INDIA BUDGET 2012-13 <Analysis by Prabhu T Srinivasan>

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SUMMARY: Budget 2012-13 has invited more criticisms than appreciations from the various stakeholders of the country. Given the unanticipated difficult situation the global markets are currently in, and the multiple problems that the Indian economy is facing, such as weakening of Rupee against US Dollars, High cost of funds, Inflationary pressures, and High unemployment levels to name a few, the finance ministry has opted for a stringent budget to defy these problems and bring the economy back on a sustainable growth path. I would like to conclude the analysis with my view that the key lies in implementation of the plans. Having observed in the past, that implementation of various initiatives have seen multiple road-blocks stalling them abruptly, we shall try to learn from our past to ensure growth and prosperity of the world’s largest democracy!
Transcript  Page 1 A NALYSIS O F B UDGET 2012-13   (By Prabhu T Srinivasan) SIGNS OF RECOVERY AFTER A DIFFICULT YEAR 2011-12 would stand out, as one of the toughest years in history, that witnessed several momentous events, such asdowngrades of sovereign ratings of The USA and France, restructuring of leading multinational firms, and monetary tightening by several central banks which shook the foundations of major global economies, making growth difficult notonly for India, but also for the world at its entirety. Greece debt crisis in Europe, political uncertainty in middle-east, andthe great north-east earth-quake in Japan, tested the strengths of various global economies. Amidst these, India, althoughmanaged to put on a remarkable growth, was not fully isolated from their negative impact. India’s current e stimated GDP growth rate of 6.9% for 2011-12 is relatively low when compared to the 8.4% CAGR (Compound Annual Growth Rate) seen during 2009-11. The historically high headline inflation level which was witnessed in 2011-12, caused an environment of tightened monetary policy which eventually affected investments andconsumption during the year, ultimately leading to such slower growth. However, signs of recovery are seen in coal,fertilizer, cement, and electricity sectors as we enter the first year of ‘India’s 12 th   five year plan’, which aims at ‘faster,sustainable and more inclusive growth’ . SERVICE SECTOR & DIVERSIFIED TRADE PARTNERS KEEPS ECONOMY AFLOAT Growth in India’s GDP is at present contributed largely by the services sector, which is estimated to grow at 9.4% for2012, along with a 3.9% growth in industrial output and a 2.5% growth in agriculture. We saw a slow-down in industrialoutput growth, because of deceleration in private investment, especially due to rising cost of credit. Structural aspectsthat led to prolonged food inflation in 2011-12, are now addressed through strengthened food supply chain. Diversifiedtrade partners, with ASEAN region contributing to 57.3% in 2011-12, (33.3% in 2000-01) is a notable achievement thatprotects the country from the difficult situation in the US and Europe. The estimated current account deficit is at 3.6%,for 2011-12, suggesting a steep deterioration in net-trade movements in the last few years. Apart from these, there are various other factors and assumptions with which the government has stated its expectedGDP growth of 7.6% +/- 0.25%, for 2012-13. LOWER SUBSIDIES & HIGHER TAXES TO CONTROL FISCAL DEFICIT In 2011-12, lower direct tax revenues (chart 1) and increased subsidiaries (chart 2)   caused slippage from the government’s ambitious fiscal deficit target of 3% (chart 3) . This has prompted the finance ministry’s decision to call for a rise inindirect tax and a lower expenditure, mainly through a controlled and systematic reduction of subsidies. Major subsidiesof Indian government are allocated to food, fertilizer, and petroleum industries. Target is to reduce these subsidies to less than 2% in 2012-13, and subsequently to less than 1.75% in the next 3 years, which could only be achieved through directed targeting of subsidies, thereby preventing leakages. Newly proposed forthis, is the use of Mobile-based Fertilizer Management System (m-FMS), recommended by the task force headed by Nandan Nilekani, the chairman of Unique Identification Authority of India (UIDAI). Pilot projects for direct transfer of subsidy to beneficiary  ’s bank account have been conducted for LPG, and Kerosene, in various parts of the country.Much anticipated tax reforms such as DTC (Direct Tax Code) and GST (Goods and Services Tax) are yet to beimplemented and the government remains optimistic about employing these reforms in the next few months. Moreinterestingly, the government ’s plan to set up GST network (GSTN) as a ‘ National Information Utility’ is also expectedto become operational by August 2012.  Page 2  Divestment of CPSEs One of the innovative tools to generate revenues, recently put into practice is the disinvestment/divestment of GoI’s shareholding in the Central Public Sector Enterprises (CPSEs). Target for 2011-12lowered to INR14,000 crore from the srcinal target of INR40,000crore, as the government did not find the market conditions attractiveenough to justify sale of shares. For 2012-13, the government has cutdown the budget and expects to raise INR30,000 crore, which stilllooks optimistic given the prevailing economic situation. However, atany point in time, at least 51% ownership and management control would rest with the government, thus providing the firms withstability and at the same time, necessary financial flexibility, at par with the private counter-parts. FDI in Multi-brand Retail  Although the centre has faced strong opposition from various stategovernments for proposing to allow Foreign Direct Investment (FDI)in Multi-brand retail, the budget still restates the centre’s hope to achieve consensus among all the political parties with regards to theissue. But, given the political structure prevailing in the country andthe coalition ruling party system in place, the centre is likely to faceseveral delays and disagreements while going forward with this.Nevertheless, it is also valid that the reform can make the food supply chain much more efficient than the present unorganized model,addressing the inflationary pressure to some extent.  Rajiv Gandhi Equity Savings Scheme  As a new tax saving investment scheme, the government hasannounced that new investors, with annual income less than INR10lakhs can now enjoy a tax deduction of 50% with a lock-in period of 3 years. However, the investment amount up to which this benefitcan be availed is capped at INR50,000 while investing directly inequity markets. This will incentivize higher participation of small retailinvestors directly in equity markets. Central KYC Depository  Another stride in the reforms is the scheduled implementation of asingle, central Know Your Customer (KYC) depository to avoidmultiplicity of registration and data-upkeep. If this is implemented,the hassles on of opening various bank accounts, mutual funds, de-mat accounts, mobile, internet & cable service provider accounts canbe effectively handled and governance processes would become fasterand easier. CHART 1: SPLIT-UP OF TOTAL REVENUE TOGOVERNMENT, SHOWING A DIP IN NON-TAX REVENUES IN 2011-12 (Y: INR 1000 crores) CHART 2: CHART SHOWING REVENUEEXPENDITURE (SUBSIDIES) FORMING THEMAJOR PORTION OF TOTAL EXPENDITURE CHART 3: CHART SHOWING BOTH ‘ REVENUE ’  AND ‘ FISCAL ’ DEFICIT WIDENING IN 2011-12 ● ● ●    Did you Know? Provision for Defense sector at  INR 193,407 crore in this budget, is less than two-third of what is recommended by industry experts  ● ● ●  Page 3 Core Banking Solutions in RRBs  With 81 of 82 Regional Rural Banks (RRBs) successfully migrating to core banking solutions, they have also joined theNational Electronic Fund Transfer (NEFT) system. The government plans to continue capitalization of weak RRBs forthe next two years, thereby ensuring financial inclusion and high integration with the banking system. INFRASTRUCTURE AND INDUSTRY India’s long  -term focus on infrastructure development is growth oriented as it should be for any developing economy. The 12 th five year plan infrastructure spending projected at INR50 lakh crore also shows the importance and emphasisthe country places on infrastructure, as this is the first and fore-most aspect that catalyzes and enables increase inproduction, consumption, employment and hence the over-all economic activity in the country. As a short-termobjective the gov  ernment has announced a target of ‘Tax -free infrastructure bonds ’ of INR60,000 crore in 2012-13(2011-12: INR8,000 crore). Further, India Infrastructure Finance Company Ltd (IIFCL) will act as the nodal agency toensure easy credit for infrastructure projects, through-out the country. As we aim to create 10 crore jobs in manufacturing sector within a decade, by increasing its contribution to the TotalGDP to 25%, infrastructure adequacy to meet the expansion requirements is a crucial aspect, that if ignored can be abottle-neck for the country’s growth aspirations.  Notable Infrastructure Targets Mentioned In This Budget      Additional 8,800 kilometer roads are to be constructed, under National Highways Development Project(NHDP) within a year.    Delhi-Mumbai Industrial Corridor is to be completed within 5 years. The project receives $4.5 billion funding from Japan, apart from INR18,500 crore of central assistance.     The government also announced that INR3,900 crore of loans for handloom weavers and their co-operativesocieties would be waived.    INR  5,000 crore ‘India Opportunities Venture Fund’ to be set up by  Small Industries Development Bank of India (SIDBI) would provide funding for small scale infrastructure projects across the country  AGRICULTURE  As always called the back bone of the Indian Economy, the Agricultural sector’s importance cannot be ignored, and rightly so, agricultural credit target has beenincreased by INR100,000 crore in this budget, to INR575,000 crore for 2012-13.Credit facilities through the Kisan Credit Card Scheme (KCC), has received positiveresponse from various groups across the country. The government plans to extendsmart card features to these cards, which would then also be used for ATMtransactions in rural areas. Another notable aspect related to agriculture is the promotion of AcceleratedIrrigation Benefit Program (AIBP) through an allocation step up by 13%, to approx.INR14,250 crore. With these various initiatives and priority lending schemes, India isheading to the second phase of green revolution, yet many agriculture-relatedinfrastructure requirements are lacking at present to enable a sustainable fast growthin agricultural production. ● ● ●    Did you Know? If the primary bread-winner of a BPL family passes away in the age-group of 18-64, the family is now eligible for a government grant  INR 20,000, twice as much as what was awarded previously  ● ● ●  Page 4 INCLUSION  The need for Inclusive growth, in the highly populated and largely rural basedeconomy of India, has been to some extent addressed through variousinitiatives. Some of them discussed in the budget include,    Rural Infrastructure Development Fund (RIDF), which has beenenhanced to INR20,000 crore, with INR5,000 crore exclusively for warehousing facilities    6000 schools to be set-up in rural parts of the country under the 12 th  five year plan     Allocations to Integrated Child Development Service (ICDS), Mid-Day Meal Scheme and other child-welfare schemes saw strong growth, as well GOVERNANCE  The finance minister touched upon the flagship governance project of India, The UID Scheme (Aadhaar), as heannounced completion of issuance of UID cards to 20 crore people till 2011-12 and expects additional 40 crore peopleto come under the UID system by the end of 2012-13. In addition to this, the government has also announced aproposal to lay a White Paper on Black Money in the upcoming parliament session. TAXES Direct Tax  Modest Rise in Tax Slabs were announced in this budget, with the exemption limit being raised by INR20,000, toINR200,000 and 20% tax slab being widened from INR5-8 lakhs to INR5-10 lakhs. This means that an individual withan income of INR200,000, will now save INR2000 annually and an invidual with an income of INR1,000,000 wouldsave INR22,000 annually through lower direct taxes, as compared to last year. However, the public had expected a muchsteeper rise in slabs, and the budget came as a disappointment to vast majority of the population.Some of the announcements received a positive response from the investors. One such aspect is, the rise of  ‘Compulsory Tax Audit Limit’ to INR1 crore from INR60 lakhs, which is expected to reduce the burden of tax auditing expenses for many Small scale industries. Another announcement seen favorably, is reduction of Withholding tax oninterest payments to ECBs, from 20% to 5% for certain stressed infra-related industries for 3 years. These direct taxproposals are estimated to result in a Net Revenue Loss of    INR4,500 crore to the government in the year 2012-13 .    Indirect Tax  This year, the government has chosen the indirect taxes route to boost its revenues to meet the various planned andnon-planned expenditures, and also reach the fiscal deficit target. This is the reason why we see a rise in service tax ratefrom 10% to 12%, with corresponding changes in rates for individual services. (Merit rate, 5% to 6%; Lower merit rate,1% to 2%)  With the government’s decision to hike the indirect taxes, receiving severe criticisms from the Investor community, thetable below shows some of the sector specific announcements and the market reaction each of them has received. ● ● ●    Did you Know?  ‘Himayat’ scheme, introduced in   J&K is estimated to provide skill training to 1 lakh youths in next 5 years. Entire cost of the initiative will be borne by Centre. ● ● ●  
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