Saturday, March 17, 2012

Budget 2012 – 2013

Overview of the Economy:
1. GDP is estimated to grow by 6.9% in 2011-12, after having grown at 8.4% in the preceding two years. For the Indian economy, recovery was interrupted this year due to the intensification of the debt crisis in the Euro zone, political turmoil in the Middle East, rise in crude prices and inflation.

2. With agriculture and services continuing to perform well, India’s slowdown can be attributed completely to slow down in industrial growth.

3. In 2012-13, India’s GDP growth is expected to be 7.6% +/- 0.25%.

4. Headline inflation is expected to moderate further in the next few months and remain stable thereafter.

5. The fiscal deficit was 4.8% of the GDP in 2010-11 (due to auction of 3G spectrum), down from 6.5% in 2009-10. The fiscal consolidation was expected to continue in 2011-12 with a budgeted fiscal deficit of 4.6% of the GDP. However, the actual deficit is estimated to be 5.9% of the GDP, due to slippages in direct tax revenue and increased subsidies.

6. The government has pledged to cut the fiscal deficit to 5.1% of GDP in the next year. The Net market borrowing by the Government to finance the deficit is estimated to be Rs. 4.79 lakh crores in 2012-13. Disinvestment target is Rs. 30,000 crores, with at least 51% ownership and management control to remain with the Government

7. Endeavor to keep central subsidies to under 2% of the GDP in 2012-13 and over the next 3 years reduce it to 1.75% of the GDP.

Key Focus Areas of the Budget:
1. Revival of Domestic Consumption
2. Achieve an Enabling Environment for Revival of High Growth
3. Remove Supply Bottlenecks
4. Intervene decisively to address Malnutrition
5. Expedite improvement in Delivery Systems and address Black Money

Legislative Reforms
1. The Direct Taxes Code was introduced in Parliament in August 2010. Report of Parliamentary Standing Committee has just been received. Will take steps for the enactment of DTC at the earliest.
2. Goods and Service Tax Bill was introduced in Parliament in March 2011. Awaiting the recommendations of the Parliamentary Standing Committee.
3. GST Network has been approved by the Empowered Committee of State Financial Ministers and will be set up as a National Information Utility and will become operational in August 2012. Use of PAN will be the common identifier in both Direct and Indirect Taxes.
4. There are 10 big-ticket bills and amendments to be moved in the Budget session.

1. Total planned outlay for the Department of Agriculture and Cooperation is being increased by 18% to Rs. 20,208 crores
2. Missions in the Twelfth Five Year Plan
(a) National Food Security Mission
(b) National Mission on Sustainable Agriculture
(c) National Mission on Oil Seeds and Oil Palm
(d) National Mission on Agricultural Extension and Technology
(e) National Horticulture Mission
3. Short Term Crop loans given to farmers at 7% will be continued in 2012-13.

Infrastructure Development
1. First Infrastructure Debt Fund with an initial size of Rs. 8000 crore launched this month to tap the overseas markets of long tenure pension and insurance funds.
2. Tax Free Bonds doubling to Rs. 60000 crores in 2012-13.
3. External Commercial Borrowings (ECB) funding allowed for Power, Aviation, Roads & Bridges, Ports & Shipyards, Affordable Housing, Fertilizer and Dams where Withholding tax has been reduced from 20% to 5% for three years.

Capital Markets
1. In 2011-12, FII limit was raised in long term infrastructure bonds, corporate bonds and government securities. The limit on ECB was raised and qualified foreign investors were allowed to invest in mutual funds and equities.
2. Now allowing Qualified Foreign Investors to access Indian Corporate Bond market
3. Simplifying the process of issuing IPOs
4. Providing wider shareholder participation through electronic voting.
5. Permitting two way fungibility in Indian Depository Receipts.
6. Restriction of Venture Capital Funds to invest only in nine specified sectors is removed.
7. It is also further proposed to remove the cascading effect of Dividend Distribution Tax in multi-tier corporate structure.
8. Propose to allow repatriation of dividend from foreign subsidiaries of Indian companies at a low tax rate of 15% as opposed to 30% for one more year.
9. Exemption of Capital Gains tax on sale of Residential property, if sale proceeds is used for subscription in equity of a manufacturing SME for purchase of new plant and machinery.

Tax Proposals
1. Direct Taxes
(a) Exemption limit for Direct taxes increased to Rs. 200,000 from Rs. 180,000.
(b) The upper limit of the 20% tax slab was been increased from Rs. 8 lacs to 10 lacs.
(c) Hence the exemption limit for Senior Citizens remains at Rs. 250,000 and the definition of senior citizen remains at 60 years.
(d) Further the exemption limit for Super Seniors, those about 80 years remain at Rs. 500,000

2. Individual tax payers will be allowed Rs. 10,000 for interest on saving bank deposits. This will allow small tax payers with salary income upto Rs. 5 lacs exemption from filing returns.

3. Within the limit for Health insurance, Rs. 5000 to be allowed for preventive health check up

4. Senior citizens, who do not have any business income, are exempt from paying advance tax.

5. Rajiv Gandhi Equity Saving Scheme will allow for income tax deduction of 50% to new retail investors, who invest upto Rs. 50,000 directly in equities and whose annual income is below Rs. 10 lacs. This scheme will have a lock in of 3 years (Hopefully it will be extended to Equity Mutual Funds too).

6. However, Infrastructure Bonds upto Rs. 20,000 may no longer be tax deductible, as this was applicable for just one year, and then extended for another year.

7. No change in the tax rates for Corporates.

8. Indirect Taxes
(a) Service Tax
i. On all services except those in the negative list, comprising of 17 heads.
ii. Service Tax is raised from 10% to 12%
(b) Securities Tansaction Tax reduced 20% to 0.1% for delivery transactions.
(c) Standard Rate of Excise Duty to be raised from10% to 12%, merit rate from 5% to 6%, and lower merit rate fro, 1% to 2%, with a few exceptions.
(d) Excise duty of large cars to be enhanced
(e) No change in proposed peak rate of customs duty of 10% on non-agricultural goods.

Hence based on the budget proposals the following are the outlooks in the equity and bond markets.

1. Budget turned out to be a non-event for the equity markets with no major structural reforms
2. Budget proposes a law that could overturn the Supreme Court ruling in the Vodafone tax case. That is certain to shock foreign investors.
3. Not clear if the investment under Rajiv Gandhi Equity Saving Scheme would be applicable to only new retain investors who had not opened a demat account yet.
4. The markets are likely to be disappointed by the continued fiscal profligacy of the Government and lack of any credible plan for fiscal consolidation. Further oil price assumed in the budget was $115.
5. As the equity markets have already run up 20% this year, and the FII have invested bout $8 billion, hence we might witness some consolidation.
6. Market will watch out for incremental news flow on global economic development, movement in crude oil, political re-alignments and RBI’s policy moves.

1. Net Borrowing of Rs. 4.79 lac crores is 10% higher than the current year, and this led to sell off in longer year bond yields. Going forward, due to the huge borrowing programme, there is going to be pressure on long term yields.
2. Expenditure estimates (except oil subsidy) seems more realistic leading to the belief that the numbers may not be revised too often. However there is no definite road map to curtail expenditure.
3. The short term spreads in the Bank CD’s and 1-3 year AAA bonds are likely to present interesting opportunities once the liquidity pressure unwinds.