The Union Budgets have enjoyed a fair share of attention and hype in India for long. And this year, the hype and eagerness surrounding the Budget is not surprising. The Union Budget for 2015-16 shall be the first full term budget being presented by the Finance Minister – Mr. Arun Jaitley for the new government. Riding on back of a popular mandate secured with promises of economic development for all, everyone seems to have a long list of expectations from the Budget.
The industry is keenly looking at the Union Budget 2015-16 with hope that the government would to define a new economic vision for India. There are strong expectations that the Budget would lay down a bold reforms plan to take the economy to above 7% growth trajectory in coming years. The recent actions by the government has lent credence to this expectation and reaffirmed faith in the government's resolve to initiate reforms.
We took an survey of fund managers to find out what these expectations were. Deliberately, we kept the replies open-ended but limited to a count of three so as to get clear and real responses. We gladly present to you the results of this survey. To make proper sense of these results, we look deeper into the top five expectations and explore the reasons why these grab a higher mind share; what exactly are the demands therein and the advantages that can be derived from out of them, if they actually fructify.
The Top 5 Expectations:
Fiscal Discipline
Fiscal discipline helps to reduce fiscal deficit which is the amount by which the central government receipts, excluding borrowings, fall short of expenditure. It is usually represented as a per cent of the GDP. The government usually finances it by borrowing from the market through issue of treasury bills and government securities. Fiscal discipline would thus mean that the government puts more checks and controls on undesired & unplanned expenditure, spend money where desired and also balance finances with higher revenues on the other hand. A higher fiscal deficit would mean that the government has less money to spend on priority areas and make higher borrowings and hence is undesired.
Fiscal discipline emerged as the most common and the highest rated expectation from the Union Budget with over 60% of fund managers mentioning same. Indeed, both the Finance Minister Mr. Arun Jaitley and Mr. Narendra Modi have reiterated the government's commitment for fiscal discipline time and again. The fiscal deficit target for year 2014-15 is of 4.1%. The underlying expectation would be to meet the target this year and a gradual decrease in the targets going forward.
Goods & Services Tax (GST) Implementation
It is said that the GST, if implemented, will be the biggest tax reform to happen in India since independence. GST is an indirect tax that will bring together most of the taxes that are imposed on all goods and services (except a few) under a single banner. This is in contrast to the current system, where heterogeneous taxes are levied separately on goods and services with Central and State governments and also local bodies. GST will create a single, unified Indian market with uniform tax rates which will be payable, as proposed, at the point of final consumption. Delay in implementation is due to lack on consensus on matters like the coverage list of goods & services, State government concerns on revenue loss, single or two rates (Central & State) for GST, a revenue neutral rate, etc.
The government has already moved a Constitutional Amendment Bill in the Lok Sabha to roll out GST, setting in motion plans to launch this ambitious tax reform from April 1, 2016. The government hopes to get the Bill passed in the Budget session. Most experts believe, that a comprehensive GST will ease business, reform taxation structure, help free movement of goods & services, broaden tax base and thus help make the economy stronger. Not surprisingly, in our survey, clear road-map for GST implementation has emerged as the second most common expectation, even above economic reforms.
Economic Reforms
The Budget 2015 is seen as an important event which will lay road-map for economic reforms. Everyone is hoping for new initiatives from the government to push economic growth. The government has already initiated some strong reform measures in the last session and also showed its' resolve by unleashing ordinances. However, given expectations, the hope is for more of bolder and structural reforms.
The major thrust of reforms is expected to be in areas like simplifying laws, making business easier, infrastructure push, reducing government role, etc. Reviving investment demand and controlling revenue leakage, both seen as major growth propellers, should be among the top priorities of the Budget. There is a lot of emphasis on reviving the manufacturing sector which today contributes around 15% to the GDP; a very small share given its' potential. More attention and reforms supporting the ‘Make in India’ initiative is thus likely to happen. On the question of ordinances, as next step, the government requires ratification of the related bills within six weeks of the parliament reconvening. And that will be a test for the government.
Rationalisation of Taxes
The topic of taxation has been in debate for quite some time. Recently, FM Mr. Arun Jaitley said that the government would look at rationalisation of taxes in non-adversarial manner and will ensure budget proposals are more transparent. The misadventure of retrospective taxation and matters of tax disputes landing in courts, has visibly hurt investments and global image of India in doing business. Thus there is the expectation of the tax regime to be predictable, consistant, transparent, non-adversarial, rational and conducive to growth.
GST, as already discussed, is a big expectation. High among other industry demands is restriction of Minimum Alternate Tax (MAT) rate to 10% to support manufacturing and relief from MAT and Dividend Distribution Tax (DDT) for developers and units in SEZs. Accompanied are also expectations for lower taxes for corporates and individuals to boost economic growth and deference of GAAR. Tax holidays and other sops are also expected to boost manufacturing sector.
Subsidy Reduction / Streamlining
In the Vibrant Gujarat Summit, PM Mr. Modi said subsidies & social spending for poor were needed as they were critical to ensure their support & livelihood. The focus of the government, it stated, is on increasing the efficiency & effectiveness of delivery of such subsidies while reducing wastages. The focus is also on reduction /removal of subsidies viewed to be non-essential. Experts suggest that broadly, subsidies face problems like not reaching the target audience, distorting market prices & structures, fostering corruption and finally putting strain on the budget.
The new government has acted on both agendas of improving efficiency while reducing subsidy burden. Measures like diesel price deregulation and launch of the cash transfer programme for cooking gas are pointers to the government's focus. Still there is are many myriad subsidies in India from food, fertilizers, power, employment, etc. that are crying for reforms. Reducing unwarranted subsidies and improving delivery will help put more money into government pockets to put money where needed.
Other notable expectations that featured in our survey were as follows...
- Strong infrastructure push
- Initiates to ease of doing business
- Implementation of Direct Tax Code
- Clearance of the ordinances
Conclusion:
We believe that Budget is usually over-hyped as decisions can be made by the government at any time, with or without the parliament session in progress. Having said that, the focus on Budget session does merit some of the attention, given that it is one opportunity to showcase the agenda and reforms path to the world. As far as expectations are concerned, there would be no end to it with every section having its' own demands. Fulfilling all these expectations is not possible for any government that has budgetary restraints, structural limitations and a federal constitutional framework to work with in addition to minority numbers in upper house. As Rome was not built in a day, it would be unfair to expect all big bang reforms to be initiated in a very short time. There are may experts that believe that the reform process should be a continuous and in a gradual, well thought and planned manner so that there are no shocks or unexpected outcomes. What is rightly needed now is for the budget to make an unambiguous, reaffirmation of the government's resolve of walking the reforms path and doing what is necessary. The budget should be a statement of this government's resolve. And that would be a fair expectation for now.
We are thankful for the whole-hearted participation of the fund managers from the following AMCs in the survey: (1) BNP Paribas Mutual Fund (2) Canara Robeco Mutual Fund (3) HDFC Mutual Fund (4) ICICI Prudential Mutual Fund (5) LIC Nomura Mutual Fund (6) Mirae Asset Mutual Fund (7) Sundaram Mutual Fund (8) TATA Mutual Fund.