 20% of the budget expenditure of Rs.17,94,892 Crores. This is a Democle sword hanging on our heads. Just imagine that even before you bring home your monthly salary, 20% of it is taken away by your employer because you had borrowed from your company. Can this continue and for how long? Are you going to create a big saving and reduce your debt? The government cannot cut any of the benefits given by them. If you look at the UPA policy when it was in power, they appealed to the voters only through those subsidies. The present government cannot withdraw because they will look like a bad guy.

Observation 3:

While the rest of the world is worried about disinflation and deflation, our government faces a serious challenge from inflation which is likely to turn into hyperinflation. Dr. Rajan has committed himself to bringing the inflation rate to 8% for FY 14-15 and 6% for FY 15-16. The problem is our inflation rate is high due to a host of factors:

The repo rate is much lower than what it should be. A strong central bank (remember Paul Volcker, former US fed Chairman) should push the repo rate much higher. Infact, the deposit rates are lower than the inflation rate which means citizens put money in the bank only to lose its purchasing power.
Supply constraint. The government procurement takes away significant amount of supplies from the market. So, a scarcity is created and to please the farmers the procurement price is regularly jacked up. Any economics student will know that this will push up the prices, given the same level of demand.

Observation 4:

We have a supply chain in the distribution of food, which adds up to so much cost to the final consumer. For example, a kilo of wheat is around Rs.17 in the futures market and is selling around Rs.45 a kilo as atta. A part of the reason is the prevailing rate of interest in the unorganized sector which is between 30 and 40 %.

In conclusion, the inflation rate cannot come down unless we ban export of food items and increase the import of essential items substantially. This inflation rate will eat away our growth rate. If we use CPI, instead of WPI as inflation indicator, one may end up asking where the growth is.

Observation 5:

We need to recapitalize our PSU banks. They are amassing bad debts. Restructuring of loans and some writing off some loans is the order of the day. To what extent the government will step in and support these banks will be an important issue in the near term. The banks have to charge more interest because of their poor lending practices. This will hurt the economy badly.

Observation 6:

Mr. Jaitley wants to bring fiscal consolidation by bringing the budget deficit lower over time. He plans to keep the deficit at 4.1% of GDP for FY 16-17. This, he plans to achieve by increasing the tax/GDP ratio to move from 10.2% for FY 13-14 to 10.6% for FY 14-15, 10.9% for FY 15-16 and 11.2 for FY 16-17. This is, certainly, achievable when the shift takes from income to consumption tax.

Observation 7:

Mr. Jaitley believes that he can increase the tax revenue for FY 14-15 by 19.8% and the real GDP to grow between 5.4% and 5.9%. A tall order to achieve!! The economy is slowly shifting towards unorganized sector. Money in the bank has been lent to big corporation and, practically, no money is available for small and medium enterprise. So, the tax revenue will, infact, grow lesser than last year and achieving this high growth rate will depend on the domestic savings rate and FDI. While inflation is eating away the savings, it remains to be seen whether FDI will offset it.

Observation 8:

The nominal GDP growth is expected to be around 13% and the expected tax buoyancy around 1.4%. Given the present real inflation rate, it is not clear as to how such high growth can be achieved.

In summary,

(1) The Finance Minister Jaitley has done a fine job, given the time limit and the mess he has inherited.

(2) After studying many budgets from the past along with the most optimistic projections. I conclude that achieving a 5% growth is a near impossibility.

(3) The savior to the economy will be the inflow of FDI. Hope we attract large sums of money and part of it go into infrastructure development.

Being a stakeholder, my dear students, if you ignore the budget as a non-event unlikely to affect you in anyway, be assured that with the government debt increasing to significant levels will result in your salary buying less and less. Also, future taxes will increase substantially. If I may say, we will continue to increase our debt over time and leave a bankrupt economy for you. Many countries have done that and our current path will take us there eventually. There are many other important issues in the budget which are equally important such as the allocation of funds to states and union territories. Items contained in subsidies and defense, etc. I have avoided them to ensure easy and quick reading. The objective of this report is to obtain a general overview.

EPILOGUE

1) Mr. Finance minister sir, your budget is an excellent one. You have given benefits to individuals and corporations up to Rs.22,000 crores a year. Given the current economic situation, it shows that you are very compassionate to fellow countrymen.

2) Your budget document is extremely verbose and is not easily readable by a common citizen unless he has the patience to read through every detailed nuances in the budget. It is said that most people tire of a lecture in 10 minutes and clever people can do it in 5 minutes.

3) Now, let us try our attention to the principle of budgeting. Sir, your document looks like an extension of the UPA budgets. Honestly, you should change the format. In that format, you should provide, the expected FDI in various sectors to be received in the coming year. It is after all the sources of funding for our economy.

4) You have rightly recognized the importance of the FDIs in general and in particular in insurance and defense, moving up from 26% to 49% is welcome and it will happen in reality.

5) The total plan expenditure in this budget is Rs.5.75 lakh crores. This is compared to Rs.5.55 lakh crores provided in the last year’s budget by Mr. P.Chidambaram. If we assume that the current inflation rate persists, this will amount to a big cut.

6) Our target for PSU disinvestment is Rs.55,000 Crores. You may recall Mr.Chidambaram provided to receive Rs.40,000 crores from divestment but instead collected Rs.21,000 crores. Given the slow economic growth, receiving more than double of last year in next to impossibility.

7) The revenue from direct taxes is expected to go down by Rs.22,000 crores. This puts India as one of the lowest GDP to tax of 10.6%. You are very generous in this case, but you are fully aware that this cannot continue in the future.

8) Your allocation to MGNREGA is around Rs.33,000 crores. This is the same as Mr. Chidambaram’s allocation adjusted to the purchasing power of today’s cost, the amount should have been Rs.36,000-37,000 Crores.

9) Sir, India is a land with very young population. A large proportion of them belong to the below 35 years category, and they are the workforce of India. As you may be aware, a very large number of them do not have any skill and needs to be trained in such jobs which could give them both employment and at the same time help the country to grow faster. You see sir, labor is an important input into the growth of GDP. Marginalizing and sidelining of these young individuals will only hurt us badly. On the other hand, if these people are trained and employed in highly productive activities, we will achieve a significant reduction in the budget deficit.

It is actually a tricky situation because if this people do not get jobs, they will engage in anti-social activities, which may increase our deficits. Sir, in future, our area of importance will be creating the right kind of labor to fulfill the needs of the economy. When combined with adequate flow of FDI, we will reach new heights in the economic growth.

While there are so many good things in the budget, it has not touched the very nerve of our economy, which is our people’s dream. Find out what our people needs and see how to accommodate. This way, I am sure, Sir, you will continue to be in power for the next 10 years. A rare opportunity is given to you to address people’s needs. I am sure you can deliver and my best wishes and regards.

CONCLUSION

Now, it is time to conclude this manual. Budget, as the very word suggests, is only an estimate. When it is planned, the planner will make a number of assumptions regarding credit, interest rates, economic activities, etc. For example, agriculture outputs is heavily dependent on the monsoon rain which is not completely predictable. The total rainfall could be below expectation or at the other end way above expectation, causing floods, etc. Similarly, natural calamities and war are outliners and so there is, generally, no need to provide for in the budget. Currently, the El Nino effect is causing serious concern is kharif crops. The agriculture output for this year may even be lesser than last year.

The main difference between the developed economy and a developing economy is that while the former has already achieved a reasonable standard of living for their citizen, the latter is desiring to get there putting all their energy and resources. It is no easy task but we, in India, are committed to getting there. Given time and effort, we are bound to reach the developed state in due course of time. Let us hope we get there soon. The Modi government will be there for 5 years and so they can take their own sweet time to bring in harsh measures.

We hope that you found reading material factual and informative. As mentioned earlier, it is not a text book nor a literary work but a simple down to earth manual about our budget. Your feedback will be of immense value to us. This is the first time this manual is prepared. We know that we have a long way to go and with your help and support, we will get there.

Thanks for reading it.

SOME SUGGESTIONS TO OUR FINANCE MINISTER:

Sir, currently, our government is issuing 10-year treasury notes similar to Japan, US, Singapore, etc. and the yield to maturity is hovering around 8.7% to 9% approximately. In addition to this, we should consider issuing both 5-year and 2-year T notes, like in the US, and allow residents and foreign institutional investors to buy them as part of portfolio management. Derivative products may also be introduced on these notes and encourage domestic and foreign hedge funds to participate. This way participation will increase. Liquidity in these products will go up and it will be a small step towards India becoming one of the important financial centres in the world. The major advantage of these short-term notes is that these notes will reduce the government costs of borrowing. This will be very similar to what the US did, shifting the attention from 30-year treasury to the 10-year treasury.
This is regarding the environment. Sir, our country has innumerable rivers, natural parks, forests, etc. All these require enormous amount of funding to maintain them in pristine condition. This is where public-private partnership could come in handy. As stakeholders of this country, we want all these nature’s gifts to be preserved for posterity. Sir, you can encourage private individuals and companies to take the responsibility of maintaining them, as part of the corporate social responsibility. There are enough experts in our country to guide us in this regard. Going one step further, unaccounted money (so called black money) could be encouraged to be invested in preserving these environmental projects. Sir, some of us go to Tirupathi to share the ill-gotten wealth with Lord Venkateshwara. As they say “cleanliness is godliness”. Sir, I hope you consider this suggestion seriously.
There are many people in India who would like to share their wealth with their fellowmen. For example, if the government encourages the citizens to gift, say even Rs.5,000 per person to the centre’s coffer, you may be surprised to find a huge sum of money coming your way which could then be used for helping the under-privileged to become entrepreneurs. For example, in my earlier job, I have given loans up to Rs.75,000 to five women to buy cows. If millions of such loans are given, we will be able to help many families to break out of poverty. The labor productivity among them is phenomenal. Give them a little loan, show them the way and we will have a new India in the years to come.

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