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17 February 2014

Union Budget 2014-15: Review The Finance Minister, Mr. P. Chidambaram presented the Interim Budget for 2014-15. The budget would be in place till June-2014. The budget aimed to continue its tight-walk for achieving fiscal consolidation, while emphasizing its objective to get India firmly on the growth path.

I. Revenue Side Revenue from tax collections (net) comprise close to 80% of the total revenue receipts of the government. For FY15, the overall growth from gross tax revenue is pegged at 19% over revised estimates. This number looks ambitious given that government was able to attain a growth rate of 12% for FY14 as compared to estimated growth rate of 19%. Both direct and non direct taxes fell short of targeted growth rates. However, indirect tax collection registered a single digit growth rate as per revised estimates of FY14 in comparison to budgeted target of close to 19%. This was largely anticipated given the slowdown that has been witnessed in manufacturing sector.

Bansi Madhavani [email protected] +91-22-6620 2243 Priyanka Sachdeva [email protected] +91-22-6620 2229

Table 1: Government Receipts (in Rs Cr) Actual BE RE 2012-13 2013-14 2013-14 Revenue Receipts 8,77,613 10,56,331 8,71,828 Tax (Net) 7,40,256 8,84,078 7,42,115 Non Tax 1,37,357 1,72,252 1,93,226 Non debt Capital Receipts 42,157 66,468 36,643 Recovery of loans 16,267 10,654 10,802 Other Receipts 25,890 55,814 25,841 Total Receipts 14,10,367 16,65,297 15,90,434

BE 2014-15 10,56,331 8,84,078 1,80,714 67,452 10,527 56,925 17,63,214

Source: Union Budget Documents, STCI PD Research

Non Tax revenue of the Centre includes interest receipts, dividends & profits and other receipts like proceeds from auction of telecom spectrum etc. Non tax revenues for FY15 are pegged lower as compared to revised estimates of FY14. This is because of the base effect since RE for FY14 recorded greater non revenue collections led by higher than budgeted collections under interest receipts and dividends and profits. The amount garnered through dividends and profits from PSUs stood at Rs. 88,187 Cr as compared to BE of Rs. 73,866 Cr. For FY15, the government has pegged this number marginally higher from BE of FY14 at Rs. 77,229 Cr and lower from RE of FY14. Further, interest receipts target at Rs. 19,729 Cr for FY15 is largely in line with the trend of previous estimates. Other communication services which include the receipts from spectrum auction are budgeted at 38,954 Cr. The RE under this head are retained at Rs.40,847 Cr as outlined in the BE of FY14. While the government raked in Rs.61,162 Cr in 2G spectrum auction, the telecom companies are given the option of payment in installments. Non Debt Capital receipts include recoveries of loans and advances and miscellaneous capital receipts which includes proceeds from divestment of government’s equity stake. Disinvestment receipts for FY15 are budgeted at Rs. 36,925 Cr. Collections under disinvestment receipts for FY14 are revised downwards from BE of Rs. 40,000 Cr to Rs. 16,027 Cr. This was expected as number of disinvestment projects were delayed due to unfavorable economic conditions. Apart from this, Rs. 15000 Cr is budgeted under divestment head. For FY14, the government collected Rs. 3000 Cr as compared to its BE of Rs. 14,000 Cr.

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17 February 2014

Table 2: Tax Break - Up (In Rs Cr) Actual BE 2012-13 2013-14 Gross Tax Revenue 10,36,235 12,35,870 Corporation Tax 3,56,326 4,19,520 Taxes on Income 2,01,487 2,47,639 Wealth Tax 846 950 Customs 1,65,346 1,87,308 Union Excise Duties 1,76,535 1,97,554 Service Tax 1,32,601 1,80,141 Taxes of Union Territories 3,094 2,758 Less - Transfers to Funds 4,432 4,800 Less - State's share 2,91,547 3,46,992 Less state's share adjustment Centre's Net Tax Revenue 7,40,256 8,84,078

RE 2013-14 11,58,906 3,93,677 2,41,691 950 1,75,056 1,79,538 1,64,927 3,067 4,650 3,18,230 6,084.02 8,36,026

BE 2014-15 13,79,199 4,51,005 3,06,466 950 2,01,314 2,00,585 2,15,478 3,401 5,050 3,87,732 9,86,417

Source: Union Budget Documents, STCI PD Research

II. Expenditure Side For FY15, budgeted estimate for Plan expenditure is maintained at the level of 2013-14 BE envisaging a growth rate of 16.8% over RE FY14. Non plan expenditure is budgeted to grow by 8% over RE FY14. The revised estimate for Plan expenditure stood lower in comparison to budgeted estimate as the government struggled to rein in fiscal deficit target of 4.8% of GDP. The Non plan expenditure was revised upwards for FY14 on account of upward revision in interest payments and subsidies. However the worrisome point is the increasing share of interest payments in Non plan expenditure. Interest payments nearly account for 45% of the net tax revenue of the centre. In BE for 2014-15, this number is projected at 43.3% of the net tax revenue of the centre. Table 3: Expenditure Break- Up (In Rs Cr) Actual BE RE BE 2012-13 2013-14 2013-143 2014-15 1. Revenue Expenditure 12,43,508 14,36,169 13,99,540 15,50,054 2. Capital Expenditure 1,66,858 2,29,128 1,90,894 2,13,160 Total Expenditure (1+2) (A+B) 14,10,367 16,65,297 15,90,434 17,63,214 A. Total Non Plan Expenditure 9,96,742 11,09,975 11,14,902 12,07,892 Interest payments 3,13,169 3,70,685 3,80,066 4,27,011 Defense 1,81,776 2,03,672 2,03,672 2,24,000 Subsidies 2,57,079 2,31,084 2,55,516 2,55,708 of which major subsidies 2,47,493 2,20,972 2,45,452 2,46,397 Grants to States 47,143 76,105 60,763 68,585 Other Non Plan expenditure 1,97,575 2,28,429 2,14,885 2,32,588 B. Total Plan Expenditure 4,13,625 5,55,322 4,75,532 5,55,322 Central Plan 3,04,739 4,19,068 3,56,493 2,16,760 Central Assistance for State and UT Plans 1,08,886 1,36,254 1,19,039 3,38,562 Source: Union Budget Documents, STCI PD Research

Another major contributor to the Non plan expenditure is the rising share of subsidies. For FY15, total subsidies payments are estimated at Rs. 2.46 lac crore and this is nearly 1.9% of the GDP. For 2

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17 February 2014

FY14, total subsidy burden was revised upwards due to greater outgo on account of petroleum subsidy. This was expected given the increased underecovery burden of OMCs due to sharp rupee depreciation. The reduction in subsidy burden is critical to embark on fiscal consolidation path. Going forward, the government expects to bring down the level of subsidy to 1.8% in FY15 and subsequently to 1.6% of GDP in FY16.

III. Fiscal Deficit Fiscal Deficit for FY14 has is revised to stand at 4.6% of GDP, better than the red line drawn by the FM of 4.8%. The fiscal deficit for FY15 is estimated at Rs 5.29 lac Cr, translating to 4.1% of GDP. Table 4: Sources of Financing Fiscal Deficit (in Rs Cr) 2012-13 2013-14 2013-14 Actual BE RE 1. Market Borrowings 5,20,707 5,03,844 4,76,580 Dated (Net) 4,67,356 4,84,000 4,68,902 Net buyback/switch (15,000) T-Bills (Net) 53,350 19,844 22,678 2. Securities against Small Savings 8,626 5,798 11,605 3. State Provident Funds 10,920 10,000 10,000 4. Other Receipts (6,223) 12,297 5,914 5. External Financing 7,201 10,560 5,440 Gross Fiscal Deficit 5,41,230 5,42,499 5,09,539

2014-15 BE 4,91,875 4,57,312 34,554 8,229 12,000 10,793 5,734 5,28,631

Source: Union Budget Documents, STCI PD Research

For FY14, the government has estimated an outflow to the tune of Rs 15,000 Cr attributed to the buyback program. The absolute fiscal deficit for 2013-14 is revised downwards by ~ Rs 33,000 Cr. The government had reduced the market borrowing size by Rs 15,000 Cr (auction originally scheduled for 17-Jan-14 deferred and then cancelled, subsequently, on 5-Feb-14). For FY14, while the total outflow under buyback/switch is estimated at Rs 45,601 Cr, the gross inflow is projected at Rs 30,601 Cr. The Budget 2013-14 had conceived the buyback/switch program to be fiscally and cash neutral. However, the 2013-14RE is budgeted to have an outflow to the extent of Rs 15,000 Cr. Relatively comfortable cash position is largely believed to be the reason behind this outright buyback (and not switch as was originally envisaged). The debt switch to the extent of ~ Rs 27,000 Cr has already been carried. The budget provisions indicate that further buyback could be to the tune of Rs 15,000 Cr along-with a switch program of Rs 4000 Cr. Out of this the switch for securities maturing in FY15 would be to the extent of Rs 2,000 Cr and thus the outstanding repayments for FY15 will be lower than estimated earlier by Rs 17,000 Cr as under: Table 5: Repayments for FY15 Outstanding Securities for FY15* Less: Securities to be bought back in FY14 Less: Securities to be switched in FY14 Maturities for FY15 * Post switch, as on 10th Feb 2014 Source: Union Budget Documents, STCI PD Research 3

Rs Cr 1,56,679 15,000 2,000 1,39,679

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17 February 2014

For FY15, the government has budgeted for a buyback/switch program to the extent of Rs 50,000 Cr, which is pegged to be fiscally and cash neutral.

IV. Borrowing Programme Gross market borrowing via issue of dated securities stands at Rs 5.97 lac Cr, a 6% rise from 201314RE. The net borrowing, at Rs 4.57 lac Cr, is in-fact lower by 3% from 2013-14RE. The headline borrowing number comes at the lower end of the expected range of Rs 5.8 lac Cr to Rs 6.4 lac Cr. Table 6: Market Borrowings via Dated Securities(in Rs Cr) 2012-13 2013-14 BE 2013-14 RE 2014-15 BE Gross Borrowing 5,58,000 5,79,009 5,63,911 5,97,000 Less: Repayments 90,644 95,009 95,009 1,39,679 Net Borrowing 4,67,356 4,84,000 4,68,902 4,57,321 Source: Union Budget Documents, STCI PD Research

Assuming ~62%-63% of full year borrowing is raised in H1FY15; the first half borrowing calendar would be for Rs 3.73 lac Cr. The weekly auction size for dated securities, thus, would range between Rs 15,500 Cr – Rs 16,500 Cr. For FY14, the government has increased its reliance on borrowing via T-Bills. While the 2013-14BE had estimated incremental borrowing via T-Bill at Rs 19,884 Cr; the 2013-14RE has increased reliance on T-Bills to Rs 22,678 Cr. For FY15, this reliance increases to Rs 34,554 Cr. Table 7: T-Bill Issuances and Redemptions (In Rs Cr) 2012-13 2013-14 2013-14 BE RE 14 Day T-Bill Gross Repayments Net 91 Day T-Bill Gross Repayments Net 182 Day T-Bill Gross Repayments Net 364 Day T-Bill Gross Repayments Net Total

2014-15 BE

24,37,546 (24,16,966) 20,580

24,13,650 (24,13,650) -

21,09,774 (21,30,450) (20,676)

23,43,495 (23,43,495) -

5,42,926 (5,62,439) (19,514)

5,92,890 (5,73,046) 19,844

5,90,548 (5,59,423) 31,125

6,32,589 (6,18,135) 14,454

1,29,434 (117,239) 12,195

1,30,007 (130,007) -

1,31,088 (125,299) 5,789

1,49,198 (1,49,198) -

1,30,471 (90,382) 40,089 53,350

1,30,474 (130,474) 19,844

1,36,909 (130,469) 6,441 22,678

1,57,007 (1,36,907) 20,100 34,554

Source: Union Budget Documents, STCI PD Research

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17 February 2014

V. Concluding Remarks With the Union budget 2014-15 coming against the backdrop of upcoming Lok Sabha election, there were expectations that the Finance Minister would table a budget that reinstates the existing government’s efforts to boost growth while staying on the path of fiscal consolidation. It being an interim budget, the incumbent government as a continuing practice did not seek to make any amendments in the Income Tax act, the government exercised its maneuvering capacity where it could. In order to provide fillip to the sluggish manufacturing sector, the FM proposed reduction in excise duties for auto products, capital goods, along-with restructuring duty structure for mobile handsets. In his budget speech, the Finance Minister demonstrated increased faith in the nation’s robust health. The Current Account Deficit is expected to be contained to USD 45 billion (USD 88 billion in 201314), while adding USD 15 billion to foreign exchange reserves. The budget asserted that the government is ready with the Public Debt Management Bill which seeks to shift the task of managing the government debt from RBI to the finance ministry. The budget proposed to establish non statutory PDMA which would be operational in 2014-15. While the budget was largely expected to be a ‘report-card’ of the UPA government’s performance in past ten years, the Finance Minister leveraged the platform to highlight his vision for FY15. The FM laid down tasks that lay ahead for the government- ranging from fiscal consolidation, price stability and growth to rationalization of subsidies and sharing responsibilities between states and center. Overall, the budget 2014-15 failed to have a positive impact on the bond market. While the gross borrowing below Rs 6 lac crore was welcomed, there has been an increased discomfort with respect to quality of fiscal consolidation. Moreover, it being an interim budget, better clarity on status of actual fiscal deficit for FY15, and total market borrowings would emerge in June or July once the new government tables the full budget.

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17 February 2014

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