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Fiscal target: The Finance Minister has set an ambitious goal for the fiscal deficit, aiming to
constrain it at 4.1%. Though this is likely to be a big positive for the bond markets, if the
challenge is met but in our opinion it, it will be a daunting task. A close look at the revenue
projections for the ongoing year and we find that the government is betting on a sharp increase
in revenues through the indirect taxes and disinvestment proceeds channel.
Inflation: The government has communicated a policy stance aimed at higher GDP growth,
lower inflation, and prudent policies in the Financial Year 2014-15. It is heartening to note that
from the slew of policies and reforms announced in the budget therein, due focus and
importance has been ascribed to key sectors like Construction & Infrastructure. Also measures
announced to raise agriculture output and productivity, improving irrigation and expanding the
food processing industry will help lower persistently high food inflation in the medium term.
Infrastructure: The governments commitment to infrastructure and specifically to the
development of 100 Smart Cities with an outlay of INR 7000cr is commendable. This and the
fund allocated for Internet connectivity in villages will help enable social and economic growth
of underserved regions and communities across India. Also the liberalization of FDI in
ecommerce sector, promised actions to finalize GST this year, clarity on transfer pricing along
with a collaborative framework to minimize future disputes etc., are all steps in the right
direction and indicative of a positive start to a long-term process.
Investment: Increase in foreign direct investment limits for insurance and defense sectors along
with clarity on retrospective taxation and liberalization of investment- linked deductions are
aimed at improving the investment climate.


Sluggish growth 4.7% for FY14 against 4.5% in FY13
Despite gaining a little momentum in FY14, the growth rate for the Indian Economy still registered a
sub-5 per cent growth. The growth rate for FY14 was 4.7% as against 4.5% in FY13. However it is
poised to overcome this low growth rate in 2014-15 as projected both by RBI and the Economic
Survey. After having achieved unprecedented growth rate of over 9% for three successive years
between 2005-06 and 2007-08, the Indian economy has been going through challenging times that
culminated in lower than 5% growth of GDP at factor cost for two consecutive years, i.e., 2012-13
and 2013-14. This slowdown has typically affected the industry sector.

High and Persistent Inflation CPI @ 9.5% as India moves to Inflation Targeting
In addition to the growth slowdown, inflation continued to be above the comfort zone. Despite a
decline in the wholesale price index (WPI) from 8.9% in 2011-12 to 6.0% in 2013-14, it still continues
to pose significant challenges. Moreover, the retail inflation has remained sticky, as the Consumer
Price Index (CPI) continued to stay above 9%. Given the shift in the stance of RBI towards inflation
targeting based on CPI (as per the Urjit Patel Committee Report), the inflation levels are clearly
beyond the comfort zone. The key factors contributing to this high inflationary pressure are supply
chain wastages (poor storage facilities), large number of intermediaries and poor monsoon/weather
due to El Nino effect.

Balance of Payments improved CAD at 1.7%
Indias share in world exports and imports increased from 0.7 per cent and 0.8 per cent respectively
in 2000 to 1.7 per cent and 2.5 per cent respectively in 2013. There has also been marked
improvement in Indias total merchandise trade to GDP ratio from 21.8 per cent in 2000-01 to 44.1
per cent in 2013-14.
Indias merchandise exports reached US$ 312.6 billion (on customs basis) in 2013-14, registering a
growth of 4.1 per cent as compared to a contraction of 1.8 per cent during the previous year.
Services exports registered a growth of 4 per cent in 2013-14 as against 2.4 per cent in 2012-13.

Indias Balance of Payments (BoP) position improved significantly in 2013-14, particularly in the last
three quarters. The stress on BoP observed during 2011-12 as fallout of the crisis in the Euro area
and inelastic domestic demand for certain key imports continued through 2012-13 and the first
quarter of 2013-14. The CAD rose sharply to a high of US$ 88.2 billion (4.7 per cent of GDP) in 2012-
13, surpassing the 2011-12 level of US$ 78.2 billion. After being at perilously unsustainable levels in
2011-12 and 2012-13, the improvement in BoP position in 2013-14 is a relief. After plummeting to
Rs. 68.36 to a US dollar, the rupee gradually strengthened and the year ended with exchange rate
averaging to Rs. 61 per US dollar owing to measures taken by the RBI.

Monetary Developments
Gradual monetary easing that had started alongside some moderation in inflationary pressures at
the beginning of 2013-14 was disrupted by the need to stabilize the foreign exchange market. In
May 2013, there were indications of tapering of quantitative easing by the US Federal Reserve. The
surge in capital outflows that followed resulted in sharp depreciation of the rupee. To restore
stability in the foreign exchange market, the RBI hiked interest rates and compressed domestic
money market liquidity. Measures taken in mid-July 2013 included a 200 basis points (bps) hike in
the marginal standing facility (MSF) rate to 10.25 percent; cap on daily Liquidity Adjustment Fund
(LAF) borrowing to 0.5 per cent of net demand and time liabilities (NDTL) of respective banks; and a
hike in the minimum daily cash reserve ratio (CRR) requirement to 99 per cent from 70 per cent.
Weekly auctions of cash management bills were also conducted to drain out liquidity. These
measures raised the call rate to the level of the MSF rate, making the latter the effective policy rate.

Financial Intermediation
Financial reforms are critical to the emergence of India as a strong market economy. A well-
functioning financial system will support growth, financial inclusion and stability. The passage of the
Pension Fund Regulatory and Development Authority (PFRDA) Act, the shift of regulatory supervision
of commodity futures trading to the Ministry of Finance, and the presentation of the Financial Sector
Legislative Reforms Commission (FSLRC) report, are some of the major developments in 2013-14.

Direct Tax Proposals
Personal Taxation
As a pleasant surprise to the individual tax payers, Arun Jaitley in his maiden budget increased the
tax exemption limit to INR 2,50,000 from the current INR 2,00,000, while that for senior citizens has
been raised to INR 3,00,000.
Under the Section 80C of the Income Tax
Act, 1961 which talks about the deductions
that could be applied to the income before
application of various tax brackets, the
investment limit has been raised from INR
1,00,000 to INR 1,50,000. This would lead
to a saving of a maximum amount of INR
15,450 to the investors in the 30% tax
As another positive surprise to the taxpayers, the income tax deduction on the interest to be paid on
the housing loans for the properties that are self-occupied has been raised from INR 1, 50, 000 to
INR 2, 00, 000.
Corporate Taxation
Tax Arbitrage on Debt Mutual Funds abolished
One of the most prominent steps to deter the institutional investors from using debt mutual funds
for arbitrage has been the increase in the tax on the same from existing 10% to 20%, with no
retrospective taxation on redemption made in the period from 1st April to 8th July, 14.
Originally, the tax arbitrage enjoyed by debt MF investors was that these investors had to pay capital
gains tax of 10.3% (without indexation) and 20.6% (with indexation). On the other hand, an investor
in traditional fixed deposits would be taxed according to the income slab or at 33.33% in case of

corporates. Thus, this tax arbitrage was heavily used by corporates to park away their idle cash
instead of being used by retail investors.
DDT/IDT computation base revised Will be computed on Gross Dividends
The Dividend Distribution Tax (DDT) (or the Income Distribution Tax in case of Mutual Funds) which
was earlier calculated on the net dividend distributed would now be calculated on the gross dividend
for the debt funds.
This means that if the dividend to be distributed is INR 85, then according to the proposed change,
the DDT will be calculated after grossing up the INR 85 by INR 15 (the DDT) for computation of DDT.
This will increase the revenue by 2.25%.
Investment Allowance to Manufacturing Companies Extended
The benefit of investment allowance of 15% for any investments greater than INR 100cr in new
plants and machinery has been extended to 2017.
Sunset Clause for Tax Holidays in Power Sector Extended
Currently, a deduction at 100% of profits is available to an undertaking for a period of 10 consecutive
years out of 15 years, if the undertaking begins to generate power by 31 March 2014. It is proposed
to extend the above terminal date from 31 March 2014 to 31 March 2017.
Rollback mechanism in Advance Pricing Agreements (APA) Introduced

The APA program introduced in 2012 to help bring down Transfer Pricing litigation saw
some key amendments. APAs which are presently available for a period not exceeding five
years, starting from April 1, 2013 shall now include four previous years for the international
transactions. Another positively received proposition was the introduction of a range
concept instead of the arithmetic mean which is being introduced for computation of price
of an arm's length transaction.

Indirect Tax Proposals

Customs Duty

As a major step to increase the government tax revenue, the excise on cigarette sticks of
length lesser than 65 mm have been hiked by a whopping 72 % while that on the longer
sticks have been increased by 11-12%.

A significant emphasis has been placed on the power and energy sector with the wind &
biogas plant equipment suppliers being granted increased concessions including nil excise
on forged steel rings for wind power equipment and on compressed biogas unit machinery.
Service tax has been aggressively pursued for online and mobile advertising, as a result of
which advertisements anywhere on Internet, billboards, buildings, commercial publications,
cell phone applications or ATMs would be liable to service tax with the exemption of those
made in the print media.

A very close attention has been paid to the Tax Administrative Reform Commission (TARC)
report released last month which talked about implementation of new methods of dispute
resolution & expansion of scope of existing ones. As a result, the option for filing an advance
ruling for indirect taxes now covers resident private limited companies as well. Also, the
scope of Settlement Commission has been somewhat expanded.

Excise Duty

Excise duty on cigarettes is being increased by 72% for cigarettes of length not exceeding 65
mm and by 11% to 21% for cigarettes of other lengths. Similar increases are proposed on
cigars, cheroots and cigarillos.

Full exemption has been provided to Liquefied Propane and Butane mixture, Liquefied
Propane, Liquefied Butane and Liquefied Petroleum Gases (LPG) for supply to Non-Domestic
Exempted Category (NDEC) customers by the Indian Oil Corporation Limited, Hindustan
Petroleum Corporation Limited or Bharat Petroleum Corporation Limited retrospectively
from 08.02.2013 so as to bring the NDEC customers, such as, hospitals, government
canteens, BSF/CISF mess, etc., at par with domestic customers for the purposes of supply of

A significant attention has been given to promote the usage of renewable forms of energy.
Full exemption from excise duty is being granted in respect of machinery, equipments, etc.
required for setting up of solar energy production projects. Also, is being reduced from 12%
to Nil on forged steel rings used in the manufacture of bearings of wind operated electricity

Service Tax

The ambit of service tax with regard to advertisements shall now be expanded from the
ones on radio/television to include advertising through internet website, cell phones,
buildings, bills/tickets, ATMs, theatres and means of conveyance.

The exemption of service tax on the analysis of new drugs, including herbal medicines and
vaccines, on human participants has been withdrawn.

A host of previously exempted services have been continued in this budget. This includes
services received by eligible educational institutes such as transportation of students,
faculty, staff and also security and house-keeping services.

On the other hand, a slew of new exemptions have been granted. Life micro insurance
schemes, if and when approved by IRDA would qualify for exemption. Transfer of organic
manure via vessel, rail or road is exempted thus bringing them at par with the fertilizers.
Specialized services received by RBI from abroad with regard to foreign exchange reserves
management shall also now be exempted.

There was confusion regarding the income earned from Foreign Portfolio Investors. Fund
managers were apprehensive of setting up offices in India to manage funds on account of
the fact that the incomes/ gains could be taxed at full rates. Clarification has been provided,
that the security held would be a capital asset and the income would be taxed under capital
gains. Existing provisions include lower WHT of 5% on Interest paid by Indian Cos to Non-
residents on foreign currency from outside India under a loan agreement or long term infra
bonds from 1 Jul 2012 to 30 Jun 2015. This has now been extended to 31 Jul 2017. Also the
5% concessional rate is applicable for bond proceeds utilized for purposes other than
specified conditions. This will encourage long-term foreign currency borrowings at low cost.
Also concessional WHT in of all types of bonds will encourage greater investment in Indian
debt securities, development of the Indian debt market and growth.
Holding period for determining whether gains from unlisted securities and unlisted units
would be short-term or long-term capital gains will be 36 months instead of the currently
being 12 months. The amended provisions have a negative impact on investment in units of
debt mutual funds; many of the products offered significant tax arbitrage opportunities in
comparison with similar debt products.
U/s 73, losses incurred in relation to a speculation business was allowed to be carried
forward for 4 years, to be set off against the profits of any other speculation business. It
deems the income of a company other than banking or granting of loans and advances from
purchase and sale of shares to be considered as speculative income. The bill will exclude
companies whose principal is dealing in shares. It will bring relief to proprietary traders as
this would allow them to set off of losses from trading, other income, with income from
business activities.

There is a huge need for intervention and good policies from the government for there to be
a secure future energy-wise. The finance ministers 2014 budget is a step towards this very
objective. Emphasis was on Coal based projects and renewable energy sectors.
The FM announced an allocation of INR 1,000 crores just for the solar energy sector. The
announcement on the renewable energy was received well by the industry. The break up for
the investment in this sector include an allocation of INR 500 crore for new and renewable
energy, INR 400 crore for a project to power one lakh odd water pumps using solar energy

and INR 100 crore for setting up 1 megawatt solar harvesters on the banks of canals. The
government is also focusing on rationalizing the coal linkages and developing super critical
ultra-modern thermal power stations, and for this it has set aside an amount of 100 crore.
The FM said that efforts are being made to make sure that enough coal is provided to the
thermal stations that have already been commissioned. The FM has now announced a 10
year tax holiday for all the undertakings that will start production, distribution and
transmission of power by March 31, 2017, instead of the annual extensions.
To increase the power supply to the rural areas, the government has proposed the Deen
Dayal Upadhyaya Gram Jyoti Yojana, for feeder separation and to strengthen the sub
transmission and distribution system. INR 500 crores has been allocated for the same.

For the past 2 years, the Indian economy is going through a challenging phase. This is even truer for
the manufacturing sector which has seen almost zero growth over this period. With such a gloomy
background, the manufacturing sector had high expectation from Mr. Jaitleys maiden budget.
The Minister at the outset mentioned that the theres a need to revive growth in the manufacturing
sector suggesting that he is aware of the challenging situation. However, as far as this sector is
concerned, the budget was more of statement of intentions rather than any concrete steps or plans.
Here are the key highlights for the manufacturing sector in the union budget 2014
The excise duty benefits to automobile sector announced in Chidambarams interim budget
are to be extended till Dec. 31

Increased focus on the highways and expressways with an eye to improve the supply chain;
set aside Rs 37,880 crore for the road transport sector; government will target 8500 KM of
highway construction which is indeed a positive news for the manufacturing sector as this
would reduce transport costs as well as drive up automobile sales

Cap on FDI in domestic defence manufacturing increased to 49% from 26% - this will help in
increasing the speed of indigenization and bringing in advanced technical know-how

Establishment of a 10,000 crore fund for start-up companies would help start-ups to raise
capital through soft-loans etc.

Definition of MSMEs to be revisited to provide for a higher capital investment ceiling

Amendment of the Apprenticeship Act which would help them getting more skilled
manpower by making it more responsive to industry and youth

A skilled India programme is announced with an emphasis on employability and
entrepreneur skills.

Hike in excise duty for aerated drinks (35% -> 40%) and tobacco products (61 %-> 72%),
Indian Beverage Association said the additional 5% excise duty announced in the Budget
would hit the industry hard and may lead to a slowdown in the sector.

The Union Budget should augur well for the infrastructure sector with major schemes and reforms
being announced. The government announced that it will provide funds for financing long-term
infrastructure projects.

The FM proposed a tax efficient pass through for two new investment vehicles, Real Estate
Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).This should provide a
new source of cash to Indian developers that have struggled to reduce debt with high
interest rates in the country and also reduce the pressure on the banking system.

Setting up of airports in cities where currently there is no airport. The move is likely to boost
companies such as Reliance Infrastructure, GMR and GVK.

The Finance Minister has announced the launch of Syama Prasad Mookerjee Rurban Mission
for rural development for urbanization of rural areas. This should help generate employment
apart from creating a pool of skilled talent in villages.

Announced Deendayal Upadhyaya Gram Jyoti Yojana (Rs 500 crore) to ensure 247
uninterrupted power supplies in rural areas.

To create infrastructure in agriculture sector, the Union Budget has proposed to raise the
corpus of Rural Infrastructure Development Fund (RIDF) by an additional Rs 5,000 crore.

In his Budget speech, the Finance Minister emphasized on strengthening and revival of the
Special Economic Zone (SEZ).This will contribute to the economic growth of the country.

The FM has proposed to allocate Rs 37,850 crore for road building plan via the NHAI and Rs
11,635 crore to develop existing ports & harbors.

Understanding the importance of PPP, the Finance Minister (FM) in the budget has
announced measures to fast-track the projects under PPP in several areas and has proposed
setting up of an institution, called 3P India, with a corpus of Rs. 500 crore to provide support
to mainstreaming PPPs.

Money raised by the banks through issuance of instruments infrastructure bonds would not
be covered under CRR and SLR requirement thus encouraging banks to lend money to
infrastructure sector.