UNION

BUDGET
2014 - 2015

UNION BUDGET
2014 - 2015

INDEX

Key Highlights

Tax Rates:
Direct Taxes

Market movements:
Equity & Debt

Economic update:

Budget summary

Revenue snapshot

Expenditure snapshot

Sector updates

Financial Sector

Mutual Funds

Equity Market: Outlook and Strategy

Debt Market: Outlook and Strategy

1
UNION BUDGET, 2014 - 2015

KEY
HIGHLIGHTS

On the back of a decisive mandate, the first budget of the NDA government has laid out
a broad policy framework in terms of sustained growth along with fiscal prudence. The
finance minister has presented the budget amidst challenges like sub 5% growth and
high level of inflation. The budget stresses the need to revive growth in manufacturing
and infrastructure sectors. It also highlights the importance of improvement in Tax to
GDP ratio and Non-tax revenues.
Tax revenues budgeted at 10.6% of GDP in FY15.
Tax budgeted to grow at 20% in FY15 compared with 10% growth seen in FY14
Assumption of nominal FY15 GDP growth of 13.4%.
Retains fiscal deficit target at 4.1% of GDP.
Increased divestment target of Rs 634 bn
Boost to domestic manufacturing and investments, particularly in infrastructure and
export-oriented manufacturing sectors
PPF scheme annual ceiling enhanced to Rs 1.5 Lakh p.a. from Rs 1 Lakh at present
Personal income tax exemption limit raised by Rs 50,000/-, to Rs 2.5 Lakh
Investment limit under section 80C of the Income tax Act raised to Rs 1.5 lakh
Deduction limit on account of interest on loan in respect of self-occupied house
property raised from 1.5 Lakh to Rs 2 Lakh
Rate of tax on long term capital gains (LTCG) increased to 20% on transfer of units of
mutual funds, other than equity oriented funds. Also, the period of holding in respect of
such units increased from 12 months to 36 months for the said purpose
2
UNION BUDGET, 2014 - 2015

TAX RATES

Direct Taxes
Personal income tax exemption limit raised by Rs 50,000/-, from Rs 2 lakh to Rs 2.5
Lakh in the case of individual tax payers below the age of 60 years. Exemption limit
raised from 2.5 Lakh to Rs 3 Lakh in the case of senior citizens:
The following table elucidate the new tax rates:

Investment limit under section 80C of the Income tax Act raised from Rs 1 Lakh to Rs
1.5 lakh
Deduction limit on account of interest on loan in respect of self-occupied house
property raised from 1.5 Lakh to Rs 2 Lakh.
Positive. The increase in the personal income tax limit in conjunction with the

increase in investment limit under Section 80C and the increase in the allowed
deduction limit on account of home loan interest is a big positive for
investors/individuals/savers. The benefits that will accrue on account of the tax saved
by way of the above should add a decent amount in the hands of individuals due to a
lesser tax outgo.
3
UNION BUDGET, 2014 - 2015

MARKET
MOVEMENT

Equity Market

After opening marginally higher the markets traded near the previous close as
investors awaited the announcement of the Union budget. After slipping lower in the
late morning session, the markets moved higher in the afternoon, but gave up the
gains in the later half before ending the day with moderate losses

Among the sector indices consumer durables lost more than 3% while Realty lost
almost 5%. In the Sensex stocks Hindalco (3.16%), Tata Power (2.72%) & Gail India
(1.54%) were the gainers while Hero Motocorp (-3.99%), TCS (-2.06%) and Bharti
Airtel (-1.59%) were among the major losers

The Sensex lost 72 points or 0.28% to close at 25,373 and the Nifty lost 17 points or
0.23% to close at 7,568

Debt Market

The market had expected the new fiscal deficit target in the range of 4.4%-4.6%,
resulting in an additional borrowing burden for FY15 of INR 300-400bn

However, the status quo on fiscal deficit and borrowing numbers was a mild positive
surprise for the bond markets. Gilt yields reacted to this and dropped by almost
10bps during the day

However all the gains were given up and the market closed in the red. It turned out
to be a volatile session for the bond markets.

4
UNION BUDGET, 2014 - 2015

ECONOMIC
UPDATE

Retains fiscal deficit target at 4.1% of GDP; but revenue targets even more optimistic
Budget FY15: Gross tax revenues overestimated by Rs.400-500 bn while non-tax revenues
overestimated by Rs ~150 bn
Widespread overestimation

Tax revenues budgeted at 10.6% of GDP in FY15 vs 10.2% in FY14 (FY09-FY14 Avg: 10.2%)

Key assumption of nominal FY15 GDP growth of 13.4% itself is on higher side

Given marginal improvement in growth, gross tax revenue growth of 17.7% too high; across all segments
tax projections are optimistic

Targeted revenue growth would be even higher if FY14 actual revenues are taken into consideration; Actual
indirect tax revenues are lower than FY14 RE revenues by ~5%

Non-tax revenue overestimated under revenues from economic services such as renewable energy, roads &
bridges and communication

Indirect duties adjusted to boost domestic manufacturing in consumer durable and auto, capacity addition in
chemical and petrochemicals, solar power and address the issue of inverted duties

Increased divestment target of Rs 634 bn, though significantly higher compared to FY14 RE, looks
achievable, given disinvestment potential and market conditions
Budget austerity relaxed a bit as expenditures likely to grow at 14.8% YoY (over FY14 actual exp) the
fastest in past 4 years; Subsidy bill credibly provided
Quality of fiscal consolidation unlikely to improve significantly. Estimated improvement in revenue deficit
(2.9% of GDP from 3.3%), may fall short given the extent of overestimation
Boost to domestic manufacturing and investments, particularly in infrastructure and export-oriented
manufacturing sectors
Policy implications: Meeting budget arithmetic on revenue side would be difficult. With cash drawdown of Rs
172 bn already used for funding, shortfall in revenues have to be met through increase in borrowing, higher
divestment or cut in expenditure. Even increasing pace of expenditure would be inflationary in nature thus raising
possibility of further rate hikes. However, tax benefits available to various sectors for limited period may speed
up capex activities by corporates
UNION BUDGET, 2014 - 2015

ECONOMIC
UPDATE

Budget Summary: Aggressive tax projections leading to lower fiscal deficit

INR Bn

(in INR Bn)

Total receipts
Gross Tax revenues
Tax revenues (net to centre)
Non-Tax Revenue
Non-debt capital receipts
Total Expenditure
Plan expenditure
Non-plan expenditure
Fiscal deficit
Fiscal deficit as % of GDP
Primary deficit
Primary deficit as % of GDP
Financing of fiscal deficit
Dated securities
as % of fiscal deficit
Short term borrowings
Drawdown of cash balances

% YoY

FY13

FY14 RE

FY14 P

FY15 BE

FY14 RE

FY14 P

FY15 BE

9,202
10,362
7,419
1,374
410
14,104
4,136
9,967
-4,902
-4.8%
-1,770
-1.8%

10,659
11,589
8,360
1,932
366
15,904
4,755
11,149
-5,245
-4.6%
-1,445
-1.3%

10,553
11,388
8,160
1,992
401
15,635
4,531
11,104
-5,081
-4.5%
-1,306
-1.2%

12,637
13,645
9,773
2,125
740
17,949
5,750
12,199
-5,312
-4.1%
-1,042
-0.8%

16%
12%
13%
41%
-11%
13%
15%
12%
7%

15%
10%
10%
45%
-2%
11%
10%
11%
4%

20%
20%
20%
7%
85%
15%
27%
10%
5%

-18%

-26%

-20%

4,674
95.3%
534
-510

4,539
86.5%
227
150

4,685
92.2%
330
-109

4,612
86.8%
346
172

* BE is the Budget estimate, RE is the Revised estimate, A is the Actual

6
UNION BUDGET, 2014 - 2015

ECONOMIC
UPDATE

Revenue snapshot - Tax budgeted to grow at 20% in FY15 compared with

10% growth seen in FY14
Extra-ordinary dividends from PSUs and RBI to bridge deficit in FY15 as well
(INR bn)

% YoY

FY13

FY14 BE

FY14 P

FY15 BE

FY14 BE

FY14 P

FY15 BE

10,362

11,589

11,388

13,645

12%

10%

20%

Personal Income Tax

2,015

2,417

2,378

2,843

20%

18%

20%

Corporation tax

3,563

3,937

3,947

4,510

10%

11%

14%

Excise duties

1,765

1,795

1,695

2,071

2%

-4%

22%

Customs duties

1,653

1,751

1,721

2,018

6%

4%

17%

Service tax

1,326

1,649

1,546

2,160

24%

17%

40%

Tax revenues (net to centre)

7,419

8,360

8,160

9,773

13%

10%

20%

Non-Tax Revenue

1,374

1,932

1,992

2,125

41%

45%

7%

Interest receipts

208

210

224

198

1%

8%

-12%

Dividends & profits

538

882

904

902

64%

68%

0%

Non debt capital receipts

410

366

401

740

-11%

-2%

85%

259

258

276

634

0%

6%

130%

Revenue receipts
Gross Tax revenues

o/w, Disinvestments

* BE is the Budget estimate, RE is the Revised estimate, A is the Actual

7
UNION BUDGET, 2014 - 2015

ECONOMIC
UPDATE

Expenditure snapshot Higher expenditure growth may end up stoking

inflation; Subsidy provisions adequate
Higher growth in Plan expenditure compared to non-plan expenditure would
change in mix of expenditure pattern

% YoY
(INR bn)

Plan expenditure
Plan Revenue expenditure
Plan Capital expenditure
Non-plan expenditure
Non-plan Revenue expenditure
Interest payments
Subsidies
ow, Food
Fertiliser
Petroleum
Non-plan Capital expenditure
Total Expenditure
of which, Revenue expenditure
Capital expenditure

FY13

FY14 RE

FY14 P

FY15 BE

FY14 RE

FY14 P

FY15 BE

4,136
3,292
844
9,967
9,143
3,132
2,571
850
656
969
824
14,104
12,435
1,669

4,755
3,719
1,037
11,149
10,277
3,801
2,555
920
680
855
872
15,904
13,995
1,909

4,531
3,525
1,005
11,104
10,230
3,775
2,557
927
674
854
874
15,635
13,756
1,879

5,750
4,535
1,215
12,199
11,146
4,270
2,607
1,150
730
634
1,053
17,949
15,681
2,268

15%
13%
23%
12%
12%
21%
-1%
8%
4%
-12%
6%
13%
13%
14%

10%
7%
19%
11%
12%
21%
-1%
9%
3%
-12%
6%
11%
11%
13%

27%
29%
21%
10%
9%
13%
2%
24%
8%
-26%
21%
15%
14%
21%

* BE is the Budget estimate, RE is the Revised estimate, A is the Actual

8
UNION BUDGET, 2014 - 2015

SECTOR
UPDATES

Capital market measures (Positive)

ADR/GDR allowed for all instruments (earlier allowed only for equity)

Revamp of Indian Depository Receipt (IDR) to make it more liberal

Clarity on tax treatment on income of foreign fund whose fund managers are located in India

Uniform KYC norms and inter-usability of the KYC records across the financial sector

Positive for Indian cos looking to raise funds abroad, foreign cos looking to raise funds
in India; Uniform KYC positive for entire financial sector

Agriculture and Rural Development

Price stabilization fund of Rs.5 bn to mitigate price volatility

Impetus to farmers improve warehousing, post harvest lending, and reorient APMC Act to
establish private markets/yards

Agriculture credit disbursement targeted at Rs.8 tn up 15% YoY

Allocation for rural development increased by 35% to Rs.800 bn

Autos (Positive)

Deadline for lower excise duty was extended pre-budget

A few indirect positives in Budget:

Increase in personal tax exemption threshold

Capex for Defense increased by 20%

Long-term Agri measures to improve farmer productivity/income

Positive for two wheelers and tractors

9
UNION BUDGET, 2014 - 2015

SECTOR
UPDATES

Banking & Financial Services (Positive)

Infrastructure lending to be lucrative for banking system as there will be limited regulatory preemption of SLR, CRR and PSL. This will lead to redeployment of resources at higher yields

Insurance sector foreign investment limit increased to 49% from 26%. This will lead to value
unlocking for domestic promoters

No major increase in re-capitalization of PSU banks and indication of higher retail participation
in future dilution (we expect there would be some discount for retail). Uniform KYC norms and
inter-usability of the KYC records across the financial sector

Positive for private and PSU banks. Increase in foreign limit in insurance to benefit
companies in this business

Capital Goods (Positive)

Banks will be permitted to raise long term funds for infrastructure lending with minimum
regulatory pre-emption such as CRR, SLR & PSL. This would lower the cost of funds by 100200 bps

Reduced capex threshold to Rs 250 mn from Rs 1 bn earlier for availing higher depreciation
rate of 15%

FDI in Defense raised to 49% from 26%

Subsidies for wind turbine sector not restored

Outlays increased in Defense by 20%, Railways budgetary support hiked by 25%

Cement (Positive)

Increased spending on Infrastructure such as roads, metro rail projects and urban
infrastructure

Cement industry would benefit from higher volume growth

9
UNION BUDGET, 2014 - 2015

SECTOR
UPDATES

FMCG & Retail

Excise duty on cigarettes hiked by weighted average ~21%.

No timeline for GST implementation was a major negative

Scrapping of excise duty on Palm Fatty Acid Distillate and Glycerine to benefit soap
manufacturers

Reduction in excise duty on footwear

Internet

Service tax to be levied on online and mobile advertising, while print media continues to be
exempt from service tax net.

This will make online and mobile ads costlier, which can marginally impact ad volumes in the
short run. However, we do not expect any change to the secular shift in offline ad spends to
online

Power and Infrastructure (Positive)

Banks to raise long term funds for infrastructure lending with minimum regulatory pre-emption
such as CRR, SLR & PSL.

Tax on dividend from foreign subsidiaries continued at 15% and sunset clause removed

Investment Trusts for infrastructure to get tax pass-through benefit similar to Real Estate
Investment Trusts (REITs)

To set up 16 new ports with allocation of Rs 116 bn

Allocation of ~Rs 380 bn to NHAI in FY15 for road building

Positive for EPC companies, private infrastructure developers, private power gencos

Metals (Negative)

Levy of import duty of 2.5% on coking coal.

Negative for steelmakers

9
UNION BUDGET, 2014 - 2015

SECTOR
UPDATES

Oil & Gas (Negative)

Proposed a complete overhaul of subsidy regime. However, no concrete steps/ timelines for
subsidy reduction were announced.

Customs duties on ethylene, propylene, butadiene and ortho-xylene cut to 2.5% from 5%

PPP models to be employed for developing gas pipelines infrastructure

Negative for Oil PSUs as Street expected roadmap for subsidy reduction

Realty (Positive)

To provide necessary incentives and a conducive tax regime for REITs, however, further
easing of tax essential for minimizing leakage which is a must for REITs to succeed.

Lower minimum area and capital requirements for FDI in real estate

Increased tax incentives on home loans (higher limits under Sec 24b and 80C)

These measures will improve liquidity for the sector

Telecom (Negative)

Budgeted amount from telecommunication services at Rs 455 bn. This includes estimated
receipts of ~Rs 300 bn from auction of 1800 MHz, 900 MHz and 800 MHz bands and one-time
spectrum charges.

Imposed basic customs duty at 10% on specified telecommunication products

Likely higher payout for 900 Mhz to increase leverage and cost of operating business

9
UNION BUDGET, 2014 - 2015

FINANCIAL
SECTOR

Capital Market Uniform KYC and single operating demat account

Introduction of uniform KYC norms and inter-usability of the KYC records across the entire
financial sector.

Introduce one single operating demat account

Both these measures are a positive for the capital markets. Ease of transactions from an
operational point of view for investors/customers/clients will be enhanced. This should also
help attract more number of investors to the financial sector as a whole.

Small Savings

Kissan Vikas Patra (KVP) to be reintroduced

A special small savings instrument to cater to the requirements of educating and marriage of
the girl child to be introduced.

A National Savings Certificate (NSC) with insurance cover to provide additional benefits for the
small saver

In the Public Provident Fund (PPF) scheme, annual ceiling will be enhanced to Rs 1.5 Lakh
p.a. from Rs 1 Lakh p.a. at present.

Positive. The reintroduction of the KVP after its closure close to 2.5 years ago is a welcome
move. Alongwith the NSC, this could give small savers an additional attractive option from a
fixed income perspective. That apart, the enhancement of the PPF limit is also a constructive
move since at present, the PPF is about the only instrument which falls under the exemptexempt-exempt (EEE) regime.

The EEE essentially means that the investors money at the time of investment is exempt from
(income) tax (the first E), the interest earned on PPF is also exempt from tax (the second E)
and the maturity proceeds too are exempt from tax (the third E).

9
UNION BUDGET, 2014 - 2015

MUTUAL
FUNDS

Non equity oriented funds tax arbitrage removed

To remove tax arbitrage, rate of tax on long term capital gains (LTCG) increased from 10
percent to 20 percent after allowing indexation benefit on transfer of units of mutual funds,
other than equity oriented funds

Also, the period of holding in respect of such units increased from 12 months to 36 months for
the said purpose

Currently, LTCG was applicable for units held for more than 1 year

This amendment will take effect from 1st April, 2015 and will accordingly apply in relation to the
assessment year 2015-16 and subsequent years

Investors will have to factor the change in the taxation laws before investing or redeeming
investments in non equity oriented mutual funds

DDT on gross instead of net amount

Income and dividend distribution tax to be levied on gross amount instead of amount paid net
of taxes

This amendment will take effect from 1st October, 2014

There will be less distributable surplus left in the hands of the investor post this announcement
(investors will get lower dividend since effective tax rate will go up)

Increase in limit of Section 80 C

This is a positive for Equity Linked Savings Scheme (ELSS)

9
UNION BUDGET, 2014 - 2015

EQUITY
MARKET
OUTLOOK
AND STRATEGY

Since the beginning of this year, equity markets have rallied on the back of
expectations of a stable and pro business friendly government at the Centre

This rally was further strengthened by the outcome of the General Election results.
BJP led NDA won by a comfortable majority

FIIs pumped in $5.8 bn in the last quarter on anticipation of turnaround in the

economy with strong verdict in favour of business friendly Govt. led by Mr Modi who
has a successful history of leading the state of Gujarat

Post the election results, Indian markets looked forward to the Union Budget.
Expectations were being built up on the steps the new government would take to
boost the economy

The maiden NDA Budget delivered a non-negative and yet pro-growth budget, while
reiterating the reforms agenda

The steps announced in the budget can only be the beginning of a journey towards a
sustained growth of 7-8 per cent or above within the next 3-4 years along with
macro-economic stabilization

We recommend investors to accumulate equities from a 3 to 5 years

investment horizon

Equity market valuations are also reasonable when compared to their long term
Price to Earnings (P/E) averages

We advise Diversified Equity, Large Cap and Mid Cap funds

10
UNION BUDGET, 2014 - 2015

DEBT
MARKET
OUTLOOK
AND STRATEGY

The government retained the fiscal deficit target of 4.1% as was outlined in the
interim budget. This was against market consensus which had anticipated an
additional borrowing in the range of INR 300-400 bn. This should be reassuring to
the bond markets

However, the quality of fiscal deficit is a concern. The Revenue targets seem to be
optimistic. This could prove a dampener in sentiments for the bond markets

Markets would also keep a close eye on inflation numbers. While CPI and core CPI
trajectory is expected to fall in coming months due to base effect, markets would be
assessing the sustainability of the fall

RBI is unlikely to lower rates in the near term. Any threats to inflationary trajectory
might lead RBI to even tighten the rates

Another positive trigger could arise from any move to increase G-Sec limits for
foreign investors

At current levels, many negatives already seem to be priced into G-sec yields. The
likelihood of G-Sec yields moving much higher from current levels seems unlikely.
They are likely to be range-bound in the near term, however they can come off in the
medium term. We continue to advise investors to use these levels to
accumulate Long Term Income , Gilt and Dynamic Bond Funds with a horizon
of 18 to 24 months

Short term income funds can be recommended for investors with an

investment horizon of 9 to 12 months to benefit from current accruals levels and
capital appreciation, if any

Investors are advised to factor in the current changes in the income tax laws
pertaining to taxation of debt funds before making investments

The budget does not provide allocation for fresh tax-free bond issuances this year.
Due to lack of fresh issuances and continuous demand of tax free bonds, there could
be further improvement in the yields in the secondary market. Investors can invest
in tax free bonds at current levels in the secondary market
UNION BUDGET, 2014 - 2015

11

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UNION BUDGET, 2014 - 2015

DISCLAIMER

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Rulebook) who satisfy the regulatory criteria set out in the DFSAs rules, and should not be relied
upon, acted upon or distributed to any other person(s) other than the intended recipient.
UNION BUDGET, 2014 - 2015