www.livemint.com   New Delhi, Mumbai, Bangalore, Kolkata, Chennai, Chandigarh, Pune   Saturday, February 27, 2010   Vol. 4...
L2 COLUMNS
SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM




Up in the air
From fiscal correction to populism, the financ...
HOME PAGE L3
                                                                                                             ...
L4 COLUMNS
SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM




                                                            ...
www.livemint.com                                                                                                          ...
L6   SATURDAY, FEBRUARY 27, 2010                                                                      www.livemint.com


 ...
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Budgetebook
Upcoming SlideShare
Loading in …5
×

Budgetebook

1,090 views

Published on

Published in: Business, News & Politics
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,090
On SlideShare
0
From Embeds
0
Number of Embeds
9
Actions
Shares
0
Downloads
28
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Budgetebook

  1. 1. www.livemint.com New Delhi, Mumbai, Bangalore, Kolkata, Chennai, Chandigarh, Pune Saturday, February 27, 2010 Vol. 4 No. 21 LOUNGE All of Mint’s coverage before, during and after the budget. Distilled into one download. THE BUDGET 2010 EBOOK. CHAPTER 1 The Big Picture CHAPTER 2 Taking It CHAPTER Personally 3 Equal and Opposite CHAPTER 4 Sector Inspector CHAPTER 5 Run Up UP IN THE AIR
  2. 2. L2 COLUMNS SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM Up in the air From fiscal correction to populism, the finance B Y A NIL P ADMANABHAN tion and growth the minister, decided to embark on a new dubious legacy; matters were ···························· risking personal political dam- strategy: the government will cap worsened because some of his minister shows his heart is in the right place but missteps in implementation could mean trouble— for the government and the economy F inance minister Pranab Mukherjee’s second effort in less than nine months is a honest age, has opted for the latter and at the same time, to ensure the desired fiscal discipline, targeted its stock of internal debt at 68% of gross domestic product and derive the fiscal deficit, gross bor- predecessors resorted to creative accounting to mask the fiscal impact of subsidising consump- attempt at consolidation and cor- subsidies in a manner that could, rowings, as a residual, instead of tion, especially when there was a recting the fiscal abuse of the in the short-term imply an deriving the fiscal deficit from runaway rise in international fuel past, but it may yet fall under the adjustment cost for consumers. spending excesses as it used to prices. Any effort to undo this burden of scepticism emerging Together with an across-the- do previously; since the govern- would inevitably imply adjusting from the underlying risks and board increase in indirect taxes, ment also plans to eliminate the prices. Unfortunately, since this what’s been left unsaid in Budget which signalled the roll back of revenue deficit, the gap between has coincided with the roll back 2010. the fiscal stimulus, and bringing the government’s income of the fiscal stimuli that the UPA In the trade-off between infla- new services in the tax net, the through taxes and other revenues had injected over the last two Budget creates the basis for infla- and its spending, this means that years, it is likely to lend a price tionary pressures. it will progressively reduce its shock to the system—indeed, if Given the politics, especially borrowings. Not only will this not contained, it could spiral out with the opposition parties stag- guarantee a non-inflationary of control. ing a walkout, the first in the his- financing of development pro- Inflation, as measured by the tory of Parliament during the grammes, it will also ensure that wholesale price index was presentation of a Budget, it is such financing does not crowd already high at 8.5% in January; understandable that the minister out private investment and cre- more worrying is the fact that stayed away from stating the ate an upward pressure on inter- food infla tio n continu es to bare-facts about the adjustment est rates. remain in the high double digits. (consumers will end up having to It is apparent that a lot of Some of the inflationary effects pay more for a variety of offer- thought has gone into this Bud- of the Budget have already ings, although Mukherjee has get. resulted in price rises in some tried to lessen the impact of the It is not, despite the Rs26,000 offerings; rises in several others blow). The downside is that crore giveaways in direct tax con- could follow. The list of such because he hasn’t done this, cessions and the sustained offerings includes fuel, cars, air interpretations are open to exag- spending on social sector pro- tickets, cement, coal, cigarettes, geration. This could mean trou- grammes, by any measure a pop- consumer products, and air con- ble when the message sinks in. ulist budget. A tax concession of ditioners. This is evident in the reac- The challenge tion of the markets—buoy- The Opposition has, by seiz- ant at first, muted later. ing on the weak link in the Politically, this can make Budget, signalled its intent to the Congress-led United Pro- throw down the gauntlet on gressive Alliance (UPA) inflation. The UPA has no unpopular and give the Opposition a rallying point COAST OF THE SEMAN­ choice but to take up the chal- lenge; it will find the going dif- besides stirring disquiet TICS, A LARGE LAN­ ficult since some of its allies among allies. It could also make individuals and com- GUAGE OCEAN. A have very publicly differed with it on politically sensitive panies hold off investments SMALL RIVER NAMED reforms. So far, the Congress and defer consump- has demonstrated leadership tion—threatening growth DUDEN FLOWS BY qualities by refusing to bow to and the core of the govern- ment’s strategy. THEIR PLACE AND SUP­ such pressures, even as it has, occasionally, passed on the A reforms legacy PLIES IT WITH THE NEC responsibility to politically Still, the UPA has to be weakened allies such as the complemented for seizing Nationalist Congress Party led the political space provided by Sharad Pawar. It has been by the 13th Finance Com- helped no doubt by its firm mission (TFC) to press ahead commitment to inclusive with some honest and much about Rs60,000 for anyone earn- growth, something that Mukher- needed (and politically difficult) ing above Rs9 lakh, a key demo- jee referred to as “an article of fiscal reform even as it continues graphic category among the mid- faith”. the stock market friendly disin- dle class, would in normal cir- The Congress’ spin doctors will vestment programme. If it does cumstances be construed a sop. have to back Mukherjee and not lose its nerve and effect a Instead, it is, as are the other wear down the political criticism retreat, the UPA may well find direct tax changes, designed to to the Budget. To its advantage, itself in a position to add to its ready the tax infrastructure for the Congress still enjoys credibil- already enviable legacy as the the introduction of the ity with people; but in politics, political coalition that helped put gamechanging direct tax code like in cricket, situations can alter in place the building blocks for a (DTC) in April next year. Simi- dramatically and often without modern economy. Mukherjee larly, the minister has gone in for warning. What would also help is has, with this budget, already several measures—such as pre- the fact that Mukherjee, as a joined the pantheon of politi- ferring to retain the service tax CVoter survey reported in Mint cians such as P.V. Narasimha rate at 10%—in the area of indi- on 25 February showed enjoys Rao, Manmohan Singh, P. rect tax to prepare ground for the personal credibility. Trouble Chidambaram and Yashwant introduction of a single goods shooters of the government have Sinha, who pushed difficult but and services tax (GST). already indicated that they are very critical economic reforms. Mukherjee has also taken an prepared to take on the political Budget 2010also marks a initiative to usher in the much opposition. The Congress has 208 departure from finance bills of needed institutional reform. Key seats in the Lok Sabha, needs 273 the UPA’s first tenure (2004-09) among these is the move to cre- for a simple majority in the when the government failed to ate the information technology house, and it still has the backing take advantage of a booming infrastructure that can make a of 276 members of Parlia- economy to undertake structural success of efforts such as the ment—even after the withdrawal measures to cutback expendi- implementation of GST and of outside support from the ture. This is important because DTC. Another is the implementa- Samajwadi Party and Bahujan the action taken report (ATR) on tion of TFC’s recommendation to Samaj Party. the recommendations of the TFC create a national mission for The real test for Budget 2010, submitted to Parliament on delivery of judicial and legal however, will be the ability of the Thursday seemed to suggest that reforms. UPA to ensure strong policy the government had deferred any Equally significant, is the response to prevent inflationary response to the proposals on UPA’s decision to press ahead on pressures from spiralling out of expenditure reform. green initiatives. Accordingly, it control. So far, it has been found It emerges that, relying on the has effected a 61% increase in the wanting on that front. But now recommendations of the TFC, a outlay to the ministry of new and the stakes, both political and eco- constitutional body, the govern- renewable energy, funded new nomic, are very high. Any mis- ment has actually moved ahead programmes for river cleaning step in policy would not only set with a reordering of expenditure and give a big push to use of non- back the Congress as well as the and committed itself to a trans- fossil fuels such as solar energy. UPA, it could plunge the country parent and binding medium Threat of inflation into an economic crisis—that term fiscal reforms programme. Since previous governments could mean missing out on a Not only is the UPA going to shied away from action on the once-in-a-lifetime opportunity to reduce its borrowing by about vexing issue of expenditure break the economic shackles and Rs1 trillion from 2009-10, it has reform, Mukherjee inherited a deliver inclusive growth.
  3. 3. HOME PAGE L3 SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM terms of level but also in terms of size, will structure of public expenditure, overweight on go a long way to cool the debt markets. infrastructure and agriculture, and plan over HASEEB NIRANJAN A. At one stage where it was certain that non plan, will go a long way to dampen some DRABU RAJADHYAKSHYA 10­year government paper may touch 8.5%, it of the impending crowding out effects on the is now more likely that to be in the range of investment side. If delivered well, these could Chairman & CEO, J&K Bank 7.75 ­ 8%. It is now almost certain that yields even crowd in private investment. Besides will stay at sub 8 levels. this, given the focus on agriculture and infra­ THIS BUDGET SHOULD BE A neighbour friendly budget However, notwithstanding the fiscal stance of the budget the pressure on rates is bound to come in from monetary policy action most structure, it will have a sobering impact on inflation as well. Other than a heightened global adversity, REMEMBERED FOR or a game­changing one? likely to happen in April. True, this budget lacks the glamour of big bang reforms. But then that was not even the real threat to the budget numbers will come from expenditure over runs which, in the true 1970s style, have been understated RESTORING THE BALANCE required at this stage. Given the extant and to show a lower dower deficit number. And, BETWEEN POLITICS P ragmatically positive: what it is more likely to do is to arrest or the emerging environment, what was required of course, from the rather ambitious divest­ A Budget for uncertain times For the last two years the macroeco­ reduce the possibility of a further decline; limit the extent of the downside as it were. was a classic 1970s budget: nuts and bolts with an eye for detail and without any grand ment program of Rs 40,000 plus the 3G auc­ tion receipts. Give the recent experience of AND ECONOMICS. nomic conditions, international and national, This is the single most important achieve­ standing and posturing. the NTPC and the REC share sales, this does have been severely adverse. While the overall ment of the Budget 2010. If one is driving a car in fog, it is not likely look like a vulnerable number. environment may appear to have improved, In budgetary terms, the all round uncer­ that the wheels will be changed. What an To sum up, it is a creatively conservative the fact is that adversity has been replaced tainty was getting manifested in a simple experienced driver does is to ensure the fog budget which will not be remembered for by uncertainty. To put it in market parlance, issue: demand for continuance of the fiscal lights (the size of borrowings), the front long either for the budgetary arithmetic or earlier the downside far outweighed the stimulus. There were arguments and implica­ shield wipers (structure of expenditure), the for any fiscal policy initiatives. If at all, it upside but now the possibility of a upside is tions for and against this. The master stroke tail lights (infrastructural spending), and the should be remembered for restoring the bal­ becoming stronger. in the Budget is that the fiscal stimulus has side indicators (personal tax rate reduction) ance between politics and economics in the In such a situation of uncertainty, eco­ been neither withdrawn (or deferred) nor are in order. That is more likely to get you formulation of the budget. In the last twenty nomic policymaking is far more complex than extended; the finance minister has deftly where you want to be. Maybe a little late, years or so, the Budget had come to become it is in difficult times. The economic policy changed the nature of the fiscal stimulus. but safely not bruised and battered. And that a specialist economic policy document with makers of India be it the Reserve Bank of What was an enterprise/institutional stimulus is exactly what the Finance Minister seems an overdose of intended policy interventions, India or the Ministry of Finance, did well to has now been converted into a retail stimu­ to have done. stabilization measures, reforms initiatives and minimize the impact of the global turmoil lus! This will help sustain a broader recovery. A fairly clear road map, even if long on structural adjustment schemes. through concerted monetary and fiscal meas­ So in some way, by design and not by promise and short on delivery, a change in Contrary to that, this budget has restored ures. How well they handle uncertainty was default, he has avoided the “either/or” conun­ the nature and quality of stimulus, and a less the political aspect of the budget and reas­ to be seen in this Budget. This was a budget drum of the stimulus exit. than expected recourse to borrowings, is serted the fact that at the end of the day in uncertain times. The other big uncertainty which has been what has seen the markets rally so strongly. budget is a document of political economy Looking at the basic structure and the reduced considerably is regarding interest In the current environment, it is not just and not just economics alone. In a democracy, underlying theme, what was been delivered rates. Coming in right after the clear mone­ the just the level but also the structure of this must been seen as a major gain. yesterday is a budget for uncertain times. tary policy stance of a hardening interest rate public expenditure that will be a key variable What this really means is that the budget regime, the fiscal policy in general and the and needs to be analyzed in great detail. may not ensure a quick turnaround. Instead level of borrowing in particular, not just in The small but significant touches on the vate sector investment to drive growth at months ahead. The central bank is widely this stage of the economic cycle, it would be expected to increase policy interest rates in NIRANJAN NIRANJAN useful to step back a bit and take a look at April. A useful thumb rule is that a tighter RAJADHYAKSHYA RAJADHYAKSHYA what has happened in these two manic years. fiscal policy will allow the central bank to Economic growth over the past two years conduct a relatively looser monetary policy. Managing Editor, MINT has been propped up by a rise in private and In other words: interest rates would have government consumption spending, thanks to had to be pushed up more aggressively in A LOT ALSO DEPENDS ON Full marks for the fiscal stimulus, increase in funds for select schemes such as the National Rural Employment Guarantee Scheme and the sal­ case the finance minister had not announced such a deep cut in the fiscal deficit and mar­ ket borrowings. WHAT THE macroeconomic strategy ary increases given to public sector employ­ ees. The brutal import compression in the worst months of the downturn also contrib­ Global experience clearly shows that coun­ tries that have well­managed public finances can maintain a regime of low interest rates RESERVE BANK OF INDIA DOES IN THE uted to economic growth. to boost private sector activity. The 13th MONTHS AHEAD. T he fiscal prudence that Pranab Mukher­ Higher market borrowings because of a However, the contribution from investment Finance Commission chaired by economist jee has promised in the coming fiscal higher fiscal deficit would have pushed up was negative as companies held back invest­ Vijay Kelkar has quite rightly called for a year should create the space needed for interest rates and put a spoke in the capital ment plans amid all the uncertainty. Capital sharp decrease in the fiscal deficit in the next economic expansion driven by private sector spending plans of companies. Such crowding spending by the government too has been five years, a rise in capital spending by the investment ­­­ just what India needs at this out did not happen last year because corpo­ weak. But there can be no doubts that a government and a cut in the stock of public point of the economic cycle. rate demand for funds was low and the fast­ growing economy such as ours needs debt to less hazardous levels. The government hopes that public spend­ Reserve Bank of India could conduct open more investments to create capacity and India needs investment­led growth right ing will grow at a slower pace than the market operations and desequester Market rebuild our tattered infrastructure. The gov­ now. The sort of fiscal discipline that the growth in the nominal gross domestic prod­ Stabilization Scheme (MSS) bonds to ensure ernment will help the investment cycle turn if finance minister has promised in the coming uct. This along with an estimated Rs75,000 that the Rs4 trillion borrowing programme it keeps its borrowings within the budgeted years should help keep down government crore that it plans to collect from the sale of for 2009­10 did not unsettle the money mar­ limits, though the decision to increase the borrowings and interest rates, creating incen­ equity in public sector firms as well as the kets. This is not possible now: private minimum alternate tax is a bit puzzling in tives for companies to build new capacity. auction of spectrum for third generation demand for funds is picking up and the MSS these circumstances. In that sense, the broad macroeconomic should help it keep its net market borrowings bonds have been used up. The fiscal correc­ The Union budget is just one part of a strategy implicit in Budget 2010 is laudable. to Rs3.45 trillion, a level that the financial tion is thus timely. policy tango so a lot also depends on what markets seem very comfortable with. To understand why it is important for pri­ the Reserve Bank of India does in the 2000­01 as the base would be higher and the Revenue expenditure on defence is budgeted market is therefore worried that this could to be lower than the revised estimates for MANAS NIRANJAN mean more borrowings this fiscal year. Third, the current year. There’s a big question mark CHAKRABARTY RAJADHYAKSHYA the bond market expects the government bor­ over whether these expenditure cuts will be rowing to be front­loaded, which, after taking possible. CONSULTING EDITOR, MINT the higher redemptions of government bonds On the revenue side, while the estimates this year, works out to around Rs 14000 crore for tax receipts are likely to be met given the THERE’S A BIG QUESTION MARK A skeptical view of the worth of government borrowings every week from 1 April, according to Indranil Pan, chief economist, Kotak Mahindra Bank. And lastly, buoyancy in the economy, the Rs 74571 crore taken as “other non­tax revenue” includes the proceeds from disinvestment of around Rs OVER WHETHER Union Budget with the fuel price hike and the rise in excise duties, the danger of inflation becoming more broad­based has also increased—the markets 40000 crore, higher than anticipated. Whether the government will be able to go in for disinvestment of this amount is debat­ THESE EXPENDI­ TURE CUTS WILL will now look to the Reserve Bank of India’s able. BE POSSIBLE. A s expected, the Union Budget for reduction is credible. Although the net borrow­ credit policy in April and the likelihood of fur­ That said, there are several positives in the 2010­11 has focused on fiscal consoli­ ing requirement has come in as expected, ther monetary tightening. Budget. The biggest of them is the huge dation. The finance minister has been bond yields went up after the budget. There So far as the Budget estimates are con­ increase in capital expenditure. Adjusting for able to stick to the 5.5% fiscal deficit target are several reasons for this. One, the borrow­ cerned, revenue expenditure is expected to defence expenditure, total capital expenditure for the year, a target he had set himself in ing requirement is large and there is no scope rise by just 5.8%. At first glance, this looks is up 33.6% compared to the revised esti­ his medium­term fiscal policy statement last this fiscal year of unwinding securities under commendable. A closer look, however, casts mates for the current year. The reduction in year. Interestingly, though, the fiscal deficit the market stabilization scheme nor is there some doubt on the numbers. For example, income tax on certain categories is also wel­ target for 2011­12 in the medium­term fiscal any scope to de­sequester or convert MSS subsidies are lower by Rs 14800 crore com­ come, but part of that giveaway will be statement was 4% last year­­this year, he bonds into government debt. That means the pared to the revised estimates for the cur­ negated by the hike in fuel pieces and excise has raised that to 4.8%. That has happened effective borrowing from the market goes up. rent fiscal year. It’s difficult to see how this duties. in spite of the economy doing much better at Two, a reason for the fiscal deficit coming in can happen, unless the government is going The stock market’s skeptical view of the present than at the time of the last budget. at 6.7% of GDP is because the base year has to free pricing in oil and fertilizers and the budget and the importance of global factors Clearly, fiscal consolidation is going to be a been changed. As A Prasanna, senior econo­ finance minister has given no indication of are amply brought out by the fact that the slow process. mist with ICICI Securities points out, that that. Revenue expenditure on police services, Sensex gained around the same 1% as the What is important is whether the deficit would mean the fiscal deficit computed with social services has been drastically curtailed. Hang Seng during the day.
  4. 4. L4 COLUMNS SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM other banks. At least one of them was adventur­ undertakings and selling 3G licences. The Budget ous and used the bank’s money to play in the has also not made any provision for subsidies TAMAL NIRANJAN stock market. In the second lot, Kotak Mahindra for oil firms. On top of that, the rise in excise BANDYOPADHYAY RAJADHYAKSHYA Finance Ltd, an NBFC, was converted into a com­ duty on automobiles and petrol and diesel will mercial bank in 2003 and a group of private fuel inflation. That’s not good news for the bond MINT’S DEPUTY MANAGING EDITOR IN MUMBAI equity investors, professionals and Rabobank market. International Holding BV were licensed to float Yet another focus of the Budget is financial THE PERFOR­ MANCE OF NEW Let corporations float banks Yes Bank Ltd. There is nothing wrong in allowing a corpora­ tion to float a bank, provided it has an impecca­ stability, which Pranab Mukherjee has been harp­ ing on since last year. In fact, in his address to the RBI central board after the last Budget he GENERATION PRI­ with checks and balances ble track record and meets the regulator’s “fit and proper” criterion. A corporation can set up the bank on its own and bring down its stake to mentioned that the Act that governs the central bank does not have any reference to financial stability. The RBI governor’s response to this VATE BANKS CAN GUIDE THE REGU­ fulfil the norm of a diversified holding pattern to was, “like pornography, financial stability is LATOR ON NEW A fter a gap of six years, once again India is additional banking licences to private sector play­ ensure corporate governance within a predeter­ something that cannot be defined”. Mukherjee set to open its closely­guarded banking industry to private players. This marks a ers and non banking financial companies or NBFCs could also be considered “if they meet the RBI’s mined time frame. Even successful micro finance institutions with a large balance sheet and capi­ has chosen to address this by setting up a Financial Stability and Development Council. This PLAYERS clear shift in policy—from consolidation to expan­ eligibility criteria”. Shares of listed NBFCs such as tal base can be considered, since the objective is body will monitor macro prudential supervision sion. In a country where 50% of the population Reliance Capital Ltd and a few others zoomed, financial inclusion. of the economy and take care of inter­regulatory does not have access to banking services, this is anticipating banking licences but under the exist­ The other critical market­moving announce­ coordination issues. In other words, the new natural and, in fact, the Reserve Bank of India ing licensing norms, no corporate entity can hold ment in the Budget is the relatively lower gov­ body will formalize the loosely constructed and (RBI) should have opened its doors earlier. The more than 10% stake in a bank. Will the Tatas, ernment borrowing programme for fiscal 2011. informal platform of High­level Coordination critical question is: Will Indian corporations be Birlas, Anil Dhirubhai Ambani Group (ADAG) and The government will borrow Rs3.45 trillion from Committee on Financial and Capital Markets. allowed to float banks? Many of them cherish the Bajajs will be allowed to float banks? All of the market to bridge an estimated 5.5% fiscal Finally, Mukherjee has promised to set up a the dream of getting into the highly leveraged them have NBFCs under their belt and, given a deficit next year. The amount is lower than the Financial Sector Legislative Reforms Commission business but RBI has reservations as banks deal choice, wish to convert them into banks. Rs3.64 trillion raised in the current fiscal but to rewrite and clean up the financial sector laws with public money and one bad apple can spoil The history and performance of the so­called despite this, bond prices dropped and bond and make them contemporary. In my last col­ the entire system. new generation private banks can guide the reg­ yields rose as the market is not convinced about umn on Monday I raised the issued of conflict The finance minister’s Budget speech does not ulator on selection of the new players. Of the the numbers. The government may end up bor­ among various Acts in the financial sector and indicate any change in the existing norms as it first set of nine banks that set shops in 1994­95, rowing more if it’s not able to raise Rs75,000 the need to revisit them. Thank you finance min­ says the central bank is considering giving some three could not survive and got merged with crore by divesting its stake in public sector ister for taking note of that. budget. The average comment I heard before the prices to go up – inflation is said to be the cruel­ budget still hovered around the expectation of est tax in the world – it hurts the most vulnera­ MONIKA NIRANJAN higher taxes. This is misplaced because income ble, the poor and the old. Which brings the dis­ HALAN RAJADHYAKSHYA tax rates have been going down for the last few cussion back to the pipeline. Unless it is fixed, years and India has a fairly low average income not only will we fritter away the growth advan­ CONSULTING EDITOR, MINT tax rate at various tax slabs. This budget is also tage, but will cause the resentment in the minds a step in the same direction of lower income of the tax­payers to fester. WE NEED TO REMEMBER THAT Three goals and a taxes, with the slabs widening so that the top income tax rate now applies at Rs8 lakh, up from Rs5 lakh in the current year. The deduction is up End Note. I can’t end this column without applauding the setting up of a sort of a super­regulator in the DIRECT TAXES Super Regulator by Rs20,000 and now you can invest up to Rs1.2 lakh. This gets us to an average tax rate for a Rs5 lakh a year household at just 7%. A Rs10 form of the Financial Stability and Development Council (FSDC). Its stated aim to “monitor macro prudential supervision of the economy” means in ACCOUNT FOR JUST ABOUT 8% OF lakh household pays an average rate of 16%. Not English that it will be the super regulator that has THE TOTAL EXPEN­ W ork in progress is how this budget can a part of the growth, there is huge unrest ahead. high by global standards at all. been in public debate for so long. It will monitor be described. The three large goals that the finance minister articulated in his The key to this transfer is the pipeline that moves resources as they are created from the Rather than worry about the direct taxes, we need to remember that direct taxes account for the functioning of large financial conglomerates. This means in English that another instance of a DITURE last budget are still the key focus of the propos­ top of the pyramid to the bottom. But the exist­ just about 8% of the total expenditure of the large universal bank coming near the brink will be als and the continuity of governance is a relief. ing pipeline is leaky – squandering away the Central government each year. Indirect taxes, sought to be avoided. Third, it will iron out wrin­ First, the finance minister wants growth to gains and causing tax payer unrest. The third which we all pay, account for a huge 48%. With kles among various regulators. With the spat quickly revert to the 9% trajectory, before hitting goal looks at fixing the pipeline. The desperate the excise duty cuts getting rolled back, we need between the Securities and Exchange Board of double digits. Two, he wants that growth to be need to get this in order is part of his speech: to look at paying out more across the board on India and the Insurance Regulatory and Develop­ inclusive so that India is not pushed into social “Indeed, in the coming years, if there is one fac­ the goods we buy. An even more silent worry is ment Authority coming out into the open, this unrest due to a lopsided sharing of the gains of tor that can hold us back in realising our poten­ that 30% of government expenditure comes from comes at a good time to address contentious turf the growth. ‘Trickle­down’ is a cynical phrase tial as a modern nation, it is the bottleneck of the borrowing programme. It hurts us as entre­ issues. And last, FSDC will also be responsible for spun out by incumbents as they tried to keep our public delivery mechanisms.” preneurs as we find funds priced out of our reach a coordinated look at financial literacy and finan­ the fruits of growth and development with them­ The failure of the pipeline to funnel tax­payer as the government sucks out the huge pools of cial inclusion. The yet to be tabled Swarup Com­ selves and does not work. Unless wealth is redis­ money to where it should go is the reason that money that the households put away each year. mittee Report has recommendations in both these tributed, as it is created, to those least able to be most tax­payers remain hugely cynical about the We suffer as consumers since the deficit causes areas and maybe will see the light of the day. RAMESH PATHANIA/MINT BOOSTING GROWTH Towards a better tax structure The Budget’s most B Y S ANJIV S HANKARAN The increase in indirect taxes ···························· significant contribution aim to rein in fiscal deficit, to tax reform is its reiteration of tenets N EW DELHI -- April 2011 is the deadline for far-reach- ing tax reforms that are expected reduce government borrowings and create space for loans to drive private investment and to feed into the ongoing fiscal growth in the economy. laid down in the consolidation and eventually Though the immediate proposed direct tax boost economic growth. impact of the increase in indi- code and the uniform Finance minister Pranab Mukherjee’s budget proposals rect taxes would be to push up the general price level in the goods and services tax on both direct and indirect tax economy, the eventual outcome were designed to seamlessly would be to neutralise inflation- flow into the likely architecture ary pressure which stems from of the proposed direct tax code an unchecked fiscal deficit (the (DTC) and goods and services excess of expenditure over reve- tax (GST) respectively. nue which is funded through Of the two, DTC is more borrowings). (Cenvat rate) to 10% was trillion by ironing out inefficien- in the recent past to simplify tax under the control of the central According to Kaushik Basu, designed to be in sync with the cies and lowering costs. law, reduce exemptions and government, Ashok Chawla, chief economic advisor in the central government’s design of A buoyant economy is expec- introduce moderate rates, all of finance secretary, said at a press finance ministry, the budget GST. ted to create a virtuous cycle by which have contributed to the conference following the budget proposals on indirect taxes The central government, enhancing tax revenues and recent buoyancy in direct taxes. speech. GST, which aims to cre- would add about 0.43% to the unlike the states, wants a single lowering the fiscal deficit by Mukherjee’s budget proposal ate a common market in India, inflation rate as measured by GST rate to cover both mer- compressing the extent of to provide benefits on direct would require state govern- the wholesale price index. chandise and services. Prior to expenditure which needs to be taxes are expected to boost eco- ments to sign on. Currently, the “Beyond a point you are feed- the budget, services were taxed met through borrowings. nomic growth. centre and states are engaged in ing into deficit,” Basu said, at 10%, and Mukherjee point- On the direct tax side, “(The) whole idea is a large discussions to roll out GST. while explaining the rationale to edly remarked he chose to leave Mukherjee provided benefits on part will go into savings. Growth Mukherjee proposed to par- increase indirect taxes. “Noth- the prevailing service tax rate at personal income tax and also depends critically on the sav- tially roll back fiscal stimulus ing is a free lunch in developing the same level. pushed further along the path to ings rate,” Basu said. measures by increasing the a budget.” Studies commissioned by the link tax exemptions for compa- According to budget docu- mean central excise duty by two Another senior official in the 13th Finance Commission nies to investments rather than ments, benefits on personal percentage points to 10%, and finance ministry, who did not (TFC) indicated the rollout of profits, both of which were sug- income tax would also boost enhancing indirect taxes on want to be named, said the GST could increase gross gested by DTC. private consumption and push some petroleum products. increase in mean central excise domestic product by almost Rs1 The DTC builds on the move economic growth forward.
  5. 5. www.livemint.com SATURDAY, FEBRUARY 27, 2010 L5 Parenting PRIYANKA PARASHAR/MINT Party pooper? From buying a television to watching a movie in a cinema hall, you need to pay tax on all goods and services you buy, irrespective of your age. tax AFP How much do you really pay? Besides paying income tax, you also need to pay tax on the goods and services you buy every year. We take three income groups to show how much this works out for you on an average B Y M ONIKA H ALAN costs us. For example, did you gory: travel to work and within The results are not surprising: monika.h@livemint.com know that each litre of petrol we the city, consumer services and The people at the lower end of the ······························ buy would cost us half if we took rent. But after the top three, the income pyramid end up getting T he income-tax deduction that shows up in the salary slip really hurts. What that money could have done to ease up consumption and investment the taxes out of the final price? To compute the total tax hit that we take each year, Money Matters looked at an average household at three levels of trend begins to vary. If the Rs5 lakh household spends on basic food and vegeta- bles, the Rs10 lakh and Rs20 lakh households spend on fruits and hurt more from indirect taxes than those who are richer. Though we get a uniform 7-7.5% incidence of indirect taxes on the three income categories, the needs is a frustrating thought. income, which correspond to dif- vegetables and education. effect is much sharper on a Especially when the taxpayer sees ferent income-tax rates. Next we Next we got the tax consul- household at a lower income base the government missing from his looked at their average consump- tancy, BMR Advisors, to work in compared with the income-tax average daily life in the absence tion baskets and put a tax number the tax rates—both direct and incidence. of efficient water, power, security, against it. Then we added the two indirect—to give us a consoli- The average income-tax paid is urban transport and housing to reach the final figure. This is dated number for tax paid by 7% for a Rs5 lakh household, 18% facilities. our total tax bill to the govern- each household. for a Rs10 lakh household and But have you ever thought ment. 24% for a Rs20 lakh house- about what you really pay as your Since the direct tax incidence hold—this is fair on a progressive total tax bill? We are aware only of the direct taxes we pay, which is differs across gender and age, we took three faces to represent an ASSUMPTIONS: system of taxation. However, for the Rs5 lakh income tax, but there is another average household at an annual earner, the tax bucket more than tax bucket called indirect taxes, which is also filled with our money. Customs, excise, value- income of Rs5 lakh, Rs10 lakh and Rs20 lakh—for a woman under 65 years of age, man under 65 and a 1 Expenditure on conveyance indi­ cates cab hire charges and does not entail expenditure towards doubles with the weight of indi- rect taxes. For the Rs10 lakh household, indirect tax is around added and service taxes make up senior citizen over 65 years of age. self­owned vehicles (fuel cost). 30% of the total tax paid. On the the heads under which we pay The Delhi-based economics other hand, for the Rs20 lakh Ten conversations with Mint’s Anil Padmanabhan additional tax to the government. We pay these on the basket of goods and services that we buy research firm, Indicus Analytics, gave us an average break-up of a consumption basket at these 2 Expenditure on education indi­ cates tuition fees for school and colleges and does not indicate earner, indirect taxes are just about 20% of the total taxes. While there is nothing much we and Monika Halan that cuts through the clutter and every year. three levels of income. The three expenditure on commercial coach­ can do about what we pay to the tells you what to watch out for in the union budget Because the tax is embedded, items on which people spend ing and so on. government, it does help to know speech and why we don’t always know what it most are the same for each cate- what we pay.
  6. 6. L6 SATURDAY, FEBRUARY 27, 2010 www.livemint.com Insider Click here to download our tax calculator and nd out SOURCE: Tax data and analysis by BMR Advisors ; consumption basket data from Indicus Analytics

×