Good, Bad and Ugly of Union Budget 2015

Just like everyone else in the world, India likes grandiose plans and announcements. These give people reason to cheer and uplift sentiments. They also give a sense of purpose and new hopes to millions. Everyone look forward to big bang announcements in the budget.  Anything less fails to impresses the intelligentsia.

The Union Budget during NDA regime in 1999-2004 brought big bang road projects – Golden Quadrilateral, North South, East-West, etc.

Good: Approach

This budget has addressed some issues that limit growth of the country as “business hub” such as financing for MSME, deferring GAAR for foreign investors, transfer pricing, addressing inverted duty structure, etc.  The bigger success story of this budget – increase in general tax structure across service tax, corporate tax, tax on super HNI and excise duty – has not received much media attention or protest. This tax increase will help bring in much needed funds to kick start the investment cycle in the economy.

Badly Designed scheme

Before the budget, we highlighted the dire need to utilise the gold stockpiles in Indian households. This will arrest rise in gold prices, reduce forex outflow and curb speculative demand (India consumes 1/3rd of global production of about 2,400 tons per annum).A “gold deposit / bond” initiative was announced. It is well intentioned but is destined to fail because of its structure and mechanics.

Much of the gold is used for storage and circulation of black money. Therefore, such holders will hesitate to expose this inventory to the government. The initiative needs to be implemented as an amnesty scheme to encourage voluntary disclosure and allay fears of backlash. Previous attempts to launch gold bonds were not successful due to similar practical problems.

REITs- Example of London, Business Trust, Commercial Real Estate

Real Estate Investment Trusts (REITs) allow segmentation of returns to better match needs of various classes of investors. Long-term investors such as pension funds require stable, predictable income flows while developers or property owners wish to unlock value of their investment and redeploy it into other projects. Usually REITs are attractive at  payouts of 4-5% over risk free rate.

However, yields are lower than cost of capital. This fact because of high property prices, transaction in cash and real-estate as avenue for deploying black money. No sane investor would invest in commercial real-estate REIT at 8% when government bonds are yielding 7.5% p.a.

REITs will not take off unless measures to significantly cool off property prices are taken.

Ugly: Intention 

The 14th finance commission recommended steps towards federalism and increase in sharing of revenues with the states by 10% taking it to 42%. The budget casts doubts on government’s intentions. It has used cess and surcharges at various places that are not shared with states. For example excise duty structure on petrol and diesel is partially converted to cess; wealth tax has been abolished but substituted with additional tax on super rich. States will now get 37% of collections by the government this year in contrast to 36%last year after all the accounting jugglery.

The government is keen to promote reviving of industrial climate in the country. Creation of new capacity has multiplier impact on the economy and job creation. This, however, remains a distant dream.

Most of the foreign investment FDI which has come in the country over the last few years has resulted in acquisition of existing assets rather creation of new capacity. Private sector only invests when capacity utilization reaches 95% on sustainable basis. Foreign capital will rush in when GDP grows above 7% for two to three years.  The challenge for the Union government will be how to revive the economy when it is racing against time and aspiration of millions.

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