Friday, March 16, 2012

Not a Populist Maneuver

The Union Budget of FY2012-13, presented by the Finance Minister Mr. Pranab Mukherjee, resulted in the market closing 1.19% in red. Most of the sectoral indices, except FMCG and Consumer Durables closed in red. India Inc has called this budget “a missed opportunity”.


The expectations from the Budget were low to begin with. But, while the expectations were low, wishlist was long. The table below is an example of the wish list of a few industries.

Sector Wishlist

Cycles
*Abolition of all duties

Infrastructure
*Revive power sector. Extend benefit under Sec. 80IA
*Exemption from MAT.
*Lift the $30 bn annual cap on External Commercial Borrowing temporarily.
*Take a call on the no-go criterion for the coal blocks.
*Bring more private players into mining

Health Care
*Import duty cuts on import of equipments, drugs and chemicals.
*Declare it a 'National Priority Sector'.
*Make it a part of the infrastructure sector so that it can avail loans for infrastructure financing institutions.
*Increase the medical reimbursements exemption limit from Rs15,000 to Rs1,00,000/-

Viscose Rayon
*Reduce excise duty from 10.3% to 0.
* Retain S.A.D in lieu of Sales Tax.

Branded garment
*Remove 10.5% Central Excise Duty.
*Refund of Excise Duty on lines similar to refund of duties of input and finished goods.

SSI
*Increase in exemption limit from Rs1.5cr to Rs5cr.

MSME
*Provide more reliable and accessible internet broadband.

Real Estate
*Single-window clearance mechanism for real estate projects.
*Better clarity on the indirect taxes being levied on developers.
*Development of a viable Real Estate Investment Trust (REIT).
*Make rental business attractive for investors.

Source: Compiled from various industry associations and news reports


Everyone wanted this budget to be “not a populist maneuver”, but in the same breath, they would roll out a series of exemptions and sops that they wished for from the budget.

One thing is for sure. This budget is not a populist maneuver and as the market reactions point out, Mr. Finance Minister has not been able to satisfy everyone. And this is exactly what works in his favor.

As we can see, almost every industry wanted tax sops to continue, duties and taxes to reduce or be removed. But the finance minister has stuck to tackling the burgeoning fiscal deficit and concentrating on key areas of infrastructure, education, health and food. There is effort to contain the outflows on subsidies, containing them to 2% of the GDP. There is emphasis on removing bottlenecks for the coal, mining, roads and energy sectors, and various customs reliefs and duty cuts have also been proposed for these sectors. Create capacities for storage, increasing supplies, reducing duties and customs in the agricultural sector are truly welcome. The allocations for education and health related schemes have also gone up by more than 20% overall.

The ‘aam aadmi’ does not get too much, but should not be disappointed as well. Within limits, the budget has put something in their pockets too without taking away much. The income tax exemption limit has gone up to Rs2,00,000/- The limit for tax exemption on interests earned has gone up from Rs5,000 to Rs10,000/- The retail investor gets an incentive to invest in the stock markets, through the Rajiv Gandhi Equity Savings Scheme. Service Tax had been increased by 2% but then it was inevitable as the service tax was reduced in 2008 as sops given to tide over the financial crisis.

Black money and tax avoidance have been frowned upon. Amendments to Fiscal Responsibility and Budget Management Act, 2003, have been announced.

The government is embroiled in corruption charges, the mandate of the people in the recently held state elections was not encouraging, and the so called allies are not being too helpful either. Not much is expected from the financial year 2013-14 budget as the country goes to elections in 2014, assuming that the UPA government manages to hold on till then. This was the only chance for Mr. Pranab Mukherjee, to push for reforms, save some face by doing it, and bring India back on the growth trajectory. While there are many sectors that are disappointed for not getting any sops, the finance minister has done a pretty good job within his constraints.



Reining in the Fiscal Deficit

The government is embroiled in corruption charges, the mandate of the people in the recently held state elections was not encouraging, and the so called allies are not being too helpful either. Not much is expected from the financial year 2013-14 budget as the country goes to elections in 2014, assuming that the UPA government manages to hold on till then.


So the budget being presented tomorrow by Finance Minister Pranab Mukherjee, might be the only chance to push for reforms, save some face by doing it, and bring India back on the growth trajectory. One of the primary concerns this year is to rein in the Fiscal Deficit.

Last year, Mr. Mukherjee had said that the government would target a budget deficit of 4.6 per cent for 2011-12, compared with the 5.1 per cent expected for 2010-11. We are nowhere close to the targeted figures. Subir Gokarn, the Deputy Governor of RBI has predicted that the Fiscal deficit would be close to 7% by the end of March 2012. The government badly missed their own revenue and expense predictions. Government borrowing has been increasing. This has resulted in high interest rates. On the one hand the government is not able to control expenses; on the other hand, it is not doing much to improve revenues.

The four areas, which are being talked about and are very likely, the budget may target to rein in the fiscal deficit are Subsidies and welfare schemes, Foreign Direct Investment, non-tax revenues and tight fiscal management policies. Let’s look at the state of and the challenges facing each one of these areas.

Subsidies and welfare schemes: Year after year, the government has rolled out more and more subsidies (fuel, food, fertilizers) and welfare schemes (MNREGA, NHRM) for the people that have now turned into giants, with ever increasing appetite for cash. Various subsidies account for close to 3% of the GDP!

On the one hand, the government spends close to Rs55,000cr in food subsidies every year, on the other, the estimated wastage of food in an year is close to 60 million tones, approximately 20% of the total production. The prices of diesel and fertilizers are far from reality and decontrolling them or reducing the subsidy might result in early polls. Apart from this, there is lack of transparency about how the money is spent on various welfare schemes. Accountability and achieving the targets should be the key words in such schemes, but they are not!

Foreign Direct Investment: FDI in aviation, retail, insurance, and infrastructure are all pending since long and need urgent attention. There are benefits to be gained from FDI apart from the capital, in terms of technology, expertise, backward and forward linkages etc. Simplifying processes for the foreign investors, reducing the number of days taken to conduct business and set up operations could all go a long way in attracting investors. Though it might now be difficult to build consensus in the Parliament and it may be impossible to push through bills like FDI in multi- brand retail.

Non-tax revenues: Divestment or sale of stake in Public Sector Undertakings is one way to raise money without putting burden on the common man. The Government failed miserably in this last year. The recent example of investors shying away from ONGCs follow-on public offering and LIC being ordered to pick up the shares to save the offer from falling through is a case in point.

Tight fiscal management policies: Except the Non-Direct Tax collections, the government has fallen short on almost all other forms of Revenues collection. The estimated shortfalls for the FY2011-12 are Rs20,000cr in Direct Taxes, Rs35,000cr in Non-Tax revenues, Rs27,000cr in Divestments and Rs37,000cr in Non-Debt Capital. The expenditure has been as budgeted to a great extent, in fact it might be lower than budgeted as on the year end. With transparency and good governance, proceeds from divestment could go up. Measures to improve the tax and non-tax collections have to be put in place, including coming down heavily on corruption, which might be leading to money going into private coffers rather than the exchequer. Voluntary Disclosure Schemes or Amnesty Schemes could be put in place to encourage people to bring back the black money stashed away in tax havens.

Overall it seems that the fiscal deficit situation that we have gotten into is mainly due to mismanagement and poor planning. Taking calculated and tough stand and having clarity in the policies will definitely help rein in the fiscal deficit.

Budget Wish List

The Union Budget of FY2011-12, presented by the Finance Minister Mr. Pranab Mukherjee, resulted in the market going up by close to 3% and breathing a sigh of relief for not having been burdened with more taxes or duties. Ofcourse, there was nothing to rejoice about at the same time. But at least status quo does not imply being worse, if not better!


The expectations from the Budget of FY2012-13 are low and the stage is set with the monetary policy review dampening the sentiments of the markets today. While the expectations are really low, wishlist from the Budget is long. And that might work in Mr. Mukherjee’s favor, if his budget shows even a slight sliver of hope for reforms.

Everyone wants this budget to be “not a populist maneuver”, but in the same breath, they roll out a series of exemptions and sops that they wish for from the budget. One thing is for sure. This budget will not be a populist maneuver, because whatever Mr. Finance Minister does, he will not be able to satisfy everyone. The table below is an example of the wish list of a few industries.

Sector Wishlist

Cycles
*Abolition of all duties

Infrastructure
*Revive power sector. Extend benefit under Sec. 80IA
*Exemption from MAT.
*Lift the $30 bn annual cap on External Commercial Borrowing temporarily.
*Take a call on the no-go criterion for the coal blocks.
*Bring more private players into mining

Health Care
*Import duty cuts on import of equipments, drugs and chemicals.
*Declare it a 'National Priority Sector'.
*Make it a part of the infrastructure sector so that it can avail loans for infrastructure financing institutions.
*Increase the medical reimbursements exemption limit from Rs15,000 to Rs1,00,000/-

Viscose Rayon
*Reduce excise duty from 10.3% to 0.
* Retain S.A.D in lieu of Sales Tax.

Branded garment
*Remove 10.5% Central Excise Duty.
*Refund of Excise Duty on lines similar to refund of duties of input and finished goods.

SSI
*Increase in exemption limit from Rs1.5cr to Rs5cr.

MSME
*Provide more reliable and accessible internet broadband.

Real Estate
*Single-window clearance mechanism for real estate projects.
*Better clarity on the indirect taxes being levied on developers.
*Development of a viable Real Estate Investment Trust (REIT).
*Make rental business attractive for investors.

Source: Compiled from various industry associations and news reports

As we can see, almost every industry wants tax sops to continue, duties and taxes to reduce or be removed. But the finance minister has no magic wand and must tackle the burgeoning fiscal deficit. Hence, exemptions and indirect-tax reductions may seem farfetched. Though, the budget may actually pave way to implement the Direct Tax Code (DTC), taking at least small strides this year.

Increasing the personal income tax limit from Rs1.8/1.9 lakhs to Rs3 lakhs, increasing the Sec80c exemption limits, hiking the slabs for tax rates will all put more disposable income in the kitty of the common man.

Rising inflation, rising prices of food, petrol, LPG, had the households scrambling to cope throughout the last year and they do not expect this year to be different. The common man is worried about the sky rocketing education and healthcare costs, rising housing costs and declining amenities. They are looking at Mr. Pranab Mukherjee to ensure that they can plan their monthly budget with more precision and have improved standards of living.

Create capacities, reduce wastage, improve infrastructure, to increase supply in the agricultural sector. Have more clarity on the prices of fuel. People are confused. Are the Oil prices really independent? Will the diesel prices be deregulated? Why are we paying more and getting less of everything?

All these questions concern the common man and giving income tax sops alone may not be enough to enthuse them to vote you back Mr. Finance Minister.