Indian federal budget fails to impress the majority
Finance minister makes a weak attempt to trim deficit
Dubai: Disappointing economists, business leaders and stock market, India’s finance minister Pranab Mukherjee on Friday presented the federal budget 2012-13, which made a feeble attempt, at best, in reducing India’s ballooning fiscal deficit.
The budget set a fiscal deficit target of 5.1 per cent of GDP for the fiscal year, down from an expected 5.9 per cent in the current year. This year's figure, however, ended up far above the 4.6 per cent it had originally targeted in its budget a year ago.
Mukherjee said he expected the Indian economy to grow by 7.6 per cent in the next fiscal year, up from an expected 6.9 per cent in the current year but below the 8.4 per cent growth of the previous fiscal year.
"We are disappointed with the budget because it assumes a relatively high, 5.1 per cent deficit in the 2012-13 fiscal year. We also think that growth target is a bit too optimistic while inflation may have hard time falling as much as they are assuming,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole, Hong Kong.
“The market was hoping for a lower deficit for the next financial year, so disappointing from that perspective. India continues to have the largest fiscal deficit within emerging Asia, hence expect this to weigh on the rupee,” said Jonathan Cavenagh, foreign exchange strategist, Westpack, Singapore.
In the budget estimates for 2012-13, the gross tax receipts are estimated at 10, 7.76 trillion which is an increase of 15.6 per cent over the Budget Estimates and 19.5 per cent over the revised estimates for 2011-12. After devolution to States, the net tax to the central government in 2012-13 is estimated at Rs 77 trillion. The Non Tax Revenue Receipts are estimated at Rs16.46 trillion and Non-debt Capital Receipts at Rs 4.16 trillion. The total expenditure for 2012-13 is budgeted at Rs149 trillion. Of this Rs52 trillion is the Plan Expenditure while Rs96.9 trillion is budgeted as Non Plan Expenditure.
Tax proposals
The tax proposals are guided by the need to move towards the Direct Tax Code (DTC) in the case of direct taxes and Goods & Services Tax (GST) in the case of indirect taxes. For now it appears that the DTC has been deferred from the planned implementation from April 1, 2012.
Individual income upto Rs200,000 will be free from income tax; income upto Rs 180,000 was exempt in 2011-12. Income above Rs500,000 and upto Rs 1 million now carries tax at the rate of 20 per cent; the 20 per cent tax slab was from Rs500,000 to Rs800,000 in 2011-12. A deduction of up to Rs10,000 is now available for interest from savings bank accounts.
The budget made an attempt to widen the service tax base. All services will now attract service tax, except those in the negative list. The negative list has 17 heads and includes specified services provided by the government or local authorities, and services in the fields of education, renting of residential dwellings, entertainment and amusement, public transportation, agriculture and animal husbandry. Service tax rate is being increased from 10 per cent to 12 per cent, with consequential change in rates for services that have individual tax rates. The standard rate of excise duty for non-petroleum goods is also being raised from 10 per cent to 12 per cent. No change is proposed in peak rate of customs duty of 10 per cent on non-agricultural goods.
The direct tax proposals in the budget will result in a net revenue loss of Rs 450 billion and the raising of indirect taxes will result in a net revenue gain of Rs 4.6 trillion resulting in a net gain of Rs 4.1 trillion.
"The finance minister is looking to collect large sums of money through indirect taxes, probably to mitigate the fiscal situation, but this could have an impact on consumption,” said Deven Choksey, managing director of K R Choksey shares & Securities, Mumbai.
My comments as follows:
The presentation of budget 2012-13 by Finance Minister Pranab Mukharjee presents a feeling of let down to middle class citizen of India. He projected India’s GDP growth in 2012-13 to be 7.6 per cent, +/- 0.25 per cent when compared to global growth is impressive.
With increased cess on crude oil to Rs 4,500 per tonne from Rs 2,500 per tonne, Oil exploring companies will be burdened further and look for relaying it to the end users.
Ignoring the cry of indian companies manufacturing heavy power equipment to increase the customs duty on imports of such equipments will demotivate growth in this sector.
The budget did not give support to Indian engineering exporters like Larsen & Tubro, which accounts for about one-fourth of the country's total merchandise exports and instead proposed to raise excise duty to 12% from 10%.
Power utilities are likely to benefit with proposed two-year exemption on import duty for companies importing thermal coal.
A proposal to allow external commercial borrowing to part finance rupee debt of power projects will also help growth in this sector.
Low cost housing developers and financiers will benefit after the budget proposed allowing external commercial borrowings for low-cost housing projects below Rs 25 lakhs. Hope it brings more quality and genuine infrastructural offerings to common man.
Private Airlines will benefit after the budget proposed to allow external commercial borrowings of up to USD 1 billion to help meet immediate funding needs.
The proposal to allow foreign direct investment by airlines under "active consideration" may bring a smile on two on airline king Vijay Mallya.
The above two items looks as interesting options for Indian investors from abroad to move in with financial platters to stake more presence in the forthcoming years to barter important rights to NRIs.
Infrastructure finance companies such may tend to benefit after the proposal to double the issue of tax-free bonds for financing infrastructure projects.
India also announced an increase in import taxes for assembled SUVs and utility vehicles costing more than USD 40,000. On one hand the proposal mentioned on will see increased prices on luxury cars, we are yet to see any reforms being done on the registration of such cars at the point of purchase origin or rather a unified registration charges in all states, which is where the state exchequer and in turn centre being devoid of a major share on taxation. However, the move may turn out to be positive for indigenous car makers like Tata and Mahindra.
Fertilizer makers could see a fall in expenditure after the budget fully exempted basic customs duty on import of equipment for three years which when passed on to farmers could result in smiles on ordinary citizens.
On one hand it brought in measures to reduce the pricing on medicines for treating cancer and HIV, there was no mention on the facilitators to control the costlier trial and error methods they use to treat these patients. This therefore will remain a costlier option for common man in the year to come.
Full exemption on branded silver jewellery from excise duty may create interest in silver as first choice.
Duty-free allowance for eligible passengers of Indian origin from `25,000 to `35,000 and for children of up to 10 years from `12,000 to `15,000, which seems to be one among the few sugar candies thrown at NRIs in this overall exercise.
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