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India’s Annual Budget Aims for High Growth

Modi Govt Announces Measures to Boost Foreign / Domestic Investmets

Rationalises Procedures , But Acts Tough on Tax Dodgers

By TN Ashok     Diplomatic Editor

New Delhi, Feb 28: India today presented its annual 2015-16 budget to its Parliament consistent with Prime Minister Narendra Modi’s aggressive foreign policy initiatives to attract foreign investments and encourage its corporate sector to pep up manufacturing by doing away with some procedures and slashing taxes.

Finance Minister Arun Jaitley, a successful corporate lawyer turned politician, followed Modi’s dictum for sending a positive message to foreign investors by doing away with the distinction between Foreign Institutional Investments (FIIs or portfolio investments) and Foreign Direct Investment (FDI – money that is locked in projects) so that Indian corporates can easily clinch joint ventures with foreign investors under a less cumbersome bureaucratic procedure.

By enlarging its scope of industries for calculating economic indicators and changing the base year, Finance Minister Jaitley projected a robust 8.10 to 8.5% growth in the next 2015-16 fiscal year (April 2015 to March 2016) and exuded optimism of a even higher double digit growth. “This is the time for India to fly …….. especially when the world is looking at us enthusiastically” , Jaitlye told the lower house of parliament where it has a brute majority but a slim one in the upper house where it needs to increase its strength to get tricky legislations approved.

The budget slashed the corporate tax from 30% at present to 25% over the next four years while at the same time withdrawing exemptions granted to them. Jaitley argued that exemptions fetched only Rs 1,008 crore a year while reduction in , which was not much of a revenue loss , when compared to corporte tax revenues government would mop up  around Rs 9,000 crore a year.

Jaitley also hiked the taxes on the services sector from 12.5% to 14% hoping to raise additional resources for the government to put in growth oriented infrastructure sector. The services sector dominated mostly by the Information Technology and IT enabled services has been the biggest contributor to India’s GDP growth in the past few years and Jaitley argued it was right to tax them to raise resources. Because the agriculture sector did not pay much taxes as it was constituted majorly by poor farmers rather than rich agriculturists. And the slackness in the manufacturing sector did not contribute to much tax buoyancy.

Jaitley regretted that India was still pursuing a high cost tax economy as compared t ASEAN countries which had much lower rates of taxes – max rate of 30% in India and just about 22% in ASEAN countries. But India is still a under taxed country in terms of its reach to the population which explains why its tax bouyancy is much less at 3% when compared to China’s 20% which raises huge resources for infrastructure to feed the world.

The government did not pander to populism by raising the exemption limit for direct taxes for individual tax payers from rs 2.5 lakhs to rs 3 lakhs as expected by the majority of the wage earners in the country. . “ I don’t have much resources with the government at the moment, when growth picks up and I have money, further concessions for individual tax years could be considered “, Jaitley said.

Jaitley’s tax relief was aimed more at giving incentives to the middle class to invest in pension plans and health care through tax breaks for doing so. He hiked the tax break for health insurance premia from rs 20,000 to rs 25,000 and to a further rs 30,000 for senior citizens.

The redefinition in the architecture of fiscal relations between the state and the centre had also left the centre with lesser collections than the state. India has three layers of taxation to raise public finances for development projects – a tax from which the centre alone appropriates monies, a tax from which it shares majority of revenues with the states and a third layer is the tax that is exclusively levied by the 29 odd state goverments to fund its public welfare schemes and development projects.

Jaitley said it was time to revisit this aspect of taxation policy and rationalise it. In the meanwhile, he felt that the Goods and Services Tax , more popularly known as GST, would replace a plethora of taxes in the country levied by both centre and states briging about greater uniformity and raise huge resources for the economy — both for the centre and states..

Jaitley’s budget provides a massive allocation of over Rs 23,000 crore for the defence sector probably in tune with its new policy to make defence equipment in India consistent with its Make in India campaign by upping foreign investments to 49% to slash imports that were expensive and eating into the state exchequer. The budget has also opened the floodgates in the financial sector by upping foreign investment limits to 49% especially in the banking and insurance sector. It also seeks to crackdown on the behemoth public sector banks which aggregate Non-Performing Assets pandering to political whims sending a clear message for them to perform or quit. It may also dilute its equity which ranges from 52% to 80% in a wide range of state owned banks.

That would further release huge amounts of money to funding infrastructure projects.

Jaitley’s budget has taken a macro economic outlook, unlike the micro economic outlook taken by predecessors bordering on populist schemes to satiate vote banks, balanced the need for fiscal responsibility with the imperative of greater public-sector investment to lay the groundwork for economic growth. He said the government would hit its deficit target of 4.1% of gross domestic product for the year ending March 31.

In following years, Jaitley said the administration would give itself more latitude to spend than it had originally planned because It would “not be pro-growth to stick to fiscal consolidation.” Instead of aiming for 3.6% in the coming fiscal year, it will shoot for 3.9%.

“The additional fiscal space will go toward funding infrastructure investment,” he said.

That is a welcome change. In recent years, capital expenditures have been trimmed to meet fiscal deficit targets – with serious consequences.

As Mr. Jaitley rightly said, “There has been major slippage in the last decade on infrastructure. Our infrastructure doesn’t meet our growth ambition.”

India needs better transport, power, sanitation, health and education to facilitate business expansion. The young country’s demographic dividend will be a liability, not a boon, if India can’t create enough jobs and give its youth the training needed to do them.

The Modi government has benefitted largely this year from the steep decline in global petroleum prices which has reduced its oil import bill substantially and the state of the economy report, called Economic Survey, made before budget, has also predicted a further 20% decline in oil prices that would help conserve valuable foreign exchange reserves. India’s foreign exchange assets have burgeoned to a record US $ 380 billion ever since the Modi government took the reins of power raising hopes of big bang reforms to attract foreign capital. But India is nowhere China which has trillions in foreign exchange reserves.

Jaitley promised all of the savings from the petroleum price plunge would be invested in capital infrastructure. Combined with the infrastructure improvements promised in the railway budget last week by his ministerial colleague Suresh Prabhu, will usher in  a new era in which India’s budgets support the country’s growth. That will give India the “chance to fly,” Jaitley said.

Economists had hoped  India’s budget would unveil some “big-bang” reforms and Finance Minister Arun Jaitley opened his budget speech promising a “quantum jump” Saturday. But some argue that would India go ahead and take the difficult decisions needed to make it easier to do business in the South Asian nation.

In the run up to the budget , every industry came up with its own “ Wish List”  of demands for long-delayed revamping of regulations and tax policy. Few were actually met. Most industries now hope they will happen outside the budget or they may have to wait out for the next financial exercise of the government next year.

“The quantum leap is not there,” says R. Shankar Raman, CFO, of the construction giant  Larsen & Toubro Ltd that builds most of india’s power projects besides the new airports in the country.

The budget did include grand plans for more infrastructure spending and the standard pledge to reduce the bureaucratic barriers to doing business. Most business leaders still remain confident that the current government will eventually live up to its pro-business rhetoric but say it will take time. The latest budget, the optimists say, has plenty of signals that India is going to improve, observes a leading financial daily of the usa.

While Jaitley echoed his mentor PM Modi’s policy of Make in India, Indian industry felt he had not unveiled any big bang reforms or measures to attract foreign capital in a big ways or for domestic industry to invest in a larger than measure. We need more reforms for foreign companies to set up shop here and for us to set shop overseas, an industrialist said.

Indian manufacturers and its biggest exporters were left disappointed that many of the items on their wish-list were ignored.  India’s automobile industry wanted a cut in factory-gate taxes. The software and generic-drug industry were hoping for higher exemptions for research and development expenditure. The gem-and-jewellery industry wanted a cut in the import duties choking the gold supply. None of that happened.

Instead the government announced a unique Gold Monetisation scheme to unlock over 23,000 tonnes of gold lying idle with households and jewellery makers and at the same time sought to reduce gold imports which were eating into precious foreign exchange of the country. The scheme entails gold deposits by individuals and jewellery merchants  with state run banks against which the former could earn interest on the metal and the latter get issued jewellery loans to enhance their business.

Jaitley also proposed a “Sovereign Gold Bond” that would act as an alternate to owning physical gold. These bonds would have a fixed rate of interest and “be redeemable in cash in terms of the face value of the gold,” he said.

The Modi government’s budget offered some sops for middle-class tax payers and a series of steps aimed at boosting social security for the country’s poor.

Tax Breaks on Health Insurance, Travel: Individuals will be allowed to deduct up to 25,000 rupees ($400) annually in health-insurance premiums from their taxes. That is an increase from the current 15,000-rupee deduction. For people 60 years or older, the deduction will be 30,000 rupees.

Mr. Jaitley also proposed increasing the amount of transportation expenses individuals can deduct to 1,600 rupees a month, up from 800 rupees a month now.


Pension Deduction: Individuals can now claim an additional tax deduction of up to 50,000 rupees ($800) if they put the money in the government’s New Pension Scheme. “This will enable India to become a pensioned society instead of a pensionless society,” said Mr. Jaitley.

Social Security programs: In a bid to provide a social safety net, Mr. Jaitley said the state will provide accidental death insurance of 200,000 rupees for a premium of just one rupee a month. State insurers will also offer policies covering natural and accidental death for 330 rupees a year.

Though available to all, the relatively small size of the insurance cover implies these will likely be used mostly by the poor.

The government will also encourage individuals to set up pension accounts under a new program. For individuals who open such an account by Dec. 31, the government will match individual contributions up to 1,000 rupees a year, for five years.

Tax-Free bonds:   Jaitley plans to allow government agencies and others to issue tax-free infrastructure bonds to fund roads, railways and irrigation. Details weren’t disclosed but typically interest on such bonds is tax free.

Service Tax: Restaurant and phone bills will soon go up, because the government will raise the service tax to 14% from 12.4%. Individuals indirectly pay this tax on a wide range of services, including on insurance premia, hotel bills and electricity bills.

Unaccounted-for Money: Mr. Jaitley said the government would introduce more stringent requirements for people to declare assets held overseas and make it harder for people to buy real-estate with cash in an effort to tax evasion.

Here are the highlights of Jaitley’s budget for the fiscal year that begins on April 1.


  • Fiscal deficit seen at 3.9 percent of GDP in 2015/16
  • Will meet the challenging fiscal target of 4.1 percent of GDP
  • Remain committed to meeting medium term fiscal deficit target of 3 percent of GDP
  • Current account deficit below 1.3 percent of GDP
  • Jaitley says have to keep fiscal discipline in mind despite need for higher investment


  • GDP growth seen at between 8 percent and 8.5 percent y/y
  • Nominal economic growth seen between 11 and 12 percent
  • Aiming double digit growth rate, achievable soon


  • Expects consumer inflation to remain close to 5 percent by March, opening room for more monetary policy easing
  • Monetary policy framework agreement with the RBI clearly states objective of keeping inflation below 6 percent
  • “One of the achievements of my government has been to conquer inflation. This decline in my view represents a structural shift.”


  • Revenue deficit seen at 2.8 percent of GDP
  • Non tax revenue seen at 2.21 trillion rupees
  • Agricultural incomes are under stress
  • Net receipts under market stabilisation scheme estimated at 200 billion rupees


  • Government targets 410 billion rupees ($6.7 billion) from stake sales in companies in 2015/16
  • Total stake sale in 2015/16 seen at 695 billion rupees
  • Sets stake sale target for 2016/17 at 550 billion rupees
  • Revises down stake sale target for 2014/15 to 313.5 billion rupees


  • Propose to merge commodities regulator with SEBI
  • To bring a new bankruptcy code
  • Jaitley says will move to amend the RBI act this year, and provide for a monetary policy committee
  • To set up public debt management agency
  • Proposes to introduce a public contract resolution of disputes bill
  • To establish an autonomous bank board bureau to improve management of public sector banks


  • To enact a comprehensive new law on black money
  • Propose to create a universal social security system for all Indians
  • To launch a national skills mission soon to enhance employability of rural youth
  • To raise visa-on-arrival facility to 150 countries from 43
  • Allocates 346.99 billion rupees for rural employment guarantee scheme
  • Raises threshold for application of transfer pricing rules to 200 million rupees from current 50 million rupees


  • Gross market borrowing seen at 6 trillion rupees
  • Net market borrowing seen at 4.56 trillion rupees
  • Government defers rollout of anti-tax avoidance rules GAAR by two years
  • GAAR to apply prospectively from April 1, 2017
  • Retrospective tax provisions will be avoided


  • To abolish wealth tax
  • Replaces wealth tax with additional 2 pct surcharge on super rich
  • Proposes to cut to 25 percent corporate tax over next four years
  • Corporate tax of 30 percent is uncompetitive
  • Net gain from tax proposals seen at 150.68 billion rupees
  • Jaitley proposes modification of permanent establishment norms so that the mere presence of a fund manager in India would not constitute a permanent establishment of the offshore fund, resulting in adverse tax consequences.
  • Proposes to rationalise capital gains tax regime for real estate investment trusts
  • Extends withholding tax concession on foreign debt purchases by two years
  • Expects to implement goods and services tax by April 2016
  • To reduce custom duty on 22 items
  • Basic custom duty on commercial vehicle doubled to 20 percent
  • Proposes to increase service tax rate and education cess to 14 percent from 12.36 percent
  • Plans to introduce direct tax regime that is internationally competitive on rates without exemptions
  • Exemptions for individual tax payers to continue
  • To enact tough penalties for tax evasion in new bill
  • Tax dept to clarify indirect transfer of assets and dividend paid by foreign firms


  • No revision of income tax brackets
  • Limit of deduction of health insurance premium increased to 25,000 rupees from 15,000 rupees; limit increased to 30,000 rupees from 20,000 rupees for the elderly
  • People aged above 80 and not covered by health insurance to be allowed deduction of 30,000 rupees for medical expenses
  • Additional deduction of 25,000 rupees for the disabled
  • Limit on deduction for contributions to pension fund and new pension scheme increased to 150,000 rupees from 100,000 rupees
  • Additional deduction of 50,000 rupees for contribution to new pension scheme under section 80CCD
  • Monthly transport allowance exemption doubled to 1,600 rupees


  • Import tax on iron and steel increased to 15 percent from 10 percent
  • Import tax on metallurgical coke increased to 5 percent from 2.5 percent


  • Investment in infrastructure will go up by 700 bln rupees in 2015/16 over last year
  • Plans to set up national investment infrastructure fund
  • Proposes tax-free infrastructure bonds for projects in roads, rail and irrigation projects
  • Proposes 5 “ultra mega” power projects for 4,000 MW each
  • Second unit of Kudankulam nuclear power station to be commissioned
  • Will need to build additional 100,000 km of road
  • Ports in public sector will be encouraged to corporatise under Companies Act


  • Plan expenditure estimated at about 4.65 trillion rupees
  • Non-plan expenditure seen at about 13.12 trillion rupees
  • Allocates 2.46 trillion rupees for defence spending
  • Allocates 331.5 billion rupees for health sector
  • If revenue improves, hope to raise budgeted allocations for rural job scheme by 50 billion rupees


  • Government to provide 79.4 billion rupees capital infusion to state-run banks
  • Propose to do away with different types of foreign investment caps and replace them with composite caps
  • To allow foreign investment in alternative investment funds
  • Public investment needed to catalyse investment


  • To launch gold deposit accounts and sovereign bond
  • Import duty stays at 10 percent; disappoints jewellers
  • To work on Indian-made gold coin to cut imports


  • Raises excise duty on cigarettes by 25 percent for cigarettes of length not exceeding 65 mm
  • Raises excise duty by 15 percent for cigarettes of other lengths


  • Food subsidy seen at 1.24 trillion rupees
  • Fertiliser subsidy seen at 729.69 billion rupees
  • Fuel subsidy seen at 300 billion rupees
  • Major subsidies estimated at 2.27 trillion rupees
  • We are committed to subsidy rationalisation based on cutting leakages


  • “We inherited a sentiment of doom and gloom. The investment community had almost written us off. We have come a long way since then.”
  • “We have turned around the economy, dramatically restoring macroeconomic stability and creating the conditions for sustainable poverty elimination, job creation, durable double digit economic growth.”
  • “While being mindful of the challenges … this gives us reason to feel optimistic.”
  • Domestic and international investors are seeing us with renewed interest and hope.”


  • 2015 Budget will further reignite our growth engine, signalling the dawn of a prosperous future.
  • Budget is investment friendly & removes all doubts on tax issues. It assures investors that we have a stable, predictable & fair tax system.


  • BSE index gains 0.48 percent; NSE index up 0.65 percent
  • ITC slumps after budget hikes excise duty on cigarettes

($1 = 61.6489 rupees)

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