The 2012 -13 Budget pledged to cut fiscal deficit from 5.9% this year to 5.1% next yearAiming to rise GDP growth to 7.6% along with fiscalconsolidation, the budget seeks to raise additional Rs.40K Crs in fresh taxes
India Inc Proposal ImpactExcise duty & Service tax rate Prices need to be raised, marginsraised to 12% from 10% may get affected.Investment in Infrastructure to go More opportunities for privateup to Rs.50 lakh crore in 12th sector to invest in PPP projects.plan.Repatriation of dividends from Companies will be encouraged toforeign subsidiaries of Indian bring foreign exchange.Companies will continue at 15%up to 31 March 2013.New sectors to be added forpurposes of Investment linked Incentive for investmentdeductions.
Capital Market Proposal ImpactReduction of STT on delivery base Transaction cost will come downsale & purchase of shares from0.125 to 0.1 %Introduced Rajiv Gandhi equity Deepening of equity market withsaving scheme allowing 50% IT higher retail participation.reduction to new retail investorswho invest up to Rs.50K directly& whose annual income is belowRs.10 lakhs.Qualified foreign investors Deepening of corporate debtallowed to invest in corporate marketbond market.IPO of Rs.10 Crs & above will only Cost of issuing shares will comebe in electronic form. down & allows more investors.
Tax Payers Proposal ImpactIndividual exemption limit raised Provided tax relief of Rs.2000to Rs.200000Allow deduction of Rs.10000 for More benefits for senior citizensinterest from savings accountUpper limit of 20% to be raised to Tax benefit of Rs.20000Rs.10 lakh from Rs.8 lakhAllow deductions of Rs.5000 forpreventive health check-up Health awareness
Economy Proposal ImpactRs.30000 crore to be raised from Retail investors will get PSUdisinvestment in 2012 – 13 sharesProvision regarding Minimise transfer pricingimplementation of Advance litigation. Big boost to IT & BPOpricing agreement to be service providersintroduced in finance bill, 2012Rs.15888 crore to be provided for Banks will be better equipped tocapitalisation of public sector face competitionbanks & financial institutionsTax free bonds of Rs.60000 crores More long term financingfor financing infrastructure instruments for infrastructureprojects in 2012 - 13 projects
Couple of changes that can matter Tax Evaders under scrutiny1% tax at source on transfer of immovable property worth over Rs.50lakhs in urban areas, Rs.20 lakhs in other.1% tax at source on cash purchase of jewellery over Rs.2 lakhs & more. 30% tax on any unaccounted money even if it is within exemption limit.Compulsory filing of income tax returns for those having assets outsideIndia.Tax authorities can open cases for up to 16yrs if undisclosed foreignincome is found.Stiff penalty on undisclosed income if found in search.Withholding taxes on gold & property will be effective from July & October2012.
Govt boosts spending on health, education, food scheme & rural development to fuel growthSlowdown in industry drags GDP growth to 6.9% in FY12, but it mayaccelerate to 7.6% in FY13.Government slashes MGNREGA spending by 17.5% to Rs.33000 crore for2012 -13Rural Health gets a push with a 34% increase in allocation for NRHM toRs.28820 crore.Education budget hiked 21.6% to Rs.25555 crore. Credit guarantee fundscheme for students proposed.
Fiscal consolidation is largely revenue drivenGross tax revenue will rise to 10.6% of GDP in 2012 – 13 from 10.1% incurrent fiscalCentre’s debt will drop to 45.5% of GDP in FY13 against 50.5% target set by13th finance commissionNew indirect taxes will net Rs.45940 crores for the government but it willforego Rs.4500 crores on direct taxesOver all expenditure will rise 13.1% but revenue expenditure will growonly 10.7% Things could go wrong if:Non tax revenue falls short again – Rs.30000 crores from disinvestmentbecomes an uphill task & if Rs.40000 crores from spectrum may not comebecause of uncertainties in the sectorCrude price rally could derail subsidies – At Rs.1.9 lakh crore, theprovision for subsidies is below the revised estimates of Rs.2.2 lakh croreGrowth does not recover as envisaged – Govt is counting on an ambitious7.6% GDP growth to deliver a strong 19.5% tax growth
Continued….Fuel subsidy assumption of Rs.43600 crores and fertiliser subsidyassumption of Rs.61000 crores appear too low and slippages on theseitems could lead to an increase in fiscal deficit by 50 – 60 bps from thetarget of 5.1% To Conclude:Liquidity will remain tight due to continued overhang of Governmentborrowings. A lot will depend on crude oil prices, global financial markets and capital flows and RBI’s take on interest rate cuts.
As an Investor No need to worry about Fiscal Deficit, it’s fineRs.48663 Crs is the net FII inflows into India Equities since the last budget
Some Interesting Facts:UPA’s so called populism has resulted in excellent economicsIndia has grown 7.7% CAGR since the recession in 2008 against Brazil’s3.9% and Russia’s 1.3%India will over take China in GDP growth rateRBI must give the Govt credit for having lowered financial risk in theeconomy while growing brisklyIndia’s Debt/GDP ratio stands at 63% & the Interest/Budgetary Receipts at31% (these measures & not the fiscal deficit, are the correct ways toassess financial risk in an economy from an investor point of view)China while growing faster, has piled on unsustainable levels of debt indoing so, its Debt/GDP ratio stands at 155% now and will hot 180 – 200%by 2016, or $22 trillion. India has grown while decreasing debt & interestratios sharply.
Some Reasons to Reconsider Equities…The Macro Economic Rationale: Inflation is on its way down Interest rates have peaked GDP growth will pick up Corporate earnings will improveThe Investing Rationale: Equity valuation are reasonable - 1yr forward P/E at 15.2 Returns on debt assets will reduce Gold prices have run up sharply Billions of $ likely to enter Indian Markets shortly – So far $10 trillion worth of liquidity pumped in by central banks in developed countries since 2008 financial crisis
Continued…Global markets are flushed with liquidity at this moment and it looks likemarkets are entering into a bull phaseFII’s have poured in $9 billion so far this financial yearFII flows may continue since the federal reserve has promised to keep theinterest rates at near zero levels till 2014The pressure in Europe is also easing after the European Central Bankpumped in over Euro 1trillion into banks, banishing the danger ofsovereign credit crisisInvestors are also hoping RBI to cut rates during the monetary policy inApril 2012, which will in turn boost the growth.
Sensex Scenarios for December 2012 25539 (+58%) Best Case16466Dec’ 11 Source: Morgan Stanley
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