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India Budget 2012-13 - Analysis by Prabhu Srinivasan

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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 ...

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!

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    India Budget 2012-13 - Analysis by Prabhu Srinivasan India Budget 2012-13 - Analysis by Prabhu Srinivasan Document Transcript

    • ANALYSIS OF BUDGET 2012-13 (By Prabhu T Srinivasan)SIGNS OF RECOVERY AFTER A DIFFICULT YEAR2011-12 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 monetarytightening 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 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 waswitnessed 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 12th five year plan’, which aims at ‘faster,sustainable and more inclusive growth’.SERVICE SECTOR & DIVERSIFIED TRADE PARTNERS KEEPS ECONOMY AFLOATGrowth 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 DEFICITIn 2011-12, lower direct tax revenues (chart 1) and increased subsidiaries (chart 2) caused slippage from the government’sambitious 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 byNandan Nilekani, the chairman of Unique Identification Authority of India (UIDAI). Pilot projects for direct transfer ofsubsidy 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. PrabhuTSrinivasan@gmail.com Page 1
    • Divestment of CPSEsOne of the innovative tools to generate revenues, recently put intopractice is the disinvestment/divestment of GoI’s shareholding in theCentral Public Sector Enterprises (CPSEs). Target for 2011-12lowered to INR14,000 crore from the original 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 controlwould rest with the government, thus providing the firms with CHART 1: SPLIT-UP OF TOTAL REVENUE TOstability and at the same time, necessary financial flexibility, at par GOVERNMENT, SHOWING A DIP IN NON-with the private counter-parts. TAX REVENUES IN 2011-12 (Y: INR1000 crores)FDI in Multi-brand RetailAlthough 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 toachieve 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 CHART 2: CHART SHOWING REVENUEchain much more efficient than the present unorganized model, EXPENDITURE (SUBSIDIES) FORMING THEaddressing the inflationary pressure to some extent. MAJOR PORTION OF TOTAL EXPENDITURERajiv Gandhi Equity Savings SchemeAs 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 of3 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 retail CHART 3: CHART SHOWING BOTH ‘REVENUE’investors directly in equity markets. AND ‘FISCAL’ DEFICIT WIDENING IN 2011-12Central KYC Depository ● ● ●Another stride in the reforms is the scheduled implementation of a Did you Know?single, central Know Your Customer (KYC) depository to avoidmultiplicity of registration and data-upkeep. If this is implemented, Provision for Defense sector at INR193,407 crorethe hassles on of opening various bank accounts, mutual funds, de-mat accounts, mobile, internet & cable service provider accounts can in this budget, is less than two-third of what isbe effectively handled and governance processes would become faster recommended by industry expertsand easier. ● ● ● PrabhuTSrinivasan@gmail.com Page 2
    • Core Banking Solutions in RRBsWith 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 INDUSTRYIndia’s 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 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 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 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-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 countryAGRICULTURE ● ● ●As always called the back bone of the Indian Economy, the Agricultural sector’simportance cannot be ignored, and rightly so, agricultural credit target has been Did you Know?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 If the primary bread-winner of aresponse from various groups across the country. The government plans to extend BPL family passes away in the age-smart card features to these cards, which would then also be used for ATMtransactions in rural areas. group of 18-64, the family is now eligible for a government grantAnother notable aspect related to agriculture is the promotion of Accelerated INR20,000, twice as much as whatIrrigation 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 was awarded previouslyheading to the second phase of green revolution, yet many agriculture-related ● ● ●infrastructure requirements are lacking at present to enable a sustainable fast growthin agricultural production. PrabhuTSrinivasan@gmail.com Page 3
    • INCLUSION ● ● ●The need for Inclusive growth, in the highly populated and largely rural basedeconomy of India, has been to some extent addressed through various Did you Know?initiatives. Some of them discussed in the budget include, ‘Himayat’ scheme, introduced in  Rural Infrastructure Development Fund (RIDF), which has been J&K is estimated to provide skill enhanced to INR20,000 crore, with INR5,000 crore exclusively for training to 1 lakh youths in next 5 warehousing facilities years. Entire cost of the initiative will  6000 schools to be set-up in rural parts of the country under the 12th be borne by Centre. five year plan ● ● ●  Allocations to Integrated Child Development Service (ICDS), Mid- Day Meal Scheme and other child-welfare schemes saw strong growth, as wellGOVERNANCEThe 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.TAXESDirect TaxModest 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 auditingexpenses 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 TaxThis 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. PrabhuTSrinivasan@gmail.com Page 4
    • Industry Indirect Tax Announcement Investor SentimentAgriculture & Related Sectors Exemption from basic customs duty for setting up Positive fertilizer projects upto March 2015Infrastructure Exemption from basic customs duty and Positive concessional CVD of 1% to steam coalMining Exemption from basic customs duty for coal mining Nuetral projectsRailways Proposed upgradation of track structure for high Nuetral speed trainsRoads Exemption of import duty for certain road Nuetral construction materialManufacturing Proposed tax relief for labour-intensive sectors Positive producing items of mass consumptionHealth and Nutrition Lower customs and excise duty on Soya products, Nuetral Iodine and ProbioticsEnvironment Rise in basic customs duty on imports of gold and Negative other precious metalsThe various proposed Indirect taxes are estimated to result in a net revenue gain of INR45,940 crore. Therefore, on anaggregate basis, all the tax reforms announced in this budget are estimated to result in a net gain of INR41,440 crore forthe country. (In Thousand Crore Rupees) Revenues & Expenditures 2010-11 A 2011-12 E 2012-13 BSUMMARY Revenue Receipts 788 767 935Budget 2012-13 has invited more criticisms than Tax Revenue 569 642 771appreciations from the various stakeholders of the Non Tax Revenue 218 124 165country. Given the unanticipated difficult situation the Capital Receipts 409 551 555global markets are currently in, and the multiple problems Recoveries of Loans 12 14 12that the Indian economy is facing, such as weakening of Other Receipts 23 15 30Rupee against US Dollars, High cost of funds, Inflationary Borrowings and Other Liabilities 373 522 513pressures, and High unemployment levels to name a few, Total Receipts 1197 1319 1491 Non Plan Expenditures 818 892 970the finance ministry has opted for a stringent budget to On Revenue Accounts 726 815 866defy these problems and bring the economy back on a Interest Payments 234 275 320sustainable growth path. I would like to conclude the On Capital Account 92 76 104analysis with my view that the key lies in implementation Plan Expenditure 379 427 521of the plans. Having observed in the past, that On Revenue Account 314 346 421implementation of various initiatives have seen multiple On Capital Account 64 80 101road-blocks stalling them abruptly, we shall try to learn Total Expenditure 1197 1319 1491 Revenue Expenditure 1041 1162 1286from our past to ensure growth and prosperity of the Grants for creation Capital Assets 87 138 165world’s largest democracy! Capital Expenditure 157 157 205 Revenue Deficit 252 395 350 (3.3) (4.4) (3.4) ● ● ● Effective Revenue Deficit 165 257 186 (2.1) (2.9) (1.8) Did you Know? Fiscal Deficit 374 522 514 (4.9) (5.9) (5.1) Short-term crop loans will now be Primary Deficit 140 246 194 available at 7% per year to farmers, (1.8) (2.8) (1.9) and at 3% per year to prompt-paying farmers through ‘Interest-subvention scheme’ ● ● ● PrabhuTSrinivasan@gmail.com Page 5