This post is by Bhushan Gajaria, CEO of Beehive Capital Advisors Pvt Ltd. An alumnus of Sydenham College aud Jamnalal Bajaj Institute of Management Studies, Bhushan last worked with IDFC Securities (earlier SSKI) as Sr VP - Research
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There is a conundrum – Should the FM be given a flak for
a placid Union Budget and unrealistic numbers or should he get a pat on the
back for not falling prey to extravagant populist announcements. PC had to fine
balance the budget to please the party on one hand and Financial markets and
rating agencies, which consider him a savvy finance minister, on the other
hand. And A SMART Finance Minister (I said smart, not good) that he is, he
chose “not to displease Madam” on one hand and “fool the financial markets with
un realistic fiscal deficit numbers of 4.8%, which the financial markets will
take as a Gospel Truth, until proven otherwise”. But in all this the biggest
miss has been – THRUST ON EXPORTS, WHEN CURRENT ACCOUNT DEFICIT AND
INELASTICITY OF IMPORTS REMAIN CONCERN AREAS.
The FM was so pre-occupied with Election Freebies and
Fiscal Consolidation that he missed out on the biggest need and the opportunity
of the hour – promoting exports (Detailed explanation given below).
Here is a macro view on the Union Budget…
THANK GOD, IT COULD HAVE BEEN WORSE
Loyal to its rural vote bank in the election year, FM has
upped allocation towards rural development by a whopping 46% to Rs800bn and
allocated additional Rs100bn towards Food Security (Rs1trillion in all). While
the Plan Expenditure is budgeted to increase by 16% in FY14, UPA continues to
focus on Revenue Expenditure, rather than Capital Expenditure (which is more
important to drive sustainable growth). Sorry state of economy (increasing
inflation and slowing investments) can be explained from the fact that share of
capital expenditure has dropped from 33%+ in NDA regime to 20% now. But then, I
am not complaining as I feared worse. Given the compulsion of the hour, UPA
could not be as maverick or extravagant as in 2008 to spend government coffers
to buy their votes. Thankfully, there was no Farm Loan Waiver and no
sharp jump in NREGA allocation. FM had to target his vote bank through cosmetic
announcements – Bank for Women, additional allocation for minorities, Nirbhaya
Fund for women security and making vague references of skill development for
youth without any concrete announcements. And hence I say, between an
option of pleasing the UPA Chief or displeasing her, FM made a smarter choice
of “not displeasing her”
ACHIEVING FISCAL DEFICIT TARGET OF 4.8% – PC ONLY
COMES FROM RAJNIKANT’S STATE, HE IS NOT A RAJNIKANT
There is nothing that RAJNI KANT.. PC seems to be thinking
that it applies to him as well. Either he considers himself to be a super hero
or he considers us fools, or probably both. FM has increased the expenditure
budget by 16% from FY13’s Revised Estimates (RE). Should we believe that? While
the FY13RE is in line with initial Budgeted Estimates (BE), it has been
achieved by cutting down planned expenditure by nearly 20%. This is unlikely to
be repeated in an election year and hence 29% jump in FY14 BE will be a
reality. On the other hand, government is building in Oil Subsidy of meager
Rs650bn in FY14, as against FY13 RE of Rs969bn. Despite the government’s
serious attempts to curb fuel subsidy in the recent past, USD105/barrel of
Crude Oil prices and sustained price hikes in H2FY14 (closer to state and
national elections) seem to be false assumptions to start with. More
unbelievable is the 21% revenue receipt growth target. While increase in
surcharge and likely corporate earnings growth of 12-13%in FY14 will help
government achieve 17% growth target in corporate taxes, indirect tax
collections in all probability will miss the budgets. With no change in
excise duty and service tax rates and overall economy growth remaining subdued,
government is unlikely to achieve its 16% and 36% growth target respectively.
To put into perspective, government revised its FY13 revenue estimates downward
by nearly 7%. On the other hand, government has increased its target
from disinvestments from Rs240bn in FY13 to Rs558bn in FY14, including Rs400bn
from spectrum auction – Again a steep task! Hence all in all, projected
attempt of fiscal consolidation through excel sheet working is an EYEWASH. And
for those who take it as a gospel truth, be prepared for a disappointment in
the coming months. And any slippage in growth (Q3 GDP growth at multi year low
of 4.5%, as against projected growth of 6.2-6.7% in FY14 as per Economic
Survey) can prove to be a nightmare as cascading effect of fiscal deficit on
forex currency could be dangerous.
THRUST ON INVESTMENT – A GOOD MOVE
This probably is the only good move in the entire budget. Few
announcements like 15% investment allowance on capex upward of Rs100cr in plant
and machinery, 3000km of road projects in H1FY14, increasing target of tax free
bonds, more infrastructure development funds, extending 80IA benefits for power
companies by one year, Rs1lac of additional benefit on interest on new home loans,
etc will help revive the investment cycle partially. Though the issue
of green clearance remains to be addressed, we see some positive impact of the
announcements. While PPP in coal mining can be extremely beneficial, what FM
has spoken on this topic is more of a passing reference.
PROMOTING SAVINGS – COULD HAVE DONE MORE
With equity markets seeing value destruction in the recent
years, retail investors have developed a penchant for investment in Gold.
Participation in Debt instruments, though on an upmove, has remained
significantly lower in India. Hence, large portion of retail savings has
been towards unproductive gold. This has had two negative effects – on one hand
high gold import has put pressure on current account deficit, on the other
hand, gold remains an un productive investment tool. In this context,
government could have done a lot more to draw investors away from GOLD through
higher taxes, and towards DEBT through additional tax benefits for investments
in Infra Bonds. Failure of recent tax free bond issues, owing to low
coupon, puts doubt on government target to issue Rs500bn worth of Tax Free
Bonds in FY14.
EXPORT INCENTIVES – THE BIGGEST MISS
While acknowledging that Current Account Deficit at near 4%
remains a cause of concern, FM also accepted inelasticity of two biggest import
items – crude oil and gold. But that being the reality, government could have
focused a lot more on boosting exports through increasing incentives. Slowdown
in global economy and simultaneous process of currency devaluation by countries
like Japan puts added pressure on Indian exports. In this context, government
should have reintroduced the tax benefits under DEPB, provided special benefits
for auto exports, etc.
All in all, we believe that this budget was a NON EVENT,
thankfully… in an election year, a PLACID BUDGET IS BETTER THAN POPULIST
BUDGET. Had it not been an election year, I would have termed this budget
as disastrous…
