Expert Zone

Straight from the Specialists

Budget 2013: What the oil and gas sector expects

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(Any opinions expressed here are those of the author and not of Reuters)

India’s oil and gas sector, often regarded as the country’s growth engine, has grown by leaps and bounds over the past decade, but the quest to reach the top of global league remains a challenge because of rising under-recoveries and lack of policy incentives.

The sector is a key revenue earner for the central and state governments. In 2011/12, it contributed 2,327.69 billion rupees to central and state governments in taxes, accounting for 20.6 percent of total indirect taxes.

At a time when the government earns a chunk of its revenue from the oil sector, the finance minister should consider including in Budget 2013 proposals to lower or exempt the sector from various taxes.

The recent announcement of a partial deregulation of diesel prices, with market-linked price for bulk users and graded increase in retail prices till price parity, is a welcome move. However, the need of the hour is complete deregulation of fuel prices and allowing market forces to set the benchmark in tandem with global oil prices.

Budget 2013: Reduce fiscal deficit, make poor richer

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A lot of expectations are riding on this year’s budget. And it’s not difficult to see why.

The last 18 months or so have been poor for the Indian economy with decelerating growth and a relatively weak currency reflecting the widening current account deficit. The persistence of inflation had kept the RBI on hold and this did not help the stock market. Financial scandals and seeming political indecision as far as deregulating the economy, at least till recently, were not conducive to confidence.

Pension plans are making a comeback

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Life insurance companies had all but exited the pension sector after tough regulations were put in place to guarantee returns for the investor. This is a vital sector for insurance companies and hit overall business.

In 2010/11, new business of 122 billion rupees was added in the pension sector. This fell to 111.7 billion rupees in the following fiscal year. Worse, deletions in the business increased from 68.9 billion rupees to 195.2 billion rupees last year — surely that would have hurt.

Budget 2013: Consistent reforms, effective execution is the key

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In what is widely perceived to be the UPA government’s final budget before polls due next year, Finance Minister P. Chidambaram is likely to continue with the economic reforms he introduced in recent months.

Although these policy announcements may have boosted sentiment, the key to long-term economic growth is consistency, transparency and speed, followed by effective execution on the ground.

Budget 2013: Chidambaram’s chance to bell the cat

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This year’s budget will be an interesting one and it will hopefully be more pragmatic than populist.

Not much has changed since Pranab Mukherjee presented the budget in 2012. At the time, India was battling high inflation at 9 percent, fiscal deficit at 5.9 percent of GDP and a current account deficit (CAD) at 4.2 percent of GDP.

Time for a shift in the tax incentive regime?

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The Indian economy is currently on the path of reform with the government liberalising FDI policy and relaxing overseas debt funding. And with the union budget just around the corner, investors are hoping for incentives on the tax front as well.

Traditionally, the government provides profit-linked tax incentives to promote investment in specified industries/states. However, considering the increasing need for investment in developing economies like India, the government is considering a shift from profit-linked tax incentive schemes to investment-linked tax incentive schemes. The desire for such a shift was clear under the proposed Direct Tax Code Bill.

Budget 2013: India has no room for a populist budget

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It is still a good year into the next general elections, yet India’s two main political parties have already set the stage for a showdown. The opposition Bharatiya Janata Party is closing in on the Congress party, according to opinion polls. Even though it is still early days, this puts even more pressure on the ruling party.

Last autumn, the Congress had a change of heart with its policy priorities, having realized that dithering on industry reforms would be a safer way of losing votes than pushing ahead with unpopular measures. It ploughed through opposition to liberalize foreign direct investment, and it mainly succeeded, although progress on fiscal housekeeping, such as raising power tariffs and cutting diesel subsidies, has come at a much slower pace. Other potential measures did not happen at all. Nonetheless, the party has raised hopes and expectations that it can get India’s act together.

Budget 2013: Getting the wow factor back

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Gone are the days when Indians used to wait for the budget in February to buy new things. In the 1990s, capital market investors also waited with bated breath for the annual budget to spell out tax and policy measures that affected the fortunes of sectors and companies.

But over the years, the budget lost its wow factor, becoming more of a ritual presentation of the government’s finances, resource allocation, fundraising and spending. This is because most taxes have been rationalized (although some scope still exists) by successive governments and different ministries announce various policy measures throughout the year.

Budget 2013: Need to review tax incentives

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It’s going to be a tight budget this year and Finance Minister P. Chidambaram will be looking to save every rupee in revenue to reduce the budget deficit, to which he has committed. One option would be to withdraw tax incentives which have outlived their purpose.

The finance ministry is only too aware of revenue lost from tax incentives. In 2011/12, it was a loss of 5.29 trillion rupees. If tax incentives are withdrawn, the 2013/14 budget would be in surplus. Nothing would amuse the finance minister more.

What we want to see in Budget 2013

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Over 15 years have passed since P. Chidambaram presented what was called the ‘dream budget’. It was a budget that changed the discourse of financial policy and offered a vision of India matching the growth and dynamism of the tiger economies of Southeast Asia.

In the last full budget of his government’s term, the finance minister once again has a chance to alter the discourse of policy away from handouts and towards efficiency. Our advice to him is to be as bold in ideas as his conviction permits and as ruthless in execution as the law allows. A few ideas for him to chew on:

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