Expert Zone
Straight from the Specialists
Budget 2012: Politics is the art of the possible
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The stream of criticism directed at the 2012-13 budget misses the point that this is the best the coalition government could offer under the circumstances.
Talking about “lost opportunities” assumes that there were some opportunities to start with. Surely the rapid reversal of important decisions such as FDI in retail distribution, the exports of cotton and the hike in rail fares should have signalled very clearly the limits imposed. The resignation of the minister involved is rather sad as the cabinet should have backed him given that the hike was a collective and not an individual decision.
Outsiders may point out that India can grow at 12 pct and 13 pct and not just at 6 pct – 7 pct, but the Indian democracy, that is the will of the Indian people, wishes otherwise.
Economic policies are like a restaurant menu. You can have a coffee and a sandwich or the caviar and champagne. The former costs little and is tasteless, the latter delicious but expensive. If the Indian people go for the sandwich, who is to say that they are wrong? But we divert, so back to the budget.
The policy measures taken are likewise of little substance — a lot of twiddling with details of income tax and extension or contraction of existing taxes. The case of privatisation is addressed in an anodyne manner, “amount to be raised”, but no list of assets. The retroactive parts of the corporate-capital gains tax are regrettable because they are retroactive and not specifically because they are aimed at a certain target. Retroactive legislation goes against all principles of natural justice by making illegal or non- permissible things which were legal and permissible at the time they were committed.
The macro economic impact of the budget is mild and if the planned reduction of the fiscal deficit from 5.9 pct to 5.1 pct of GDP is achieved, then the budget will be mildly contractional.
Is the fiscal deficit phony?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The stock market did not respond positively to the budget in spite of the cut in Securities Transaction Tax (STT) and the provision of tax benefits to retail investors for investment in equity because of the trust deficit in budget arithmetic. The fiscal deficit is too high and could also escalate during the year considering that the assumptions on which it is based are not realistic.
In the 2011-12 budget, the fiscal deficit overshot the target by a huge margin. The finance minister had planned for 4.6 percent; it turned out to be 5.9 percent. The budget was messed up by the RBI with its interest policy which brought down growth and therefore tax revenues, and by the government which let expenditure shoot up under political pressures.
More precisely, a third of the increase in fiscal deficit came from the fall in tax revenues, mainly corporation tax, and two-thirds from the increase in subsidies, mainly food. That put the budget in a strait jacket. The finance minister did try to bridge the gap with the increase in service tax and excise duties which, along with a concession in direct taxes, would mop up 414 billion rupees. That was not enough and the finance minister had to have a go at the bulging subsidies.
Currently, subsidies are 2.4 percent of GDP and to that extent inflate the fiscal deficit. The finance minister has therefore resolved that subsidies will be curbed next year. Not all but those on petroleum products and fertilisers which are regressive and together account for about two-thirds of total subsidies. The latter will be chopped down in 2012-13 to 2 percent of GDP.
That is undoubtedly brave on the part of the finance minister who had been rebuffed by the Trinamool Congress for the minor offence of permitting an increase in railway passenger fares. That was also how this critical ally in the UPA had reacted to earlier increases in petroleum prices. Against this background, the initiative of the finance minister to slice off petroleum and fertiliser subsidies seems presumptuous in spite of the assurance by the prime minister that, when the time comes, he would bite the bullet. Probably what he means is that time may not come if international oil prices ease.
Not to be discouraged by the fall in tax revenue in 2011-12, the finance minister has budgeted for a 19 percent increase in tax revenues because he expects the economy to grow at 7.6 percent in 2012-13. Even if it does, the 19 percent increase, excluding additional taxation, in unlikely to come. The experience of 2011-12 is that a 1 percent increase in GDP generates 2 percent increase in tax revenues. On that basis, a shortfall in tax revenues in 2012-13 is not unlikely.
Budget 2012: IT sector expects tax measures
(The views expressed in this column are the authors’ own and do not represent those of Reuters)
The technology sector is set to cross the $100 billion mark this year with $69 billion from exports and $32 billion from the domestic market. This is a healthy increase of around 16 pct over last year’s growth despite global economic events such as the anti-outsourcing bill in the U.S. and the euro zone crisis which had an impact on the sector.
It is anticipated that going forward, these global events will have a significant adverse impact on the Indian technology sector coupled with a number of measures taken by other developing countries to get more of outsourcing business.
Additionally, the Indian technology sector is reeling under the pressure of higher wage bills, high attrition, linear growth (direct link between sales growth and headcount addition), skyrocketing real estate prices, uncertainties surrounding SEZs, the write-off of large technology contracts due to cancellation of 2G licences by the Supreme Court.
As if all this was not enough, the huge transfer pricing adjustments made by transfer pricing officers leading to potential high tax outflows and routine rejection of service tax refund claims are adding fuel to the fire.
The finance minister presents the budget later this week. As witnessed over a number of years, the industry has a lot of expectations but gets disappointed. So expectations from Budget 2012 are not very high even though the finance minister, during the current five-year tenure, may not have more than one opportunity after this.
Given the background, what would this sector look from the budget document? A slew of tax measures such as:
Budget 2012: Need for innovative incentives
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Every year as winter gives way to spring, a nation of over a billion wakes up to different expectations on Budget day.
The salaried listen in to the finance minister’s speech looking for tax sops on housing loans and higher tax exemption limits.
The corporate sector would read the fine print on excise duty harmonisation, any changes in depreciation rates, dividend distribution tax changes and service tax items.
The curious FIIs, strategy heads of foreign banks and treasury heads of banks would try and decipher any algorithms amidst new investment provisions in the budget.
For the common man, it would be ‘mundane’ stuff including subsidies for gas, kerosene, PDS items.
What’s the Budget? A document that sums up the nation’s finances and provides an inkling of expectations in the next 12 months. Amidst strong headwinds in global financial markets, local inflationary pressures and runaway prices, what can be a set of reasonable expectations for Budget 2012?
India Inc hopes for action on GST
(The views expressed in this column are the author’s own and do not represent those of Reuters)
India Inc has time and again expressed its desire for early implementation of Goods and Service Tax (GST). While implementing GST may take at least a year, the 2012 budget will clearly indicate the Centre’s seriousness in implementing GST.
There are at least three key steps the Centre can consider in this regard:
– Reduction of Central Sales tax (CST) to 1 pct or 0 pct
– Implementation of negative list based service taxation
– Liberalising Cenvat credit mechanism to avoid any kind of cascading
While all of us keep watching the dithering EGoM of state Finance Ministers to bring in a consensus on carrying out massive tax reforms, what we are witnessing is a clear push back. The recent news that states would want the Centre to increase the central sales tax rate to 4 pct (from the existing 2 pct) clearly indicates the mood.
Keeping fingers crossed in the run-up to Budget 2012
(The views expressed in this column are the author’s own and do not represent those of Reuters)
It’s interesting that in India, the run-up to the annual Budget means individuals, companies and industry associations keep their fingers crossed in the hope their annual budgets don’t get affected by the announcements of the Finance Minister.
Even the market capitalisation fluctuates several percentage points in the matter of a day based on the pronouncements in the budget. It continues to be an event everyone looks forward to each year and 2012 may be no different.
This will be the eighth finance Budget in a row by the current government, and the past seven have struggled to provide any direction to the economy or to drive it upwards. It’s an admitted fact today that economic growth in India is driven by the private sector, in spite of the government and the policy paralysis that it is so closely identified with now. The opportunity and the need for impetus in policy and government support relating to education, medical facilities, infrastructure, FDI among others is huge, if there is a political will to drive change and growth in these areas. Nonetheless, government policies define the cost of day-to-day life and hence the keen interest.
Beside the fundamental expectation that policy announcements need to be made to stimulate the growth and investment cycle, there will broadly be five areas in which policy measures will be expected.
– Clarity is required on the actual implementation of the Direct Taxes Code (DTC) and the Goods and Services Tax (GST). Both these policy announcements govern day-to-day lives of the common man in the country
– While the fiscal deficit continues to grow each year, it is not really reflected in growth in sectors where government spending and support is essential. Measures to contain fiscal deficit will be eagerly awaited
Union Budget 2012: Need for a concrete plan
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Like every budget since the subprime crisis of 2008, the one on March 16 will see the Finance Minister walking a tightrope between fiscal consolidation and growth. The only difference being — this time the government is really constrained to provide a fiscal boost to consumption.
Hence, support to growth can most likely be in the form of a boost to investment by adopting critical reforms and creating an atmosphere conducive enough for private investment to come back. With the markets and the Reserve Bank of India (RBI) breathing down its neck looking for a credible plan on bringing fiscal deficit down in the medium term and concrete steps to encourage private investment, the task is cut out for the government. It is now more a question of political will than anything else.
The results from state elections in Uttar Pradesh, Punjab, Uttarakhand, Manipur and Goa are likely to test the political will and commitment of the government to reforms and fiscal prudence.
Real GDP growth has dipped to 6.1 pct in Q3FY12, the lowest since Q3FY09 — the peak of the subprime crisis. A combination of high inflation, increased cost of capital and the weak global economy resulted in the slowdown in growth. Inflation has shown signs of moderation over the last couple of months, though doubts remain as to its sustainability. Cost of capital has continued to remain high in the wake of tight liquidity, high fiscal deficit and absence of clear direction from the RBI on interest rates.
India Inc will be looking towards the Budget to provide a credible plan on bringing down fiscal deficit and government borrowing to bring interest rates down. Also, investment as a percentage of GDP has moderated from about 33-34 pct to 30 pct levels over the last four years, thereby bringing the sustainable (non-inflationary) rate of growth of the Indian economy to about 7 pct. India Inc expects the government to kick-start reforms to boost private investment in the upcoming budget to bring the sustainable growth rate higher.
Mere lip service may not be enough in this budget. Markets need a concrete plan for execution. If fiscal deficit is projected lower, the assumptions and expectations forming the basis for such projections should be realistic and not over-optimistic. The Budget presented in 2011 had projected fiscal deficit at 4.6 pct of GDP, based on some practically weak assumptions such as a 9 pct GDP growth rate and understated subsidy bills. The reality is that fiscal deficit for FY12 is likely to exceed the budget estimate by a full percentage point.
Budget 2012: Common man’s expectations
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The weeks before the Union budget are days of wishful thinking for the common man. It is always the expectation that the threshold and tax exemption limits will be increased. This year is no exception, and the common man would definitely be happy if his wishes are met.
Realistically speaking, as we move closer to implementing the Direct Taxes Code (DTC), the personal tax slabs in this budget could be aligned to the proposed DTC thresholds. So we can expect the minimum income limit not subject to tax being raised to 2 lakh rupees from 1.9 lakh rupees.
Also, the threshold limit of applying 30 pct tax rate may be raised to 10 lakh rupees from 8 lakh rupees. This together would account for reduction of taxes by 21,000 rupees (plus the reduction in effective surcharge).
There are certain other areas in which amendments are welcome. For example, deductible interest on home loans taken for houses for self-use are pegged at a maximum of 1.5 lakh rupees. It would be a welcome move to increase this limit to 3 lakh rupees or keep it at par with the provisions applicable to a house on rent. In the latter case, the entire interest payout is allowable as a deduction.
In the absence of state-funded social security schemes for retired people in India, unlike the West, it is important for an individual to secure his post-retirement life.
Unfortunately, tax saving is often the driver for investing in such retirement plans. Presently, deductions under section 80C, which allows tax sops on such savings is pegged at a maximum limit of a lakh rupees. This limit can be extended to 3 lakh rupees to encourage more saving.
Budget 2012-13: Expectations and exigencies
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The Union budget has always provided major policy direction which has been anxiously awaited by the common man and the industry. But over the years, the tax system has become more crystallised and yet expectations have not ceased.
The common man was put on the pedestal for the first time in 2009 with emphasis on inclusive growth. His main interest is really on the expenditure side of the budget since he is outside the tax net. But the middle-class which has been tortured by high inflation for the past 20 months expects and may get some relief from income tax with the exemption limit possibly raised to 200,000 rupees.
The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is a major initiative which benefited the common man in rural areas and created a shortage of labour about which the Minister of Agriculture had a lot to complain. MGNREGA involves an annual expenditure of 400 billion rupees and, combined with the proposed food security bill, will address the poverty issue squarely.
There is a possibility, however, that some other benefits extended to the common man may be curbed. That is true, for instance, of subsidies on kerosene, diesel and LPG which involve huge expenditures and have made the Finance Minister spend sleepless nights. Subsidies mop up nearly 30 percent of the tax revenue, leading to a sharp increase in revenue deficit which, in the first 10 months of the current year, has already exceeded the budget provision.
The shortfall in resources with the government and the 400 bps increase in interest rate on private debt combined to reduce investment in the economy. In the fourth quarter of 2011, investment dropped from 30 to 28 per cent of GDP. Industry is not inclined to add to capacity because demand for homes, for white goods, automobiles, and so on which are purchased on credit has shrunk. The result? GDP growth is down to 6.1 percent.
The conditions today are almost like those in 2009. There is an immediate need of course correction. It is legitimate for industry to expect that the Finance Minister will budget for investment-linked incentives like an increase in the rate of depreciation, reduction of Minimum Alternative Tax (MAT), cut in corporate tax and Securities Transaction Tax (STT), which together can pep up capital market, investment and growth.
Budget 2011: Good news for mutual fund industry?
(The views expressed in this column are the author’s own own and do not represent those of either Principal Pnb or Reuters)
When it comes to the mutual fund industry, the 2011-12 budget has good news and not so bad news.
Let’s first take up the good news.
In his budget speech, our Finance Minister has said “Currently, only FIIs and sub-accounts registered with the SEBI and NRIs are allowed to invest in mutual fund schemes. To liberalise the portfolio investment route, it has been decided to permit SEBI-registered Mutual Funds to accept subscriptions from foreign investors who meet KYC requirements for equity schemes. This would enable Indian Mutual Funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market.”
After being at the receiving end of rapid regulatory changes, these indeed point to better times, especially because overseas investors are expected to be mature and therefore longer term in their orientation especially considering that the long-term India growth story remains intact.
However, I would stop just short of popping the champagne because aspects like KYC, income tax and investor caps have yet to be unravelled.
Having said that, the industry should begin with obtaining approvals from overseas regulators so that it can exploit this very substantial opportunity.
