Finshots College Weekly

Budget Breakdown

In this week's newsletter, we talk about the major highlights from the 2024 budget, a simplified
analysis of the Economic Survey, and an exciting opportunity you absolutely mustn't miss.

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The Budget 2024 explained

The sequel to February’s Interim Budget has finally arrived. The Interim Budget was just a
placeholder, keeping things steady until a new government took charge. And now that the
old crew is back, albeit through a coalition, the Full Budget for FY25 is here to lay out the
financial roadmap.
So, what’s new in this edition, you ask?
Well, there are quite a few things. But let's focus on the highlights that really matter.
Let’s begin with the government’s efforts towards encouraging employment.
See, India’s employment scene is a mixed bag. While the number of employed people has
gone up by 3% over the past seven years, the unemployed crowd has grown by 12%. The
main issue? Job creation hasn't kept pace with the rising number of job seekers.
So, the government stepped in with three new employment-linked incentive schemes aimed
at both employers and employees.
The plan is to pay newly employed folks registered under the Employees’ Provident Fund
(EPF) their first month's salary, up to ₹15,000, if they earn up to ₹1 lakh a month. Plus,
employers get reimbursed up to ₹3,000 per month for two years for EPF contributions for
each new hire. There’s also a similar deal for the manufacturing sector with slightly different
rules.
This approach isn't just about creating 50 lakh more jobs, but also about encouraging the
youth to upskill through government training programs, making them eligible for that extra
first month's pay. And if you’re wondering how that’s going to happen, the government has a
plan for that too. It intends to skill 20 lakh youth through 1,000 upgraded Industrial Training
Institutes over the next five years. And there’s a government-backed loan scheme to help
25,000 students with financial assistance for these programs.
And it hasn’t forgotten about women in the workforce. Post-COVID, female employment in
India took a nosedive, dropping by 9% in 2022. That was like being on the same footing as
war hit Yemen. Sure, women’s participation in the workforce has improved from 23% to 37%
between FY18 and FY23. But it's still far from ideal. So the government’s solution is to set up
working women's hostels and creches to help them balance work and home duties, ensuring
that this upward trend continues.
Next up, let’s talk about the government’s goodies for companies and the startup
ecosystem. It has slashed corporate tax rates on foreign companies from 40% to 35%.
But the big highlight? The changes to the angel tax.
For the uninitiated, in the 2012 Budget, the Finance Minister introduced a new tax to crack
down on shady transactions disguised as investments in private companies. If domestic
investors bought shares in unlisted companies at prices higher than their fair market value,
those companies had to pay tax on the excess amount.
This move was aimed at widening the tax base and tackling black money but ended up
hurting startups. These fledgling companies, already struggling to find investors, had to
reserve a big chunk of their initial funding for hefty tax bills, limiting their operational
capital.
Over time, the government introduced exemptions to ease the burden. But last year,
Finance Minister Nirmala Sitharaman dropped a bombshell in her Budget speech. The
government removed the angel tax exemption on foreign investments, effective April 1st,
2023. So, startups receiving funds from individual foreign investors had to pay an angel tax if
shares were issued above fair market value.
This change had startups in a frenzy, not just because of the potential tax hit but also due to
valuation confusion. Valuations under the Foreign Exchange Management Act and the
Income Tax Act could be different, making the tax implications even murkier.
This, combined with the existing startup winter, caused funding to plummet to just $11
billion, which was a whopping 70% lower than FY22. Seeing the dire situation, the
government stepped in and rolled back the angel tax for all types of investors. Hopefully, this
move will help more startups get the funding support they need going forward.
Then there’s also something for India’s diamond cutting and polishing industry. 14 out of 15
diamonds set in jewellery worldwide are cut and polished in India. And that makes us a
world leader. This means that the sector employs a vast number of skilled workers who turn
rough diamonds into dazzling gems.
But there was a snag ― unpredictable tax rates for foreign mining companies selling raw
diamonds here. To fix this, the Finance Minister introduced safe harbour rates.
Let’s break it down. Imagine that Glow, a foreign mining company, sells raw diamonds to
Sparkle, an Indian firm. Normally, without safe harbour rates, the tax authorities would
scrutinise the deal to ensure that the price of the raw diamonds is fair and not manipulated
to avoid taxes. This process could be lengthy and complex, involving potential disputes over
the fair market value of the diamonds.
But now, the government says “Let’s introduce safe harbour rates.” So it sets a safe harbour
rate, specifying that raw diamonds sold by foreign companies to Indian companies will be
taxed at a predetermined rate, say 10%. So if Glow sells diamonds to Sparkle for ₹10 lakh, it
applies the 10% safe harbour rate, paying ₹1 lakh in taxes. This predictability means no more
lengthy audits or disputes for Glow.
For India, it attracts more raw diamond imports, supports local craftsmen and fosters a
stable business environment. It’s a win-win for everyone! But yeah, that 10% rate was just
an example. The actual rate slabs are yet to be announced.
And finally, the part you’ve probably been waiting for ― What's in it for common folks in
terms of personal income taxes?
There’s nothing new for those sticking with the old tax regime. But for those opting for the
new tax regime, there are a few tweaks.
First, if you're salaried, the standard deduction or the tax break you get to reduce your
taxable income has increased from ₹50,000 to ₹75,000 (or from ₹15,000 to ₹25,000 if you
earn an income from the pension of a deceased family member). According to the Finance
Minister, this will benefit 4 crore salaried taxpayers and pensioners.
Second, the tax rates have been adjusted. Previously, there was no tax on income up to ₹3
lakhs, 5% on income between ₹3 lakhs and ₹6 lakhs, 10% on income between ₹6 lakhs and
₹9 lakhs and 15% on income between ₹9 lakhs and ₹12 lakhs. Now, the 5% rate applies to
income between ₹3 lakhs and ₹7 lakhs, the 10% rate covers ₹7 lakhs to ₹10 lakhs and the
15% rate starts at ₹10 lakhs and goes up to ₹12 lakhs. The rest remains the same.
Third, you can save taxes by claiming deductions on the contribution your employer makes
on your behalf to the National Pension Scheme (NPS). Previously, employees working for
central or state government companies could claim a deduction of up to 10% of their salary
for these contributions. But now that has been bumped up to 14%, whether you work in the
private or public sector.
And all these benefits come with a few trade-offs. First, capital gains taxes have gone up. If
you sell listed stocks or equity mutual funds within a year, you'll now pay 20% instead of
15%. For similar investments held longer than a year, the tax is now 12.5%, up from 10%.
The indexation benefit on Real Estate investments is gone. This means you cannot adjust
your purchase price based on inflation while calculating the capital gains you made.
However, the long term tax rate has come down from 20% to 12.5%.
Second, if a company buys back its shares and you participate, you'll now pay the tax on this
income yourself at the applicable tax rates. Previously, the company took care of this tax.
Lastly, trading in futures and options just got a bit pricier, as the government has bumped up
the transaction tax rates here too.
So yeah, this Budget might not seem super exciting. But to reduce the gap between its
receipts and expenditure, the government needs to do a balancing act. It has already aimed
to bring the fiscal deficit down to 4.9% of GDP (Gross Domestic Product) from the 5.1%
expected for FY25 and it's targeting 4.5% by FY26. This is probably the best it can do to keep
both taxpayers and itself happy.
What do you think?
The Economic Survey 2024 Explained

Recently, the Finance Minister Nirmala Sitharaman tabled the annual Economic Survey in the
Lok Sabha. And it’s kind of a big deal for us here at Finshots. Because it gives us a glimpse
into where the economy is headed. And this year’s survey has its fair share of interesting
observations.
So let’s get straight into it.
The most controversial aspect of the report can be traced back to a few lines in Chapter 2.

We won’t quote the excerpt here. But it simply says a lot of new, young investors are
jumping into the stock market because they've seen prices going up and think this will
continue. They might be a bit too optimistic, expecting huge returns without fully
understanding that the market can go down too. And if people were to liquidate their
savings and deposits in an attempt to make money off the stock market, this could have real
life implications for them and the banking ecosystem too. After all, if banks can’t mobilise
deposits, that could affect borrowers and so on.
This has got a few people talking. Is it true that people are funnelling their savings to the
stock market?
Well, kind of. This has been a spectacular year for Mutual Funds with total assets under
management growing by nearly 35% to ₹53 lakh crores. This means that India is increasingly
warming up to the idea of fully embracing financial markets. However, some investors have
also found an opportunity to sell their holdings (thanks to the spectacular rise in stocks) and
park it in Real Estate investments.
In 2023, residential real estate sales in India were at their highest since 2013, witnessing a
33 per cent growth, with a total sale of 4.1 lakh units in the top eight cities.
Now you could look at this data and argue that some of the household savings is moving
away from banks. But you could also argue that this is a smart diversification strategy. This
money is going into mutual funds. It’s going into real estate. And it’s what people in most
developed countries do.
So this is a cue for banks to improve their offerings. Maybe it’s time to up the interest on
savings deposits instead of moaning about the fact that people are looking out for their own
best interests.
Okay, next on to inflation. There’s nothing really significant here. India managed to control
inflation better than most countries since Covid. Yes, you had the occasional rise in prices–
tomatoes, tur daal, milk, but you could pin most of it down to adverse weather conditions.
This has been a feature of India’s inflation story. Bad weather translates to higher prices and
the report accurately notes that the government may need to promote the cultivation of
pulses in more districts (and in areas with assured irrigation facilities). And maybe also invest
in better storing and processing facilities to stop all that food wastage.
There is also an interesting mention about edible oil. The domestic consumption of edible
oils has been increasing faster than production, leading to increased import dependence.
And yeah, that does not bode well for our future. So we probably need to look at that.
Then there’s the stuff around employment. Employment prospects in India have improved
no doubt. Almost every indicator points to this aspect. But there is the elephant in the room.
Only 4.4% of India's young workforce is formally skilled. This means that most young workers
have not received formal training or education specific to their jobs. And this can be a big
problem, especially considering India’s economic growth hinges on realising the potential of
its young workforce.
Will AI play a role in this?
The economic survey doesn’t make any categorical conclusions. But it does offer some
perspective.
It quotes the example of David Ricardo (a British economist) and his evolving views on
technology and labour during the early Industrial Revolution. Initially, Ricardo believed that
machinery wouldn't reduce the demand for labour. However, after observing the impact of
technologies like the power loom, which replaced artisan weavers and reduced their wages,
he revised his stance. By 1821, Ricardo suggested that if machinery could perform all tasks, it
might eliminate the need for human labour altogether.
What's the moral of the story?
Well, perhaps the authors of the Economic Survey feel like we should be increasingly careful
of deploying AI solutions in the workforce lest it replace human labour altogether.
Maybe there’s a need to strike a balance here.
There’s also a very important mention about unpaid work.
This invisible domestic work performed by women, which is usually neglected while
calculating the labour force and the GDP, has been variously estimated as highly valuable yet
invisible. But according to a recent report, it seems the economic value of women’s unpaid
domestic and care work in India is 15 – 17 % of the GDP. That’s a lot isn’t it?
The document also places an explicit focus on climate change. Now there’s a lot to unpack
here obviously. But considering this is a quick explainer in a 3 minute newsletter we will stick
to one interesting detail we encountered —water conservation efforts.
In Navanagar, Gujarat, declining water levels due to farming led to unsustainable salt levels
in the groundwater, making agriculture unprofitable. To address this, local farmers, with
support from the Water Resource Department and the Gujarat Green Revolution Company,
rejuvenated the village pond by connecting it to the Guhai Dam. They deepened the pond,
built a sump for water storage, and installed water lifting facilities, bearing the cost
themselves. They also introduced a piped water system and adopted drip irrigation,
significantly increasing crop diversity and productivity while reducing water and power
usage. This is an example where the community worked with public officials to solve a real
problem precipitated by humans and climate change.
Also, needless to say, India aims to grow economically while reducing carbon emissions,
which means balancing higher energy needs with cleaner, sustainable sources.

The document also spends considerable time extolling the virtues of the government and
the progress we have made in many spheres of life. There isn’t much criticism or internal
reflection if you were hoping for that kind of thing. But there is a beautiful passage that does
offer some sage advice.
In the Preface the authors note -
The Indian state can free up its capacity and enhance its capability to focus on areas where it
has to by letting go of its grip in areas where it does not have to. The Licensing, Inspection
and Compliance requirements that all levels of the government continue to impose on
businesses is an onerous burden. Relative to history, the burden has lightened. Relative to
where it ought to be, it is still a lot heavier. The burden is felt more acutely by those least
equipped to bear it – small and medium enterprises. It holds them back, leashes their
aspirations, and, in the process, holds the country back. On the face of it, it does not seem to
matter because the economic growth rates are good, and there are visible signs of progress.
But, we will never know the counterfactual: “what it might have been”.

Quoting the Ishopanishad the authors note - “Power is a prized possession of governments.
They can let go of at least some of it and enjoy the lightness it creates in both the governed
and the governing.”
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