Monday, 2 March 2015

Daily News Mail - News of 01/03/2015

Union Budget 2015-16


* Fiscal deficit seen at 3.9% of GDP in 2015/16

* Will meet the challenging fiscal target of 4.1% of GDP

* Remain committed to meeting medium term fiscal deficit target of 3% of GDP

* Current account deficit below 1.3% of GDP

* Jaitley says have to keep fiscal discipline in mind despite need for higher investment

* Fiscal Deficit - When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.


* GDP growth seen at between 8% and 8.5% year on year

* Aiming double digit growth rate, achievable soon


* Expects consumer inflation to remain close to 5% by March, opening room for more monetary policy easing

* Monetary policy framework agreement with the RBI clearly states objective of keeping inflation below 6%

* "One of the achievements of my government has been to conquer inflation. This decline in my view represents a structural shift."


* Revenue deficit seen at 2.8% of GDP

* Non tax revenue seen at Rs. 2.21 lakh crore

* Agricultural incomes are under stress


* Government targets Rs. 41,000 crore from stake sales in companies

* Total stake sale in 2015-16 seen at Rs. 69,500 crore


* Propose to merge commodities regulator with SEBI

* To bring a new bankruptcy code

* Jaitley says will move to amend the RBI act this year, and provide for a monetary policy committee

* To set up public debt management agency

* Proposes to introduce a public contract resolution of disputes bill

* To establish an autonomous bank board bureau to improve management of public sector banks


* To enact a comprehensive new law on black money

* Propose to create a universal social security system for all Indians

* To launch a national skills mission soon to enhance employability of rural youth

* To raise visa-on-arrival facility to 150 countries from 43

* Allocates Rs. 34,699 crore for rural employment guarantee scheme BORROWING

* Gross market borrowing seen at Rs. 6 lakh crore

* Net market borrowing seen at Rs. 4.56 lakh crore


* Government defers rollout of anti-tax avoidance rules GAAR by two years

* GAAR to apply prospectively from April 1, 2017

* Retrospective tax provisions will be avoided


* No change in personal Income Tax

* Health Insurance Premium deduction hiked from Rs. 15,000 to Rs. 25,000; for senior citizens to Rs. 30,000

* Transport allowance exemption hiked to Rs. 1,600, from Rs. 800 per month

* Additional 2% surcharge on people earning over Rs. 1 cr; to fetch Rs. 9,000 cr

* Wealth tax abolished

* Direct Taxes Code (DTC) dropped

* Rs. 50,000 deduction for contribution to New Pension

* To abolish wealth tax

* Replaces wealth tax with additional 2% surcharge on super rich

* Proposes to cut to 25% corporate tax over next four years

* Corporate tax of 30% is uncompetitive

* Net gain from tax proposals seen at Rs. 15,068 crore

* Jaitley proposes modification of permanent establishment norms so that the mere presence of a fund manager in India would not constitute a permanent establishment of the offshore fund, resulting in adverse tax consequences.

* Proposes to rationalise capital gains tax regime for real estate investment trusts

* Expects to implement goods and services tax by April 2016

* To reduce custom duty on 22 items

* Basic custom duty on commercial vehicle doubled to 20%

* Proposes to increase service tax rate and education cess to 14% from 12.36%

* Plans to introduce direct tax regime that is internationally competitive on rates without exemptions

* Exemptions for individual tax payers to continue

* To enact tough penalties for tax evasion in new bill

* Tax dept to clarify indirect transfer of assets and dividend paid by foreign firms


* Investment in infrastructure will go up by Rs. 70,000 crore in 2015-16 over last year

* Plans to set up national investment infrastructure fund

* Proposes tax-free infrastructure bonds for projects in roads, rail and irrigation projects

* Proposes 5 "ultra mega" power projects for 4,000 MW each

* Second unit of Kudankulam nuclear power station to be commissioned

* Will need to build additional 100,000 km of road

* Ports in public sector will be encouraged to corporatise under Companies Act


* Plan expenditure estimated at about Rs. 4.65 lakh crore

* Non-plan expenditure seen at about Rs. 13.12 lakh crore

* Allocates Rs. 2.46 lakh crore for defence spending

* Allocates Rs. 33,150 crore for health sector

* If revenue improves, hope to raise budgeted allocations for rural job scheme by Rs. 5,000 crore

* There are two components of expenditure - plan and non-plan.

Of these, plan expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission.

Non-plan revenue expenditure is accounted for by interest payments, subsidies (mainly on food and fertilisers), 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 defence, loans to public enterprises, loans to States, Union Territories and foreign governments.


* Propose to do away with different types of foreign investment caps and replace them with composite caps

* To allow foreign investment in alternative investment funds

* Public investment needed to catalyse investment


* To develop a sovereign gold bond

* To introduce gold monetisation scheme to allow depositors to earn interest

* To introduce Indian-made gold coin to reduce demand for foreign gold coins


* Food subsidy seen at Rs. 1.24 lakh crore

* Fertiliser subsidy seen at Rs. 72,969 crore

* Fuel subsidy seen at 300 billion rupees

* We are committed to subsidy rationalisation based on cutting leakages

Social Security

* PM Suraksha Bima Yojana with accidental death cover of Rs. 2 lakh.

*Atal Pension Yojana with government contributing 50% of the premium.

* PM Jeevan Jyoti Bima Yojana: natural/accidental death cover of Rs. 2 lakh

* Rs. 9,000 unclaimed in PPF/EPF to be used for a Senior Citizen Fund.

GST on the horizon

Goods and Services Tax. After a decade of dithering, the final deadline for implementation has been set: the start of fiscal year 2016-17.

By replacing the bewildering assortment of levies and exemptions with a single tax, GST will create one all-India market with a uniform levy for most goods and services. This will dramatically ease doing business, cut transaction costs and radically alter the indirect tax landscape. By most estimates, this will add a full percentage point to GDP growth.

The second is the plan to cut corporate income tax from 30% to 25% over four years. Simultaneously, Jaitley has promised to end the array of exemptions and concessions.

This will lead to a more transparent tax code, and put India’s corporate tax rate in the ballpark with the global average of 23.8%.

Coupled with the further deferment of the reviled General Anti Avoidance Rules by two years, and a promise to implement it only from April 1, 2017, Jaitley has removed a major bugbear for foreign investors. Along with a major change proposed to bankruptcy laws — ease of doing business includes ease of exit, too — this will improve India’s ranking on this front.

Wealth tax killed

The third is the decision to abolish Wealth Tax. In 2013-14, wealth tax collections were Rs. 1,008 crore, which puts the total assessed wealth at just Rs. 20,000 crore.

“Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax,” Jaitley asked.

Instead, he will tax those with a taxable annual income of over Rs. 1 crore an additional 2%. This will not only ease compliance and boost the mop up, it will also bury the socialist angst of the past.

The fourth is the clear move towards federalism. States will get Rs. 5.24 lakh crore out of the Centre’s revenue receipts in 2015-16 against the Rs. 3.38 lakh crore they got in 2014-15. Along with grants and transfers, they will get to spend 62% of Jaitley’s collections. Fiscal feudalism will be consigned to history.

More public investment

The fifth is the recognition that public investment will have to lead the way, and that private investment, particularly in the infrastructure space, will flow in only when the currently broken Public Private Partnership (PPP) model is fixed.

Jaitley has addressed this in a number of ways. He has stepped up public spending on infrastructure: it is slated to cross Rs. 70,000 crore in 2015-16. A new National Investment and Infrastructure Fund gets Rs. 20,000 crore, there will be tax-free bonds for infrastructure, and PPP deals will see the government underwriting much of the risk.

In the short term, this will mean a higher fiscal deficit. The gap will rise to 3.9% of GDP, the lowest since 2008 but higher than the 3.6% target set by his predecessor. But Jaitley will deviate only a little, and for a short while. In three years, he intends reducing the fiscal deficit to 3% of GDP. This, with moderate inflation — the target for the coming year is 5%, lower than the RBI’s 6 % — should pave the way for moderation in lending rates, spurring consumption and investment.

Entrepreneurship boost

The last is a focus on fostering entrepreneurship. From the announcement of an innovation fund to Rs. 20,000 crore for the creation of a ‘Mudra Bank’ to refinance lending to the MSME sector, Jaitley is betting big on the entrepreneur creating a virtuous cycle of growth and job creation.

But these future pay-offs come at the cost of some present pain, particularly for the salaried tax payer, who has only got nominal increases in healthcare and transportation allowances.

There are no grand hand-outs for the poor, though MNREGA allocations have been upped. Add the increase in Service Tax to 14% and the increase in general excise duty (by rounding off education cess), and this Budget will be a difficult political sell for the BJP.

Emphasis on 'Make in India'

Not surprisingly, the Budget placed a great deal of emphasis on the Prime Minister’s ‘Make in India’ drive, which he flagged off last September. Jaitley announced a clutch of measures that were aimed to nudge the country towards becoming a manufacturing hub.

The focus on fostering entrepreneurship was a recurring theme, even as Jaitley noted that a “major challenge is that manufacturing has declined from 18% to 17% of GDP…and manufacturing exports have remained stagnant at about 10% of GDP.”

Saying that the ‘Make in India’ programme is about meeting this challenge and creating new jobs, Jaitley announced a package of incentives to stoke the manufacturing sector. These included a gradual reduction in corporate tax, from 30% to 25%, a slash in basic customs duty on 22 industrial inputs, a reduction in the tax on royalty and the removal of special additional duty on IT products – all aimed at encouraging manufacturing at home.

A vision document

Piggybacking on Modi’s reputation for execution, the budget laid down ambitious quantitative targets on housing-for-all, road connectivity and sanitation by 2022 — India’s 75th year of independence.

The support for business was accompanied by a slew of social and welfare measures — a balance that has come to represent Modi’s signature style. The Pradhan Mantri Jan Dhan Yojana got eight mentions in the speech, with the scheme getting credit for ‘bringing 12.5 crore families into the financial mainstream’, within 100 days.

Clean India drive

As one would have expected, Swachh Bharat Abhiyan, the pet project Modi flagged off last Gandhi Jayanti, which Jaitley described as a movement to regenerate India, found more than one mention.

Taking note of the 50 lakh toilets already constructed in 2014-15, Jaitley said that the target of 6 crore toilets would certainly be met. He made sure this initiative didn’t lack in funding either. Corporate contributions to the Swachh Bharat Kosh and the Clean Ganga project were granted a 100% tax exemption. A 2% Swachh Bharat cess has also been proposed on all service tax payments in future.

The budget steered clear of UPA-style populism(ideology or political movement that mobilizes the population) by pruning(cut away) fuel subsidies and promised to root out leakages. It made clear its intention of moving to direct transfers through the JAM trinity (Jan Dhan, Aadhaar, mobile numbers).

Poll Slogan

Modi’s poll slogan of Sabka Saath, Sabka Vikas was kept in mind, with a slew of special benefits for girl children, the elderly, the under privileged and the disabled.

A social security net was promised for the 10.5 crore senior citizens, a MUDRA bank flagged off to fund micro enterprises run by SC/ST/OBC owners and the Sukanya Samridhhi scheme granted tax breaks.

Service tax hike will deliver all-round blow

The hike in service tax from 12.36% to 14%, as announced in the Budget, is going to ensure that eating out is set to become more expensive. Also, be prepared: going for a movie, ordering flowers, or even getting a haircut is set to be costlier. By increasing service tax, the Government has directly hiked the price of all things which are under service tax,'. Consumers will have to shell out more even for flight tickets, music concerts, sporting events as well as entry to amusement parks. The tax is also expected to hamper the tourism industry in India, bringing down tourist arrivals by around 50%

The $20 billion that the country earned from the 7.5 million tourist arrivals in 2014, is expected to slide to less than $12 billion, according to experts.

Setting up a business will become easier

As part of its efforts to bring transparency into the procedures for starting a business in India and enhance the ‘ease of doing business’, the Government will examine the possibility of doing away with the requirement for multiple prior permissions and replacing it with a pre-existing regulatory mechanism.

It takes 28 days to start a business in India, according to World Bank data, compared with three days in Australia, four in Korea, 11 in Japan and three days in Hong Kong. Even Pakistan and Bangladesh are better than India, with average time required to start a business at 19 days and 20 days, respectively.

Jaitley said that he intended to appoint an expert committee to prepare a draft legislation that would replace the need for multiple prior permissions with a pre-existing regulatory mechanism.

Govt. to allow FDI in alternative investment funds

What is Alternative Investnment Funds : An entity that collects money from people, and invests it. But unlike the regular mutual funds, they donot usually involve in the conventional debt-equity share market type investment. And They’re not covered under SEBI’s regulations for mutual funds and collective investment schemes. Such funds / entities are called Alternative Investment fund.

The announcement by Finance Minister Arun Jaitley to allow foreign investment in Alternative Investment Funds (AIFs), a category of pooled-in investment vehicles for real estate, private equity and hedge funds, is expected to give a boost for private equity industry in India.

Furthermore, Jaitley proposed to allow tax pass-through for alternate investment funds.
Read our full coverage on Union Budget

AIFs are basically funds established or incorporated in India for the purpose of pooling in capital from Indian investors. In presentation of Budget for 2015-16, FM has also said that the government would do away with different categories like Foreign Portfolio Investors (FPI) and Foreign Direct Investment (FDI) for such investments with a view to making it easier for overseas investors to invest in AIFs.

Banking on disinvestment

Finance Minister Arun Jaitley does not seem to be fazed by past failures to achieve targets given that he has projected capital receipts of Rs. 69,500 crore from disinvestment. This includes Rs. 41,000 crore from stake sales in both profitable and loss-making PSUs.

But a new head in the Receipt Budget for 2015-16 indicates that another Rs. 28,500 crore is proposed to be raised through “strategic divestment”. Strategic disinvestment is akin to the sale of Hindustan Zinc and Balco to Vedanta by the previous NDA regime. Typically, PSU disinvestments have seen minor stake sales. Market experts say that when you sell to a strategic investor, he’s looking for control.

The Government sees disinvestment as a major source of revenue, after tax collections, to finance the fiscal deficit. It has lined up a slew of companies for possible disinvestment, including Indian Oil Corporation, National Mineral Development Corporation, BHEL and Nalco.

Divestment is also a pressing need in light of listing norms that stipulate a minimum public shareholding of 25 per cent. The major PSUs where the Government holding is more than 75 per cent include Coal India, NHPC, NMDC and SJVN. The Government’s stake is about 90 per cent in companies such as MMTC, Hindustan Copper, HMT, Neyveli Lignite and STC.

A surprise booster for MGNREGA

A day after Prime Minister Narendra Modi took a dig at the Congress over the the Mahatma Gandhi Rural Employment Guarantee Act (MGNREGA) in the Lok Sabha, calling it a living proof of its misrule, Finance Minister Arun Jaitley increased its allocation to Rs. 34,699 crore, the highest it has ever received.

Jaitley said that he was enhancing MGNREGA’s budget by Rs. 5,000 crore and it was the highest it has ever got. MGNREGA was the flagship scheme for rural job enhancement under the UPA government and has come up for flak time and again since the Modi government came to power.

Education boost

The Finance Minister targeted the country’s 70% rural population with a slew of other measures, including the allocation of Rs. 79,526 crore for rural development activities, including MGNREGA.

Education received  Rs. 68,968 crore to which Jaitley clubbed the Mid-Day Meal scheme, while health was allocated  Rs. 33,152 crore. A large chunk of these were attributed to the “poor and disadvantaged”, which means that these would impact rural India as would the Rs. 10,351-crore set aside for women and child development. To create credit for the rural population with priority to SC&ST, and rejuvenate the micro-finance sector, Jaitley allocated a corpus of Rs. 20,000 crore to create a Micro Units Development Refinance Agency (MUDRA) Bank through a Pradhan Mantri Mudra Yojana.

To skill village youth under the government’s soon to be launched National Skills Mission, he set aside Rs. 1,500 crore for the Deen Dayal Upadhyay Gramin Kaushal Yojana. Jaitley emphasised the need for streamlining the direct transfer of benefits to rural populations and the poor. Calling it “a game changing reform”, he said the JAM Trinity – Jan Dhan, Aadhaar and Mobile – will allow the transfer of benefits “in a leakage-proof, well-targeted and cashless manner”. The Jam Trinity essentially means linking the Prime Minister’s Jan Dhan Yojana with a citizen’s Aadhaar identity and mobile number to transfer subsidies and benefits.

Helping hand for neighbours

The Indian Ocean countries of Sri Lanka and Maldives are to be allocated Rs. 683 crore, which includes Rs. 500 crore to Sri Lanka under both Plan and non-Plan allocations as per the Union Budget. In addition, Bhutan, another SAARC country, will be allocated Rs. 6,160.20 crore, while strife-torn Afghanistan will get Rs. 676 crore. The Budget, including both Plan and non-Plan allocations, provides for these funds under development assistance projects implemented by India for its neighbouring countries. The Ministry of External Affairs had sought these funds from the Finance Ministry. 

While India also plans to provide Rs. 15 crore as aid to Latin America, Myanmar will be a beneficiary of aid worth Rs. 270 crore, which includes funds from both Plan and non-Plan allocation.

Security at one rupee per month

At one rupee per month Finance Minister Arun jaitley has provided a Rs. 2 lakh accident or death cover for the aam aadmi in the Budget proposal.

Christened the ‘Pradhan Mantri Suraksha Bima Yojna’, it is targeted at the poor and vulnerable sections.

To this he has added the ‘Atal Pension Yojana’ for those who can pay premiums, which will have a government component as well. The Government will contribute 50 per cent of the beneficiaries’ premium limited to Rs. 1,000 each year, for five years, in accounts opened before December 31, 2015. These schemes will use the platform created by Pradhan Mantri Jan Dhan Yojana for financial inclusion. The scheme already has over 13 crore bank accounts comprising mostly of the poor and under privileged.

The Finance Minister also proposed the ‘Pradhan Mantri Jeevan Jyoti Bima Yojana.’ Here, the rate of premium will be Rs 330 a year or less than Re 1 per day. This will be available for those in the age group of 18 to 50 years and will cover both natural and accidental death risk of Rs 2 lakh.

In his Budget proposal Jaitley said that there is around Rs 9,000 crore worth of funds available through unclaimed deposit in the Public Provident Fund (PPF) and the Employees Provident Fund (EPF). He proposed to use this amount for creating a Senior Citizen Welfare Fund. It would primarily subsidize the premiums of vulnerable groups such as old age pensioners, BPL card-holders, small and marginal farmers and others. The Government will announce details of the scheme next month.

Senior citizens living below the poverty line in rural areas would also be provided physical aids and assisted living devices under a new scheme. He said that out of 10.5 crore senior citizens (people over the age of 60 years) over one crore are above the age of 80 years. Of these 70 per cent live in rural areas and a large number are in the BPL category.

Eyes on the Horizon

The Modi government’s first full Budget has its eyes firmly fixed on achieving medium-term growth. It suggests that the government wants to do all it takes to move to a higher growth trajectory — despite a sanguine forecast of 8.1-8.5% for the next fiscal. This includes relaxing the fiscal deficit target to 3.9% of the GDP for 2015-16, against the earlier roadmap of 3.6%. The target of 3% for 2016-17 has been pushed back by a year. What is remarkable is not that the target has been set aside for a couple of years. The UPA overshot it on several occasions, either to pull the economy out of a crisis, as in 2008-09, or to boost welfare schemes — only to brutally slash capital spending in other years, as in 2013-14. But there is nothing knee-jerk about this Budget. For the first time, the need for an enhanced deficit has been put on the table with a sense of confidence — it is meant to fund infrastructure creation and, by implication, will be inevitably corrected by the growth that such assets create. With a comfortable current account deficit, benign inflation, low oil prices, stable rupee, and no foreseeable political or global shock to make foreign investors rush for the exit door and push up interest rates, the Centre has chosen the right moment to hit the ‘invest’ button. Its confidence has rubbed off on investors as well, with the markets, rather uncharacteristically, taking the higher than projected deficit for 2015-16 in their stride. Running a higher fiscal deficit also makes sense in view of the increase in devolution of funds to the states; the Centre needs a breather to adjust. So, this Budget, unlike many earlier budgets, is biased towards investment rather than consumption as the engine of growth.

To fund this investment, the Budget plans to lift both savings and efficiency in financial intermediation. The middle class has been allowed generous deductions towards healthcare and pensions, meeting both macroeconomic and social objectives. Moves to promote gold bonds and their variants are also welcome. But apart from pursuing growth, the investment push has been prompted by another circumstance. As the Finance Minister said, with the PPP model in disarray, there is a need to revisit the sharing of risk in infrastructure projects. Such a pro-active role should also be seen in the context of uncertainty over the land acquisition ordinance, which could lead to private players holding back funds over the consent clause.

The Budget’s revenue projections look more credible than what was put out in July. Then, the government estimated a tax revenue increase of 18% for the current fiscal, with the economy growing at a nominal rate of about 12%. Collections have fallen short by over Rs. 10,000 crore and Jaitley is hoping for a 15.8% rise in tax collections in 2015-16 (at Rs. 1.4 lakh crore) over the revised estimates, assuming a nominal growth** rate of 13%, while also banking on the slight increases in service tax and excise duty rates. A disinvestment target of Rs. 69,500 crore, however, looks like a tall order, despite the buoyancy in the market. Whether the Centre will squeeze social spending to stick to the 3.9% deficit target or allow the deficit to go further will depend on the monsoon and the stability of macroeconomic indices. The move to abolish wealth tax and introduce a 2 % surcharge on the super-rich instead is sensible. Wealth tax is a vestige of the inspector raj, its collections not being worth the cost and harassment.

Apart from infra spend generating demand for industry, there is a lot for corporates to cheer about. A cut in corporate taxes from 30% to 25%, accompanied by the likelihood of lower interest rates, should spur industry to invest, particularly if red tape is cut to obtain clearances. An improved mechanism to resolve contractual disputes would address one of the biggest hurdles to doing business in India. From a political economy perspective, it appears that the tax-cum-regulatory package for industry is also meant to offset the uncertainty surrounding big bang land and labour reforms, with crucial elections around the corner.

However, in this seemingly comprehensive package of supply and demand driven measures, there is a bewildering omission: agriculture. Apart from the routine hike in credit targets, the Budget has little to offer. That the fertiliser subsidy has been hiked to nearly Rs. 73,000 crore at a time of subdued oil prices shows a surprising disinterest in addressing the problem of nutrient imbalance. The imbalance, owing to a disproportionately high usage of urea, has impacted soil quality. This once again points to the political constraints to reform. In sum, this Budget takes a five-year view, but it is also like a long-distance runner subtly asking for time.

**Nominal growth - Nominal Growth. Unadjusted for inflation. A calculation of nominal economic growth simply adds up the total of goods and services in current cash terms and makes no adjustment for inflation, which may lead to great overstatement of the real position.

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