The second most awaited event of the decade - The Union Budget 2015

When I was publishing the previous post, I realized that the largest democracy of the world is going to witness a very important event of the year – The Union Budget.

In May-2014, the world witnessed a historic event happening in India. After almost 3 decades, Indian people have given a clear mandate to a single party. The budget presented post the mandate was more like an interim budget as it was presented in June and the new government was yet to gain a proper understanding. Now, the budget being presented today (when I started writing this, it was 27-Feb-2014, so tomorrow was right; by the time I published, today is right) is a much anticipated event, not only by the Indian citizens but also by the international economies.

Seriously, everyone has a lot of focus on this budget and has many expectations from it. I feel, whenever there is too much of expectation, there is bound to be disappointment. So, don’t be surprised if the budget doesn’t meet your expectations. You are to be blamed! If you had toned down your expectations, you would be in for pleasant surprises. Failing which, you could be in for a rude shock! Having said that, I would like to summarize what this budget should ideally focus on.

GST: This indeed is important. Coal block auction and allocations of certain proceeds from this to state governments is a good way to win over them. It indeed is a step forward in implementing GST. Although this may actually be unimportant in the larger scheme of things, this one act has very far-reaching consequences that every investor would gain more confidence in the economy.

GAAR: Government has been acting weak on this. They have suddenly woken up about 3 years back and went back to sleep. It is tough on the investors but it is needed. No investor can take the country for granted. They can’t avoid tax deliberately and yet not pay penalties. Therefore, government should give some clarity on this. It may not be important that we do it in this year. However, it should give some commentary on its plan to implement this. This has to be consistently maintained and thus prepare the investors. It should also categorically state that this would not be applicable retrospectively.

Black Money: Some tough stands can be taken on this! But, is it not good to say now that “no action would be taken and a flat 25% or 20% or some such level would be levied”. Also, the government should, for the safety and the interest of the public give strong assurance that the names of the people disclosing and paying the tax wouldn’t be disclosed. This way the government would get some additional tax and it would reduce the black money in the system.

Subsidies: There are too many varieties of subsidies. It is simple that the subsidies are aimed at supporting the poor or the underprivileged. In such a case, improving the Direct Benefit Transfer (DBT) system by strengthening Aadhaar mechanism would be a very good idea. Petrol/ Diesel/ LPG subsidy should be withdrawn. This is the right time, as the current Crude and Natural Gas prices are low. So, government should make announcement in this budget to reduce the subsidy levels.

Improve Savings: Lately the savings percentage has been reducing. This could be a combination of two aspects, trend of greater consumption (reduced savings) and high inflation eating into the savings. To encourage savings, as all developed economies should have higher savings rate, government should tweak the tax structure on the earnings on the savings. As most of the bank savings are short term in nature, if some tax benefits are offered to those placing deposits (retail or corporates, it doesn’t matter) for more than 10 years, it would improve banks asset liability mismatches. This would help the banks to participate more vigorously in supporting the infrastructure growth required for the economic growth.

Capital Investment and Infrastructure: As the economy is struggling and as the private players are waiting to make investments in capacity expansion, government should address this by announcing large investments plans, the bet would be in the infrastructure domain. While this may result in crowding out the private investment, but where is the private investment now? It is already at the lows. We rank low on per capita roads, per capita power consumption, most of our villages still live in the dark without access to electricity. Even though we are the 3rd largest in coal resources, we don’t extract it enough. We have good scope to invest in green energies (Solar, Wind, etc.) as well. There should be incentives to infrastructure players in these critical areas. One way would be to reduce the capital requirements on the bank loans to these sectors.

Export encouragement: As we rank badly on the current account scene, the government should encourage investors and entrepreneurs to enter into export oriented businesses to improve our foreign currency reserves. To this effect, there should be some announcements made.

Reduce import dependence: Increase the import of those products that are available and can be manufactured in India. Put some tax savings scheme for those who invest in gold ETFs or such instruments which would reduce the purchase of physical gold. While this would reduce tax inflow, it would also reduce Foreign Exchange outgo. Striking some balance here would be a good idea. Mobiles are soon becoming a large component in the import basket. Give some tax sops to the Indian electronics manufacturers and increase import duty on import of electronic goods. This would also encourage foreign manufacturers to set up manufacturing facilities in India, thereby generating employment.

Food and Agri Businesses: The Farmer is the most ignored person in almost all the budgets. While the corporate do all the financial engineering to get the benefits of F&A policies, the most important person in this value chain is often left wanting. While MSP and Kisan Credit Cards are good policies, there are just the basics. There is a greater need to improve cold storage/ food supply chain. Government should continue existing and announce some more good policies in this direction.

There is a lot more the budget should focus on, too many things that need fixing. But, most importantly, this budget should show clearly that there is a long-term design to the announcements being made in this 2015 budget.