Highlights of Union Budget 2013-14 - Axis Mutual Fund

The finance minister presented the union budget for the year 2013-14 today. What can only be termed rather pragmatic budget. We must remember that this comes in an economic backdrop where we have had growth fall to about 5% for the current year. The current has also seen consumer inflation above 10% and even Wholesale Price Inflation above 7.5% for most of the year.

So what could the finance ministry have done?

The pulls for tax policy especially were on both sides. On the one hand consolidation of the fiscal deposit demanded higher tax rates and on the other slowdown in economic activity demand stable or low tax regime. The finance minister opted to go for a fairly neutral path barring a slight increase in tax surcharge for high income earners above 1 crore rupees and for corporates the finance minister left the tax rates largely unchanged. What this means is that with the economic activity projected to grow between 6.1% and 6.7% next year. We should see overall tax revenues increase by about 19% which is what is projected in the budget today.

Consolidation on the expenditure side

On the expenditure side, the finance minister has definitely shown consolidation. On the one hand he has cut the subsidy outgo by about 10% chiefly in the three major subsidy heads; Food, Fertiliser and Fuel but at the same time to keep the growth momentum going he has increased the plan expenditure by almost 30% to Rs.5.55 lakh crores. This is also in line with what the Reserve Bank has been calling for that is a shift in the composition of government expenditure away from wasteful subsidies toward productive, planned and capital expenditure. Net net what this means is the overall expenditure is projected to rise by about 16% with the tax revenue increase of about 19%.

What does this mean for the Fiscal deficit?

The finance minister expects the fiscal deficit of about 5.4 lakh crores next year. That translates to about 4.8% of GDP. 4.8% GDP is exactly in line with the fiscal consolidation roadmap that had been set out in September of last year by the Kelkar committee. This is also in line with the medium term projection that intends to bring the fiscal deficit to 3% by the fiscal year 2016-17 and the effective revenue deficit to zero by that time. I must note that at this point of time already the revenue deficit for the upcoming year is expected to be at just under 2%. So we are well on the path towards fiscal consolidation.

The Budget and the Mutual fund industry

The mutual fund equity schemes are now being made eligible for RGESS. In addition the finance minister has given us clarity on securitization income which was subject to some dispute last year. On the other hand, the finance minister has increased the dividend distribution tax on debt schemes. So it's a mix bag for the mutual fund industry.

We see this as a pragmatic budget and we think that this will allow the Reserve Bank to cut rates going forward as the finance minister has essentially given a credible path towards fiscal consolidation and has delivered what the RBI has asking for. In all, we do expect the RBI to deliver rate cuts and bond yields to fall in response over a period of time. Today of course given that there were new proposals and given the fairly large borrowing program bond yields have risen about 5-7 basis points but we believe that as temporary blip and the medium term view remains that to stay long duration across our fixed income products.

Source : Equity Bulls

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