A Critical Analysis of Union Budget for the financial year 2014-15

Sujoy Kumar Dhar. Faculty Member, IBS Business School, Kolkata

Introduction
The outcome of 2014 general election created an immense expectation from the new
Government as after 1984, this is the first time when a single party has obtained absolute
majority. The different stakeholders of nation had different expectations from the Government.
The salaried employees were expecting a big relief in income tax. The corporate lobbies were
anticipating that the Government will provide a big push to the reformist agenda as it would not
require any support from coalition partners for the sake of survival. The sensitivity index of
Mumbai Stock Exchange or Sensex crossed 26000 points before the honourable Finance minister
Mr. Arun Jaitley placed the Union Budget on 10th July, 2014 which clearly indicated the upbeat
sentiments of both Foreign Institutional Investors(FIIs) as well as Domestic Institutional
Investors(DIIs) of India.
Direct Tax
The Union budget placed by Mr. Arun Jaitley offered an additional income tax exemption of Rs
50000 per annum both for salaried employees as well as for senior citizens but for very senior
citizen, tax slab remained unaltered1. The 80C tax deduction on investment has been raised upto
Rs 1.5 lakh against Rs 1 lakh earlier which is no doubt a bonanza for middle class people. The
maximum investment in Public Provident Fund2 (PPF) is also raised from Rs 100000 to Rs
150000 per annum. Apart from 80C exemption, persons having housing loan will get a tax
benefit upto Rs 200000 per annum on interest payment. Corporate profit tax remained unchanged
at 30%.

Individuals are not required to pay any tax up to Rs. 2.5 lakh income per annum, 10% income tax will be levied on
the individuals who are in the income bracket of Rs 2.5 lakh to Rs 5 lakh per annum, 20% income tax will be
charged on the individuals who are in the income bracket of Rs. 5lakh-Rs. 10 lakh per annum and 30% income tax
will be stipulated on the individuals who are earning more than Rs 10 lakh per annum. For senior citizen, income up
to Rs. 3 lakh per annum will be exempted. From Rs 3 lakh-Rs 5lakh per annum, 10% income tax will be imposed.
From Rs 5 lakh-10 lakh, 20% income tax will be levied. Individuals who are earning more than Rs 10 lakh have to
pay at 30% rate. A token tax rebate of 10% taxable income upto a maximum of Rs 2000 has been provided to the
individuals who are within Rs 5 lakh income slab. For very senior citizen whose age is more than 80years, up to Rs
5lakh per annum, no tax will be levied. From Rs 5lakh to Rs 10 lakh, tax will be levied at 20% rate. 30% income
tax will be imposed who are earning more than Rs 10 lakh per annum. 3% educational cess will be imposed on the
computed tax liability as earlier. 10% surcharge will be imposed to the High Net Worth Individuals who are earning
more than Rs. 1 crore per annum.
2
A PPF account may be opened at any branch of State Bank of India or its subsidiaries or at specified branches of
other nationalized banks. Though the period of PPF account is stated to be fifteen years, the number of contributions
has to be 16. This is because the 15 year period is calculated from the financial year following the date on which
account is opened. Thus a PPF account matures on the first day of the 17 th year. Deposits in PPF account can be
deducted before computing the taxable income under section 80C. The amount realized at the end of maturity period
is fully tax exempted. PPF offers 8.7% compound interest per annum as on date.

Electronic copy available at: http://ssrn.com/abstract=2478129

Small Saving Schemes

The honourable finance minister has provided a big boost for small saving schemes. He proposed
that Kisan Vikas Patra3 (KVP) scheme will be restored and National Saving Certificate4 will be
launched with insurance cover to provide greater benefit for small savers.

Capital market reforms

It is proposed in the budget that profits of Foreign Institutional Investors (FIIs) will be treated as
capital gains rather than business income. This will motivate FIIs to enter into Indian capital
market as they have to pay lesser tax5. It is a well known fact that Indian capital market is mainly
FII driven. The different height Sensex has reached in the recent past6 is neither due to the strong
fundamentals of Indian companies nor for the internal strength of Indian economy. On the other
hand it can be stated that Indian economy is suffering from various obstacles such as lower GDP
growth rate7, lower growth rate of Index of Industrial Production (IIP)8, higher inflation rate both
in terms of Wholesale Price Index (WPI)9 and Cost of Living Index (CLI)10 number, substantial

Kisan Vikas Patra is a post office scheme where investment gets double within a time span of 8years and 7 months
or alternatively it can be stated that the scheme offers compound interest of 8.4% per annum. The minimum amount
of investment is Rs 1000, though there is no upper limit. There is no tax deduction at source and withdrawal facility
is available after two and half years. KVP was discontinued with effect from 1st December, 2011.
4
National Savings Certificate is a post office scheme having maturity of 6 years and it offers 8.16% compound
interest per annum. Investment is NSC can be deducted before computing the taxable income under section 80 C.
5
Short term capital gain tax rate is 15% for shares and long capital gain tax for shares is nil provided the shares are
held for more than one year. On the other hand income from business is taxed at the rate @30%.
6
The Sensex reached 21000 points for the first time in January, 2008. After that Sensex experienced a steep fall due
to subprime crisis. The Sensitivity Index climbed to 21000 points for the second time in 2010 Diwali. After that
Sensex had undergone through a volatile phase due to the adverse impact of Euro zone crisis. Sensex again reached
the 21000 points in October, 2013. After the general election of 2014, market has followed strong bullish trend.
Sensex crossed beyond 26000 points which is its lifetime high in July, 2014.
7
The GDP growth rate for the year 2012-13 and 2013-14 was 4.5% and 4.9% respectively. The growth rates are far
below with respect to double-digit growth rate of 9.3% in 2010-11 and 8.6% in 2009-10.
8
The growth rate of Index of Industrial Production for the financial year 2013-14 is 0.1% .The IIP has been revised
since the financial year 2005-06 on base (2004- 05=100)
9

Wholesale price inflation (WPI) witnessed around 6% in 2013-14 which is above the comfort zone.
Food articles averaged 12.2% annually in the five years ending 2013-14, which enhanced Cost of living Index
number to a significant extent. The CPI inflation for the financial year 2013-14 is 9.7%. This high rate of inflation
reduces the purchasing power of the middle class population to a significant extent.
10

Electronic copy available at: http://ssrn.com/abstract=2478129

depreciation of home currency with respect to dollar11, the reduced saving12 and investment13
ratio with respect to GDP as well as higher fiscal deficit14.
Therefore performance of Indian capital market seems to be the outcome of reflected glory.
Through SEBI and Ministry of Finance, Government of India are trying their level best to
enhance retail participation in capital market by implementing strict corporate governance norms
and conducting more and more investors awareness program, the most unfortunate fact is that
even after 67 years of independence, retail participation in Indian capital market has remained
abysmally low which is 2% of total Indian population. Thus Indian capital market is not at all
self sufficient and it is heavily dependent on fund inflow of FIIs.
FIIs are investing into Indian capital market to enjoy the interest rate arbitrage15. Any FII
investing via Mauritius is hardly paying any tax due to Indo- Mauritius tax treaty. FIIs registered
with SEBI are eligible to issue participatory notes through which any overseas investors can
invest in Indian capital market without disclosing their identities. SEBI has tried several times to
create restrictions on the issuance of participatory notes but every time market has fallen to such
extent that SEBI and Ministry of Finance were succumbed to the pressure from investors side.
By providing tax relief to the foreign portfolio investors in the budget, the Finance Minister has
given a deliberate message to the overseas traders that the Government is investor friendly and
Government is not willing to lose the feel good factor created in Indian stock market at any cost.
The Finance minister promised in the parliament that Government will not to impose
retrospective tax randomly.
Implication of budget on debt market
In the budget it is proposed that debt mutual funds will be taxed like bank deposit. Equity fund
investors are already enjoying higher tax shield with respect to debt fund. Asset Management
Companies (AMCs) need not pay any dividend distribution tax while paying dividend to the
equity fund holders but the same is not true for debt fund. Long term capital gain of equity fund
is fully tax free when long term capital gain tax of debt fund is 10% without indexation and 20%
with indexation whichever is suitable for assesses. After such declaration in budget, individuals
have to pay the long term capital gain tax on debt fund depending on their slab of income which
is undoubtedly make a big difference if a person falls in 30% income tax bracket . Earlier the
person has to pay 10% tax on capital gain derived from debt mutual fund but under the changed
circumstances he has to pay 30% tax which is enhancing 20% higher tax burden in the shoulder
of the investor .This is not at all desirable from the perspective of a rational investor. Once
11

The volatility in the rupee is evident from the fact that the average annual exchange rate went up from INR 54.41
per US dollar to INR 60.50 per US dollar in 2013-14. Indian Rupee witnessed significant depreciation in 2013-14
and average exchange rate of the rupee reached a peak in September 2013 at INR 63.75 per US dollar.
12
According to the Planning Commission of India, Saving to GDP ratio is 30.5% for the financial year 2013-14
which is 1.3% less with respect to the previous financial year.
13

According to the Planning Commission of India, Investment to GDP ratio is 31.4% for the financial year 2013which is 3.3% less with respect to the previous financial year.
14
Fiscal deficit is excess of Government expenditure over its income. Revenue expenditure includes payment of
subsidy, interest, salary to the Central Government Employees, expenditure on defense. Capital expenditure
incorporates expenditure to create infrastructure and social sector projects. Revenue income consists of tax revenue
and non tax revenue. Capital income consists of public debt, recovery of loan and advances as well as disinvestment
proceed. Fiscal deficit for the year 2013-14 was 4.5% of Indias GDP.
15
When Developed nations like USA and Japan are offering rate of interest which is abysmally low almost close to
zero percent , RBI as on date is offering 8-9.05% interest rate on term deposit.

Finance Minister declared that the tax treatment for both the bank deposit and debt funds will be
same, demand for Fixed Maturity Plan and debt fund has gone down to a significant extent.
Construction and manufacturing sector reform
The budget for the financial year 2014-15, has provided a big thrust to construction and
manufacturing sector. Earlier an investment allowance at the rate of 15% was allocated to the
companies provided they are investing more than Rs 100 crore in new plant and machinery. The
budget has reduced the threshold limit to Rs 25crores. Alternatively it can be said that more
companies will be eligible for investment allowance and the benefit will be available for three
years. The Government has already allowed 100% FDI in construction sector. In order to give
further boost to the construction sector, the Government has relaxed minimum capitalization and
minimum built up area conditions. The requirement of minimum built up area for FDI has been
reduced to 20000 square meters from 50000 square meters while minimum capitalization
requirement has been halved to Rs 5 million. To channelize investment into low cost housing,
the Government has reduced both the requirements of minimum built up area and minimum
capitalization for projects which commit at least 30% of the project cost for low cost affordable
housing. In the budget, it is mentioned that Government will innovate new fund raising avenues
for financing infrastructure and real estate sector projects.

Management of Fiscal deficit

Managing the fiscal deficit is a major challenge for the Government. The Government has
realized that deficit financing cannot be an appropriate mechanism to solve the problem. From
the past experience, it has been observed that if Government borrows from the market, the
interest rate goes up to a significant extent due to excessive demand for fund. High rate of
interest crowds out16 the private investment and reduces the income or output of the nation which
ultimately defeats the basic purpose of borrowing. Under the current circumstances,
consequence of following the deficit financing strategy will be disastrous as the rate of gross
fixed investment, which accounts for bulk of total investment, fell by 2.1% in 2013-14 in
comparison to previous year as per the provisional estimates of Central Statistical Organization
(CSO). Thus Government has determined to adopt and implement its disinvestment17 agenda.
The apex body of Indian capital market, SEBI has already formulated the guidelines that
promoters of any listed company cannot hold more than 75% stake. In majority of Public Sector
Undertaking Organizations, stake of Government is much more than the threshold limit defined
by SEBI. Thus Government is utilizing the route of disinvestment to raise the fund in order to
finance the fiscal deficit. The budget has created a disinvestment target of Rs 43000 crores for
the financial year 2014-15. The finance Minster hinted that Government will dilute its stake in
PSU banks and may go for merger of a number of existing PSU banks for the purpose of
consolidation.

16

If Government uses expansionary Fiscal policy to boost the growth rate of the economy, Interest rate goes up
which will reduce the productive investment as cost of borrowing fund is jacked up. Therefore economy cannot
achieve the desired rate of growth as per Simple Keynesian Macroeconomic model. This is known as crowding out
effect. The crowing out effect can be eliminated if simultaneous expansionary Fiscal Monetary mix strategy can be
used.
17
Disinvestment implies selling the stake of PSU organizations in favour of private players by the Government.

Scope of Foreign Direct Investment

The Union budget has proposed to hike the Foreign Direct Investment (FDI) to insurance and
defense sector from 26% to 49%. According to the Finance Minister, increasing FDI in defense
sector will help to develop domestic defense manufacturing units which are in the nascent stage.
It will reduce dependencies on companies controlled by foreigners and in the long run, foreign
exchange outflow for the defense head of account will go down significantly. When Union
Railway Minister D V Sadananda Gowda placed the Railway budget just before Union budget
was tabled, he recommended FDI for Indian Railway as a means to bring in world class rail
infrastructure.
Agricultural sector reform
India is an agro based economy and there is speculation that bad monsoon may hamper the
prospect of harvesting in the current year. Mr. Arun Jaitley has declared several measures to
protect the interest of farmers. He conveyed the members of parliament that price stabilization
mechanism will be created to combat against the price hike of agro commodities. A fund of Rs
5000 crore is allocated to improve the firm supply chain management which can reduce the
wastage of food grains. Innovative irrigation schemes will be launched to hedge the risk of
volatile monsoon and user friendly balanced fertilizers will be used to enhance the output of
harvesting.
Focus on sustainability
The Finance minister has emphasized on sustainable development18 which has added a
dimension to the budget. National Voluntary Guidelines on Social, Environmental and Economic
Responsibilities of business has been developed by the Ministry of Corporate Affairs,
Government of India, designed by Indian Institute of Corporate Affairs, Partner in Knowledge,
Governance and Transformation in July, 2011. Today, sustainable development is a global
imperative (United Nations Conference on Environment and Development, 1992, 2002 and
2012) with worldwide relevance in all spheres of human activity. In this respect, endorsement
and enforcement of sustainable development in the last two decades has been more intense and
rapid in the manufacturing sector of economies vis--vis the service sector because of the visible
adverse environmental impacts in the former as compared with the latter. The Government
allocated Rs 100 crore for the establishment of a national Adaptation fund for climate change.
An initial sum of Rs 100 crore will be transferred to the fund adding that agriculture as an
activity is most prone to the vagaries of the climate change. The Government allocated Rs 1000
crores for development of ultra solar power project on high capacity plants and the radiation rich
states of Rajasthan, Gujrat, Tamilnadu and Jammu & Kashmir.
Investment in higher education and social sector projects
The Finance minister declared that Rs 100 crores have been allocated to protect and educate the
girl child across the nation and a provision Rs 150 crores have been made for safety of women in
cities. He allocated Rs 500 crore fund to help Kashmiri immigrants to rebuild their lives.
Finance minister informed the members that 5 new IITs will be established in Jammu,
Chhattisgarh, Goa, Andhra Pradesh and Kerala. He also declared that 5 new IIMs will be set up
in Himachal Pradesh, Punjab, Bihar, Odisha and Maharashtra. A fund of Rs 500 crore is allotted
for creating new IITs and IIMs.

18

Sustainable development implies development in terms of ecological, social, financial and economical dimension
which will ensure long term sustenance of the organization.

Conclusion
The opposition parties are claiming that the first Union budget placed by Modi Government is
visionless. Critiques are claiming that infrastructure, health and education are the three pillars on
which India should build its edifice of development over the next decade but these are not
provided adequate emphasis in budget. According to the opposition, the biggest disappointment
of the budget lies in the miserliness shown in allocation of fund towards education, especially in
primary and secondary school education. Critiques are saying that the Government is diluting the
gravity or brand equity of the IITs and IIMs by opening multiple new branches of the same
across the nation. Opponents are also claiming that enhancement of FDI limit in defense will
harm the national security.
It can be concluded without any ambiguity that the Finance Minster has to work hard to strike a
balance between populist and reformist agenda. It is true that Modi Government is enjoying
absolute majority in the Parliament and the NDA Government will rule for coming five years.
Apparently it seems that Finance minister is enjoying freehand to a significant extent while
preparing the budget. But it is equally true that in Rajya Sabha, NDA is not enjoying the
majority and Assembly elections of few key states such as Maharashtra, Haryana, Jammu and
Kashmir as well as Bihar are knocking at the door. Mr. Arun Jaitley has to take into
consideration all these factors before finalizing the budget. He has tried his level best to touch all
possible areas in budget. The Finance minister has made several promises, but future will say to
which extent the policy implications are efficient and effective to address the major concerns for
all stakeholders of the nation.