ANALYSIS OF BUDGET 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 as downgrades 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 not only for India, but also for the world at its entirety. Greece debt crisis in Europe, political uncertainty in middle-east, and the great north-east earth-quake in Japan, tested the strengths of various global economies. Amidst these, India, although managed to put on a remarkable growth, was not fully isolated from their negative impact. Indias current estimated 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 and consumption 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 Indias 12th five year plan, which aims at faster, sustainable and more inclusive growth.

SERVICE SECTOR & DIVERSIFIED TRADE PARTNERS KEEPS ECONOMY AFLOAT

Growth in Indias GDP is at present contributed largely by the services sector, which is estimated to grow at 9.4% for 2012, along with a 3.9% growth in industrial output and a 2.5% growth in agriculture. We saw a slow-down in industrial output growth, because of deceleration in private investment, especially due to rising cost of credit. Structural aspects that led to prolonged food inflation in 2011-12, are now addressed through strengthened food supply chain. Diversified trade partners, with ASEAN region contributing to 57.3% in 2011-12, (33.3% in 2000-01) is a notable achievement that protects 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 expected GDP 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 governments ambitious fiscal deficit target of 3% (chart 3). This has prompted the finance ministrys decision to call for a rise in indirect tax and a lower expenditure, mainly through a controlled and systematic reduction of subsidies. Major subsidies of 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 for this, 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 beneficiarys 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 be implemented and the government remains optimistic about employing these reforms in the next few months. More interestingly, the governments plan to set up GST network (GSTN) as a National Information Utility is also expected to become operational by August 2012.

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Divestment of CPSEs
One of the innovative tools to generate revenues, recently put into practice is the disinvestment/divestment of GoIs shareholding in the Central Public Sector Enterprises (CPSEs). Target for 2011-12 lowered to INR14,000 crore from the original target of INR40,000 crore, as the government did not find the market conditions attractive enough to justify sale of shares. For 2012-13, the government has cut down the budget and expects to raise INR30,000 crore, which still looks optimistic given the prevailing economic situation. However, at any point in time, at least 51% ownership and management control would rest with the government, thus providing the firms with stability and at the same time, necessary financial flexibility, at par with the private counter-parts.

CHART 1: SPLIT-UP OF TOTAL REVENUE TO GOVERNMENT, SHOWING A DIP IN NONTAX REVENUES IN 2011-12 (Y: INR1000 crores)

FDI in Multi-brand Retail

Although the centre has faced strong opposition from various state governments for proposing to allow Foreign Direct Investment (FDI) in Multi-brand retail, the budget still restates the centres hope to achieve consensus among all the political parties with regards to the issue. But, given the political structure prevailing in the country and the coalition ruling party system in place, the centre is likely to face several 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.

CHART 2: CHART SHOWING REVENUE EXPENDITURE (SUBSIDIES) FORMING THE MAJOR PORTION OF TOTAL EXPENDITURE

Rajiv Gandhi Equity Savings Scheme

As a new tax saving investment scheme, the government has announced that new investors, with annual income less than INR10 lakhs can now enjoy a tax deduction of 50% with a lock-in period of 3 years. However, the investment amount up to which this benefit can be availed is capped at INR50,000 while investing directly in equity markets. This will incentivize higher participation of small retail investors directly in equity markets.

CHART 3: CHART SHOWING BOTH REVENUE AND FISCAL DEFICIT WIDENING IN 2011-12

Central KYC Depository

Another stride in the reforms is the scheduled implementation of a single, central Know Your Customer (KYC) depository to avoid multiplicity of registration and data-upkeep. If this is implemented, the hassles on of opening various bank accounts, mutual funds, demat accounts, mobile, internet & cable service provider accounts can be effectively handled and governance processes would become faster and easier.

Did you Know? Provision for Defense sector at INR193,407 crore in this budget, is less than two-third of what is recommended by industry experts

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Core Banking Solutions in RRBs

With 81 of 82 Regional Rural Banks (RRBs) successfully migrating to core banking solutions, they have also joined the National Electronic Fund Transfer (NEFT) system. The government plans to continue capitalization of weak RRBs for the next two years, thereby ensuring financial inclusion and high integration with the banking system.

INFRASTRUCTURE AND INDUSTRY

Indias long-term focus on infrastructure development is growth oriented as it should be for any developing economy. The 12th five year plan infrastructure spending projected at INR50 lakh crore also shows the importance and emphasis the country places on infrastructure, as this is the first and fore-most aspect that catalyzes and enables increase in production, consumption, employment and hence the over-all economic activity in the country. As a short-term objective the government 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 to ensure 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 Total GDP to 25%, infrastructure adequacy to meet the expansion requirements is a crucial aspect, that if ignored can be a bottle-neck for the countrys 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-operative societies would be waived. INR5,000 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 sectors importance cannot be ignored, and rightly so, agricultural credit target has been increased 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 positive response from various groups across the country. The government plans to extend smart card features to these cards, which would then also be used for ATM transactions in rural areas. Another notable aspect related to agriculture is the promotion of Accelerated Irrigation Benefit Program (AIBP) through an allocation step up by 13%, to approx. INR14,250 crore. With these various initiatives and priority lending schemes, India is heading to the second phase of green revolution, yet many agriculture-related infrastructure requirements are lacking at present to enable a sustainable fast growth in agricultural production.

Did you Know? If the primary bread-winner of a BPL family passes away in the agegroup of 18-64, the family is now eligible for a government grant INR20,000, twice as much as what was awarded previously

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INCLUSION

The need for Inclusive growth, in the highly populated and largely rural based economy of India, has been to some extent addressed through various initiatives. Some of them discussed in the budget include, Rural Infrastructure Development Fund (RIDF), which has been enhanced 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 12th five year plan Allocations to Integrated Child Development Service (ICDS), MidDay Meal Scheme and other child-welfare schemes saw strong growth, as well

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.

GOVERNANCE
The finance minister touched upon the flagship governance project of India, The UID Scheme (Aadhaar), as he announced completion of issuance of UID cards to 20 crore people till 2011-12 and expects additional 40 crore people to come under the UID system by the end of 2012-13. In addition to this, the government has also announced a proposal 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, to INR200,000 and 20% tax slab being widened from INR5-8 lakhs to INR5-10 lakhs. This means that an individual with an income of INR200,000, will now save INR2000 annually and an invidual with an income of INR1,000,000 would save INR22,000 annually through lower direct taxes, as compared to last year. However, the public had expected a much steeper 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 on interest payments to ECBs, from 20% to 5% for certain stressed infra-related industries for 3 years. These direct tax proposals 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 and non-planned expenditures, and also reach the fiscal deficit target. This is the reason why we see a rise in service tax rate from 10% to 12%, with corresponding changes in rates for individual services. (Merit rate, 5% to 6%; Lower merit rate, 1% to 2%) With the governments decision to hike the indirect taxes, receiving severe criticisms from the Investor community, the table below shows some of the sector specific announcements and the market reaction each of them has received.

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Industry Indirect Tax Announcement Agriculture & Related Sectors Exemption from basic customs duty for setting up fertilizer projects upto March 2015 Infrastructure Mining Railways Roads Manufacturing Health and Nutrition Environment Exemption from basic customs duty and concessional CVD of 1% to steam coal Exemption from basic customs duty for coal mining projects Proposed upgradation of track structure for high speed trains Exemption of import duty for certain road construction material Proposed tax relief for labour-intensive sectors producing items of mass consumption Lower customs and excise duty on Soya products, Iodine and Probiotics Rise in basic customs duty on imports of gold and other precious metals

Investor Sentiment Positive Positive Nuetral Nuetral Nuetral Positive Nuetral Negative

The various proposed Indirect taxes are estimated to result in a net revenue gain of INR45,940 crore. Therefore, on an aggregate basis, all the tax reforms announced in this budget are estimated to result in a net gain of INR41,440 crore for the country.

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 worlds largest democracy!

Revenues & Expenditures Revenue Receipts Tax Revenue Non Tax Revenue Capital Receipts Recoveries of Loans Other Receipts Borrowings and Other Liabilities Total Receipts Non Plan Expenditures On Revenue Accounts Interest Payments On Capital Account Plan Expenditure On Revenue Account On Capital Account Total Expenditure Revenue Expenditure Grants for creation Capital Assets Capital Expenditure Revenue Deficit Effective Revenue Deficit Fiscal Deficit Primary Deficit

(In Thousand Crore Rupees) 2010-11 A 2011-12 E 2012-13 B 788 569 218 409 12 23 373 1197 818 726 234 92 379 314 64 1197 1041 87 157 252 (3.3) 165 (2.1) 374 (4.9) 140 (1.8) 767 642 124 551 14 15 522 1319 892 815 275 76 427 346 80 1319 1162 138 157 395 (4.4) 257 (2.9) 522 (5.9) 246 (2.8) 935 771 165 555 12 30 513 1491 970 866 320 104 521 421 101 1491 1286 165 205 350 (3.4) 186 (1.8) 514 (5.1) 194 (1.9)

Did you Know? Short-term crop loans will now be available at 7% per year to farmers, and at 3% per year to prompt-paying farmers through Interest-subvention scheme

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