Union Budget 2015-16

Continuity, simplification & incrementalism

Saturday, 28 February 2015

OPINION

FM sails without rocking the boat

Team InvesTrekk
investrekk@gmail.com

The first full budget of the incumbent NDA government reinforces the trend
seen in past three years. The focus continues on gradual simplification in the
tax laws and procedures, withdrawing the fiscal stimulus, and building rural
infrastructure. "Incrementalism" against "Big bang" has been the strategy and
continues to be so.
The question "whether FM could have done more?" is unfructuous in our view.
Market economists dominate - Financial markets get a cause to cheer
In a material departure from the past, the Union Budget, much like Railway
Budget, has a distinct mark of the dominance of market economists.
Historically the budget had been dominated by development economists.
Financial markets should find a cause to cheer in this.
Vision 2022 - all encompassing development, execution to improve
The vision 2022 of the PM Modi finds some feet on the ground with this
budget. The budget presents firm indications of execution strategy and plan
for the vision to effect a wholesome improvement in the life of
underprivileged (housing, water, power, health, education, access). "Plug
and play" could be a game changer for infrastructure sector investments.
Accelerated globalization - focus shifts on "enablement" from "provision"
The budget seeks to accelerate the move towards globalization of fiscal
practices and development policies. For example, consider the follwoing:
(a) Social security for all.
(b) Shades of Obamacare in health insurance, ESI to mediclaim etc.
(c) 401K makes an appearance in the form of 80CCD
(d) Platform for creating multiple layers of leverage
(e) Cashless society living on plastic money
(f)

Foreign assets and income to strictly monitored & taxed just like US.

Policy focus is conspicuously shifting on enablement of youth through skilling,

inclusion and access rather than just providing through subsidies and doles.

This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives,
financial situation and the particular needs of any specific person. Readers should seek financial advice regarding the appropriateness
of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should
understand that statements regarding future prospects may not be realized. InvesTrekk Global Research (P) Limited does not provide
portfolio management, stock broking or any other fund based service. The model portfolios mentioned in this report are merely to
illustrate the investment style and strategy recommended in the present times.
Please refer to the important disclosures at the end of this report.
Copyright 2012 InvesTrekk Global Research (P) Limited. All rights reserved. InvesTrekk Trekking the path less travelled and InvesTrekk
are trademarks of InvesTrekk Global Research (P) Limited.

28 February 2015

Key highlights - Union Budget FY16

Vision 2020
Housing for all - 2 crore houses in Urban areas and 4 crore houses in Rural
areas.
Basic facility of 24x7 power, clean drinking water, a toilet and road
connectivity.
At least one member has access to means for livelihood.
Substantial reduction in poverty.
Electrification of the remaining 20,000 villages including off-grid Solar
Power- by 2020.
Connecting each of the 1,78,000 un-connected habitation.
Providing medical services in each village and city.
Ensure a Senior Secondary School within 5 km reach of every child, while
improving quality of education and learning outcomes.
To strengthen rural economy - increase irrigated area, improve the
efficiency of existing irrigation systems, and ensure value addition and
reasonable price for farm produce.
Ensure communication connectivity to all villages.

Key Challenges
Agricultural income under stress
Increasing investment in infrastructure
Decline in manufacturing
Resource crunch in view of higher devolution in taxes to states
Maintaining fiscal discipline

A step further in inclusion

Micro Units Development Refinance Agency (MUDRA) Bank, with a
corpus of Rs20,000cr, and credit guarantee corpus of Rs3,000cr to be
created. MUDRA Bank will be responsible for refinancing all Micro-finance
Institutions which are in the business of lending to such small entities of
business through a Pradhan Mantri Mudra Yojana.
In lending, priority will be given to SC/ST enterprises.
A Trade Receivables discounting System (TReDS) which will be an
electronic platform for facilitating financing of trade receivables of
MSMEs to be established.
Postal network with 1,54,000 points of presence spread across villages to
be used for increasing access of the people to the formal financial
system.

28 February 2015

Social security
Government to work towards creating a functional social security system
for all Indians, specially the poor and the under-privileged.
Pradhan Mantri Suraksha Bima Yojna to cover accidental death risk of Rs2
Lakh for a premium of Rs12 per year.
Atal Pension Yojana to provide a defined pension, depending on the
contribution and the period of contribution. Government to contribute
50% of the beneficiaries premium limited to Rs1,000 each year, for five
years, in the new accounts opened before 31st December 2015.
Pradhan Mantri Jeevan Jyoti Bima Yojana to cover both natural and
accidental death risk of Rs2 lakh at premium of Rs330 per year for the age
group of 18-50.
Unclaimed deposits of about Rs3,000 crores in the PPF, and approximately
Rs6,000crores in the EPF corpus to be appropriated to a corpus, which will
be used to subsidize the premiums on these social security schemes.
Tax incentives increased for contribution to Pension Funds.

Infrastructure
Sharp increase in outlays of roads and railways. Capital expenditure of
public sector units to also go up.
National Investment and Infrastructure Fund (NIIF), to be established with
an annual flow of Rs20,000 crores to it.
Tax free infrastructure bonds for the projects in the rail, road and irrigation
sectors.
PPP mode of infrastructure development to be revisited and revitalised.
Conversion of existing excise duty on petrol and diesel to the extent of Rs4
per litre into Road Cess to fund investment.
Atal Innovation Mission (AIM) to be established in NITI to provide
Innovation Promotion Platform involving academicians, and drawing
upon national and international experiences to foster a culture of
innovation , research and development.
(SETU) Self-Employment and Talent Utilization) to be established as
Techno-financial, incubation and facilitation programme to support all
aspects of start-up business. Rs1000 crore to be set aside as initial amount
in NITI.
Proposed legislation to replace the need for multiple prior permission by a
pre-existing regulatory mechanism. This will facilitate India becoming an
investment destination.
5 new UMPPS, each of 4000MW, in Plug-and-Play mode.
Target of renewable energy capacity revised to 175000 MW till 2022,
comprising 100000 MW Solar, 60000 MW Wind, 10000 MW Biomass and
5000 MW Small Hydro.
The National Optical Fibre Network Programme (NOFNP) to be further
speeded up by allowing willing states to execute on reimbursement of
cost basis.
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28 February 2015

Budget highlights Financial Markets

Foreign investments in Alternate Investment Funds to be allowed.

Distinction between different types of foreign investments, especially

between foreign portfolio investments and foreign direct investments to
be done away with. Replacement with composite caps.
Tax pass through to be allowed to both category I and category II
alternative investment funds.
Rationalisation of capital gains regime for the sponsors exiting at the time
of listing of the units of REITs and InvITs.
Rental income of REITs from their own assets to have pass through facility.
Permanent Establishment (PE) norm to be modified to encourage fund
managers to relocate to India.
MAT rationalised for FIIs.
Public Debt Management Agency (PDMA) bringing both external and
domestic borrowings under one roof to be set up this year.
Forward Markets commission to be merged with SEBI.
Section-6 of FEMA to be amended to provide for control on equity
capital flows by Government in consultation with RBI.
Proposal to create a Task Force to establish sector-neutral financial
redressal agency that will address grievance against all financial service
providers.
India Financial Code to be introduced soon in Parliament.
Gold monetisation scheme to allow the depositors of gold to earn interest
in their metal accounts and the jewellers to obtain loans in their metal
account to be introduced.
Sovereign Gold Bond, as an alternative to purchasing metal gold scheme
to be developed.
Permanent Establishment (PE) norm to be modified to encourage fund
managers to relocate to India.

28 February 2015

Key tax proposals

Businesses
Rates of corporate tax remain unchanged.

Surcharge increased from 5% to 7% and from 10% to 12% for domestic

companies where income exceeds Rs10mn & Rs100mn respectively.
Tax rate for income of non-residents (including foreign companies) by
way of royalty or FTS reduced from 25% to10%.
Where income of a company from its share in an AOP or BOI is exempt,
then such income and its corresponding expenditure will not be taken
into consideration while calculating book profits under MAT provisions.
Certain income from sale of securities by Fll not to be taken into account
for calculating book profits under MAT.
The definition of charitable purpose now includes 'Yoga'.
Clarifications on taxability of indirect transfer of shares deriving substantial
value from assets in India. 'Substantial' value clarified to mean 50% Indian
assets vis a-vis global assets and minimum Indian assets of INR 100 million.
Indirect transfer of shares of an Indian company pursuant to
amalgamation or demerger of foreign companies shall be exempt from
capital gain tax subject to fulfilment of prescribed conditions.
Cost of acquisition and period of holding of capital assets of demerged
company to continue post demerger for the resulting company.
Applicability of GAAR deferred by 2 years and will now be applicable
from financial year 2017-18.
Concept of place of effective management introduced to determine
residential status of foreign company.
Higher additional depreciation and additional investment allowance on
acquisition and installation of new assets in the State of Andhra Pradesh
and State of Telangana.
100% Deduction on donation made to National Fund for Control of Drug
Abuse, Swachh Bharat Kosh and Clean Ganga Fund.
30% deduction of additional wages paid to new regular workmen in
excess of 50 regular workmen employed.
Pass through status provided to Category I and Category II AIFs.
Proposal to reduce corporate tax from 30% to 25% over the next four
years, starting from next financial year.
Rationalisation and removal of various tax exemptions and incentives to
reduce tax disputes and improve administration.
Monetary limit for a case to be heard by a single member bench of ITAT
increase from Rs5lakh to Rs15lakh.
Domestic transfer pricing threshold limit increased from Rs5cr to Rs20c.

28 February 2015

Personal income-tax
No change in the rates of income tax.
Surcharge increased from 5% to 7% and from 10% to 12% where taxable
income exceeds Rs10mn & Rs100mn respectively.
Limit of deduction of health insurance premium increased from Rs15,000
to Rs25,000, for senior citizens limit increased from Rs20,000 to Rs30,000.
Senior citizens above the age of 80 years, who are not covered by health
insurance, to be allowed deduction of Rs30,000 towards medical
expenditures.
Deduction limit of Rs60,000 with respect to specified decease of serious
nature enhanced to Rs80,000 in case of senior citizen.
Additional deduction of Rs25,000 allowed for differently abled persons.
Limit on deduction u/s 80C on account of contribution to a pension fund
and the new pension scheme increased from Rs1lakh to Rs1.5 lakh.
Additional deduction of Rs50,000 for contribution to the new pension
scheme u/s 80CCD.
Payments to the beneficiaries including interest payment on deposit in
Sukanya Samriddhi scheme to be fully exempt.
Service-tax exemption on Varishtha Bima Yojana.

Indirect taxes
Excise duty
Effective median excise duty rate increased from 12.36% to 12.50%.
Education cess and secondary and higher education cess exempted on
all goods.
Manufacturers can issue digitally signed invoices and maintain records in
electronic form.
Service tax
Effective service tax rate to be increased from 12.36% to 14%, from a date
to be notified.
Education cess and secondary and higher education cess to be
removed from a date to be notified.
Negative list pruned.

28 February 2015

Curbing black money - highlights

Evasion of tax in relation to foreign assets to have a punishment of
rigorous imprisonment upto 10 years, be non-compoundable, have a
penalty rate of 300% and the offender will not be permitted to approach
the Settlement Commission.
Non-filing of return/filing of return with inadequate disclosures to have a
punishment of rigorous imprisonment upto 7 years.
Undisclosed income from any foreign assets to be taxable at the
maximum marginal rate.
Mandatory filing of return in respect of foreign asset.
Entities, banks, financial institutions including individuals all liable for
prosecution and penalty.
Concealment of income/evasion of income in relation to a foreign asset
to be made a predicate offence under PML Act, 2002.
PML Act, 2002 and FEMA to be amended to enable administration of new
Act on black money.
Benami Transactions (Prohibition) Bill to curb domestic black money to be
introduced in the current session of Parliament.
Acceptance or re-payment of an advance of ` 20,000 or more in cash for
purchase of immovable property to be prohibited.
PAN being made mandatory for any purchase or sale exceeding Rupees
1 lakh.
Third party reporting entities would be required to furnish information
about foreign currency sales and cross border transactions.
Provision to tackle splitting of reportable transactions.
Leverage of technology by CBDT and CBEC to access information from
eithers data bases.

28 February 2015

Budget Estimates
.

Non-Plan expenditure estimates for the Financial Year are estimated at

Rs13,12,200cr.
Plan expenditure is estimated to be Rs4,65,277cr.
Gross Tax receipts are estimated to be Rs14,49,490c.
Devolution to the States is estimated to be `5,23,958. Share of Central
Government will be `9,19,842.
Non Tax Revenues for the next fiscal are estimated to be Rs2,21,733cr,
including Rs69,500cr from disinvestment of PSEs.
Fiscal deficit will be 3.9% of GDP and Revenue Deficit will be 2.8% of GDP.

28 February 2015

Fiscal roadmap
Assumptions
The Gross tax revenue has been estimated at 10.3 per cent of GDP in
Budget 2015-16, with a growth of 15.8 per cent over RE 2014-15.
Projections for 2015-16 have been made taking into account a realistic
economic recovery and continuation of set of tax measures announced
in the budget for 2014-15. It is also expected that reforms in the
administrative machinery oriented towards strict implementation will yield
result.
For the budget of 2015-16, receipts from disinvestment have been
estimated at Rs41,000 crore. However, as additional resource mobilization
to meet the revenue shortfall following 14th Finance Commission, ` 28,500
crores have been estimated to flow from strategic disinvestments. These
include sale of government holdings in non-government commercial
entities, SUUTI, BALCO, HZL etc. Over the medium term frame work, an
amount of Rs55,000cr and Rs50,000cr has been estimated for the years
2016-17 and 2017-18 respectively.
Total borrowings requirement for 2015-16 has been budgeted at
Rs5,55,649cr.
Interest payment is projected at 49.6% of net tax to Centre, which is
marked increase over the last year despite fiscal consolidation underway.
Major subsidies have been budgeted in 2015-16 at 1.6 per cent of GDP as
against 2.0 per cent in BE 2014-15.
the GDP at current market prices expected to achieve a growth of 11.5
per cent in 2015-16 (real growth of 8.5 per cent and an implied inflation of
2.8 per cent) to attain a level of Rs14108945cr (US$2.28trn with USD= Rs62).

28 February 2015

Background of the Union Budget for FY16

Based on Economic
Survey for 2014-15

The Union Budget for the fiscal year 2015-16 presented today is the first full
scale budget of the incumbent government. Having given an overwhelming
political mandate for faster, inclusive and sustainable development to the
Prime Minister, all stakeholders have been looking forward to this budget with
great anticipation of delivery on promises.
The government has delivered in right earnest inasmuch as administrative
corrections are concerned. However, the economic reforms remain a work in
progress and standing at this juncture in time, the road does not look smooth.
The economic survey for the year 2014-15, presented in the Parliament
yesterday succinctly highlights the bumps in the road ahead and the strategy
to move forward. The Budget should be interpreted in juxtaposition with this
background to arrive at appropriate conclusion.
Highlights of the Economic Survey 2014-15

Real GDP Growth Rate for FY2015 pegged at 7.4%.

Average CPI to stand at 6.2% in FY2015. A further deceleration is

expected opening up the space for further monetary policy easing

Assuming a further moderation in average annual price of crude oil the

current account deficit is estimated at less than 1.0% of GDP in FY2016

Risks from a shift in US monetary policy and turmoil in the Eurozone need
to be watched but could remain within control

Indias services sector has grown rapidly in last decade with almost 72.4%
of the growth in Indias coming from this sector which is growing in 2 digits

Indias e-commerce market is expected to grow by more than 50 per

cent in the next five years

Proposals for the next five years, in renewable energy, are likely to
generate business opportunities of the order of US$ 160 billion

With contained inflation and fiscal deficit, Liquidity conditions are likely to
remain benign in FY2016.

To remain strong at external front, India should target foreign exchange

reserves of $750Bn - $1 Tn over the long term

Expenditure control and expenditure switching, from consumption to

investment, both in the short and medium term will be key for maintaining
fiscal discipline

Raising economy-wide skills must complement efforts to improve the

conditions for manufacturing

Skill India objective should be accorded high priority along with, and
indeed in order to realize, Make in India

Infrastructure growth in terms of eight core industries has been higher

than industrial growth since 2011-12 and this trend is expected to
continue

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28 February 2015

Creative incrementalism with selected boldness

The policy stance of government so far has been incremental changes in
status quo rather than any "big bang" departure from the past. This stance is
likely to be maintained in the coming years also.
"Equally though, the mandate received by the government affords a
unique window of political opportunity which should not be foregone.
India needs to follow what might be called a persistent, encompassing,
and creative incrementalism but with bold steps in a few areas that
signal a decisive departure from the past and that are aimed at
addressing key problems such as ramping up investment, rationalizing
subsidies, creating a competitive, predictable, and clean tax policy
environment, and accelerating disinvestment.
Thus, Webers wisdom cannot be a licence for inaction or
procrastination. Boldness in areas where policy levers can be more easily
pulled by the center combined with that incrementalism in other areas is
a combination that can cumulate over time to Big Bang reforms. That is
the appropriate standard against which future reforms must be
assessed."
Lagging employment growth a worry
Unemployment is emerging to be the single most critical challenge for the
policymakers. The challenge is even more severe in case of urban skilled
workers who have been at the core of the India's urbanization so far. Given
the current demographics of the country, a year's delay in finding a suitable
job could jeopardize the whole professional career of a person.
Moreover, in past few years the rural wages have declined steadily thus
impacting the very fulcrum of the India's consumption story.
"Regardless of which data source is used, it seems clear that
employment growth is lagging behind growth in the labour force. For
example, according to the Census, between 2001 and 2011, labor force
growth was 2.23 percent (male and female combined). This is lower than
most estimates of employment growth in this decade of closer to 1.4
percent. Creating more rapid employment opportunities is clearly a
major policy challenge."

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28 February 2015
Dramatic macro improvement warrant caution
Helped by some prudent policy measures by the government, RBI, lower
global commodity prices and some improvement in business conditions, the
matrix of India's macro parameters has improved materially in past 4-6 qtrs.
However given the speed and nature of the improvement some caution is in
order and jumping to bold decisions may prove counterproductive at this
stage.
"Indias macroeconomic improvement has been nothing short of
dramaticinflation has been cut in half to about 5 percent today,
underlying rural wage growth has declined from over 20 percent to
below 5 percent, and the current account deficit has shrivelled from
over 6.7 percent of GDP (in Q 3, 2012-13) to an estimated 1.0 percent in
the coming fiscal year.
That said, there is hardly room for fiscal complacency. To understand
why, to realize where India needs to go, it is important to understand
where it has been, and to draw lessons from this experience. The similarity
between Indias situation today and in the early 2000s makes this
exercise especially important."
Corporate balance sheets stressed, execution to remain challenged
The revival of investment cycle and improvement in project execution is also
contingent upon strong corporate balance sheets. The data shows that the
stress in corporate balance sheets has risen materially in past five years.
"India needs to tread the path of investment-driven growth. Can the
private sector be expected to rise to the occasion? Highly leveraged
corporate balance sheets, and a banking system under severe stress
suggest that this will prove challenging."
"The biggest lesson from stalled projects and the associated credit aided
infrastructure bubble is that perhaps more than a run up problem (over
exuberant and misdirected private investment), we face a clean-up
problem (bankruptcy laws, asset restructuring, etc.). Creative solutions
are necessary for distributing pain equally amongst the stakeholders from
past deals gone sour.
An idea to fix the clean-up problem is setting up of a high powered
Independent Renegotiation Committee. In the presence of a market
and regulatory failure, perhaps a creative step would be to involve
external experts for a quick and independent resolution of the problems."
"Many infrastructure projects are today financially stressed, accounting
for almost a third of stressed assets in banks. New projects cannot attract
sponsors, as in recent NHAI bids, and banks are unwilling to lend. Given
its riskiness, pension and insurance funds have sensibly limited their
exposure to these projects. This current state of the public private
partnership (PPP) model is due to poorly designed frameworks, which
need restructuring."
As per a research study by Credit Suisse, almost one third of the companies
are not earning enough to meet their interest liability.
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28 February 2015

(ICR = Interest Coverage Ratio)

Banking sector repressed and stressed
The challenges in the Indian banking system fall into two categories: policy
and structure.
"The policy challenge relates to financial repression. The Indian banking
system is afflicted by what might be called double financial repression.
Financial repression on the asset side of the balance sheet is created by
the statutory liquidity ratio (SLR) requirement that forces banks to hold
government securities, and priority sector lending (PSL) that forces
resource deployment in lessthan-fully efficient ways.
Financial repression on the liability side has arisen from high inflation since
2007, leading to negative real interest rates, and a sharp reduction in
households financial savings. As India exits from liability-side repression
with declining inflation, the time may be appropriate for addressing its
asset-side counterparts."
The structural problems relate to competition and ownership. First, there
appears to be a lack of competition, reflected in the private sector
banks inability to increase their presence.
Indeed, one of the paradoxes of recent banking history is that the share
of the private sector in overall banking aggregates barely increased at a
time when the country witnessed its most rapid growth and one that was
fuelled by the private sector.
It was an anomalous case of private sector growth without private sector
bank financing. Even allowing for the irrational exuberance of the Public
Sector Banks (PSBs) that financed this growth phase, the reticence of the
private sector was striking.
Finally, even within the public sector banks there is sufficient variation in
performance. Viewing public sector banks as one homogenous block
would be a mistake."
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28 February 2015
Need for public investment, Railways selected to engine the growth
Since the new government assumed office, a slew of economic reforms has
led to a partial revival of investor sentiment. But increasing financial flows are
yet to translate into a durable pick-up of real investment, especially in the
private sector. This owes to a number of interrelated factors that stem from
what has been identified as the balance sheet syndrome with Indian
characteristics. If the weakness of private investment offers one negative or
indirect rationale for increased public investment, there are also more
affirmative rationales.
"The two biggest challenges facing increased public investment in India
are financial resources and implementation capacity. the trick is to find
sectors with maximum positive spillovers and institutions with a modicum
of proven capacity for investing quickly and efficiently. Two prime
candidates are rural roads and railways."
Conceptually, there is a strong case for channeling resources to
transport infrastructure in India given the widely known spillover effects of
transport networks to link markets, reduce a variety of costs, boost
agglomeration economies, and improve the competitiveness of the
economy, especially manufacturing which tends to be logistics-intensive.
However, resources need to be prioritized among sectors based on
assessments of risks, rewards, and capacity for efficient implementation."
Interest liability rising, subsidies, defence allocation down

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28 February 2015

Important disclosures
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any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative
related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). InvesTrekk reports are not intended to provide
personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any
specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment
strategies discussed or recommended in the reports and should understand that statements regarding future prospects may not be realized.
InvesTrekk Global Reseach (P) Ltd, does and seeks to do business with companies and people mentioned in various reports. Though, the author(s)
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contracts for differences). The reports are not intended to provide personal investment advice and these do not take into account the specific investment
objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of
investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements
regarding future prospects may not be realized.
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