Impact on Fixed Income
The bond market reaction to the FY 14 budget has been negative on account of the higher gross borrowing figures though the net borrowing numbers show no significant change. The gross borrowing numbers have been higher to the tune of Rs.500bn on account of the proposed buyback of government securities maturing in FY 15. It means that the government is borrowing higher in FY14 so as to reduce the gross borrowing in FY15 by buying back the securities maturing in FY15.
Overall the government has stuck to its budget deficit commitment of 4.8%, though the gross borrowings are higher on account of buyback of government security maturing in FY15.
We believe that the higher gross borrowings numbers will lead to gradual steepening of the curve. The 10yr government securities yield has gone up by 7 bps, trading at 7.86%.
Impact on Equities
Budget falls shorts of any bold ideas to revive the flagging investment sentiment, though it has given a distinct preference to Capital spending in its Expenditure plans. It manages to achieve fiscal consolidation on paper, but as always execution will be the key. Significant increases assumed in disinvestment and reductions assumed in subsidies. In the run up to elections and in the absence of any clear policy risk of slippage remains as earlier. Increases in tax and no major benefit to capital market sector are also somewhat disappointing.
The good part is that equities usually shrug off the impact of budgets fairly soon. We expect something similar this time too.
Key Highlights of the Budget 2014
Ø Fiscal deficit for the current year contained at 5.2% and for the year 2013-14 at 4.8%.
Ø Revenue deficit for the current year at 3.9% and for the year 2013-14 at 3.3%.
Ø By 2016-17 fiscal deficit to be brought down to 3 %, revenue deficit to 1.5% and effective revenue deficit to zero per cent.
Ø Revised Estimates (RE) of the expenditure in 2012-13 at 96% of the Budget Estimates (BE) due to slowdown and austerity measures.
Ø During 2013-14, BE of total expenditure of Rs. 16, 65,297 crore and of Plan Expenditure at Rs. 5, 55,322 crore.
Ø Plan Expenditure in 2013-14 to grow at 29.4% over Revised Estimates for the current year. Non Plan Expenditure is estimated at Rs.11, 09,975 crore.
Ø Rs 27,049 crore allocated to Ministry of Agriculture, an increase of 22 per cent over the RE of current year.
Ø For 2013-14, target of agricultural credit kept at Rs. 7 lakh crore
Ø Need of new and innovative instruments to mobilise funds for investment in infrastructure sector. Measures such as:
o Infrastructure Debt Funds (IDF) to be encouraged,
o IIFCL to offer credit enhancement.
o Infrastructure tax-free bond of Rs. 50,000 crore in 2013-14,
o Build roads in North eastern states and connect them to Myanmar with assistance from WB & ADB,
o Raising corpus of Rural Infrastructure Development Fund (RIDF) to Rs. 20,000 crore and
o Rs. 5,000 crore to NABARD to finance construction for warehousing. Window to Panchayats to finance construction of godowns
Ø Companies investing Rs. 100 crore or more in plant and machinery during the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15 per cent of the investment.
Ø SEBI will simplify the procedures and prescribe uniform registration and other norms for entry for foreign portfolio investors.
Ø Rule that, where an investor has a stake of 10 per cent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 per cent, it will be treated as FDI will be laid.
Ø FIIs will also be permitted to use their investment in corporate bonds and Government securities as collateral to meet their margin requirements.
Ø FIIs will be permitted to participate in the exchange traded currency derivative segment to the extent of their Indian rupee exposure in India.
Ø Stock exchanges to be allowed to introduce a dedicated debt segment on the exchange.
Ø Modified provisions of GAAR will come into effect from 1.4.2016.
Ø Relief for tax payers in the first bracket of Rs.2 lakhs to Rs. 5 lakhs. A tax credit of Rs. 2000 to every person with total income upto Rs.5 lakhs.
Ø Need to incentivise greater savings by household sector in financial instruments. Following measures proposed:
o Rajiv Gandhi Equity Savings Scheme to be liberalised.
o Additional deduction of interest up to Rs. 1 lakh for a person taking first home loan upto Rs. 25 lakh during period 1.4.2013 to 31.3.2014
o In consultation with RBI, instruments protecting savings from inflation to be introduced.
Ø Surcharge of 10% on persons (other than companies) whose taxable income exceed Rs. 1 crore to augment revenues.
Ø Increase surcharge from 5 to 10% on domestic companies whose taxable income exceed Rs.10 crore.
Ø In case of foreign companies who pay a higher rate of corporate tax, surcharge to increase from 2 to 5%, if the taxable income exceeds Rs.10 crore.
Ø In all other cases such as dividend distribution tax or tax on distributed income, current surcharge increased from 5 to 10%.
Ø Additional surcharges to be in force for only one year.
Ø Security Transaction Tax rates cut from 0.017 to 0.001%for equity futures. Small cuts for mutual fund and derivatives too. Commodity transaction tax coming up only on non-agricultural commodities.
Ø No change in the normal rates of 12% for excise duty and service tax.
Ø No change in the peak rate of basic customs duty of 10% for non-agricultural products.