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Budget 2014: Finance Minister Arun Jaitley has little room to manoeuvre …

By Aviral Gupta

The Budget session of Parliament will be held from July 7 to August 14 and the first Union Budget of the Narendra Modi government will be presented on July 10, Thursday. The Rail Budget will be presented on July 8, Tuesday, while the Economic Survey will be released on July 9, Wednesday.

The Rail Budget as well as the Union Budget would literally be the first formal roadmap and policy announcement of the new government elected on May 16 this year and would be keenly watched by the entire investment fraternity.

Some three weeks before the Rail Budget is to be presented, the passenger fares were hiked by 14.2 per cent and freight charges by 6.5 per cent – a move that would garner Rs 6000 crore ($1 bn) to the bleeding Railways as the losses on the subsidised passenger fare stand at Rs26,000 crore ($4.3 bn).

It is expected that the rise in passenger fares will add around 10 basis points to CPI inflation, while there will be a limited indirect impact on the CPI from the freight hike. WPI inflation is likely to see a marginally larger impact as the cost of transporting goods such as coal, cement, oil, steel and food grains will rise.

The new government has inherited a bleeding economy, as indicated by the latest data point regarding the fiscal situation that the April – May fiscal deficit, which stood at 33.3 per cent of the full year target last fiscal, is 45.6 per cent for this fiscal. As far as I can see, with such figures, Arun Jaitley, the Finance Minister, has little room to manoeuvre through the budgetary numbers.

In this regard, I don’t see any tax breaks or enhancement of tax exemption limits coming in this Budget as the government would like to retain the source of earnings in the current difficult situation, also exacerbated by the looming drought like conditions due to deficient monsoon and higher crude oil prices due to the Iraq crisis.

However, there is a good possibility of subsidies being slashed to strengthen the nation’s PL account and balance sheet. The key would be how the government will curb the expenses under non-plan expenditure while rationalising the social schemes and try to stimulate the economy through the increase in plan expenditure.

The markets are expected to react positively on any of the following: subsidy being slashed particularly on LPG/kerosene, housing thrust and the change in the land (real estate) and labour laws. Further clarity on retrospective tax and GAAR would be welcomed.

Apart from the Budget we have the trade data – the exports and imports on Wednesday and Index of Industrial Production (IIP) for May on Friday.

IIP for April grew at 3.4 per cent after contracting for two months. However, growth in the eight core industries has slowed down to 2.3 per cent in May, a four month low, from 4.2 per cent in April. The eight industries – coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity – account for ~38 per cent of the IIP. For May, coal, fertilisers, cement and electricity sectors recorded a growth in output. However, the other four sectors – crude oil, natural gas, refinery products and steel – recorded a contraction in output year-on-year.

(The author is Founder Investment Strategist, Mynte Advisors)

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