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    Budgetebook Budgetebook Document Transcript

    • 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
    • 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.
    • 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.
    • 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.
    • 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.
    • 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
    • www.livemint.com SATURDAY, FEBRUARY 27, 2010 L7 SPENDING Style I, the consumer DummWith a 2% B Y V IJAYA R ATHORE AND Several companies replaceable kits for household increase in excise duty R ASUL B AILAY ···························· announced price hikes in Janu- ary to offset rising cost of water filters, other than those based on reverse osmosis tech- this Budget, get ready to pay more for G et ready to shell out more for that bigger refrigerator and the air conditioner you inputs such as steel, alumin- ium, copper and plastic. “There will be another hike nology, to 4% will not bring down the price of final product. “Also, the reduction in excise refrigerators and ACs; were planning to buy this sum- of at least 2% across products,” duty on LED lights to 4% will but microwave ovens mer. said George Menezes, chief not lead to any significant ben- and cellphones could The finance minister has announced a 2% increase in operating officer, appliances division, Godrej and Boyce efit as most of the LED prod- ucts are imported,” said Anil be cheaper.y excise duty and consumer Manufacturing Co. Ltd, adding Chugh, vice-president, Wipro durables companies making that the industry cannot absorb Consumer Care and Lighting. ACs, refrigerators and other the increased pressure of duty The Budget is also unlikely to appliances are likely to pass on hike, higher freight and logis- change the way you buy per- this cost to the consumer. tics cost due to the increase in sonal and home care products. In fact, the cost of most white fuel prices. Although there has been an goods is likely to go up owing The actual price rise could be increase of 2% in excise duty, to impending hike in fuel nearly 4%, according to leading these companies are wary of prices and rising raw material companies in this space. Sam- passing on the burden to the costs. sung is expected to announce consumer. The good news is that micro- its new prices in a couple of According to analysts track- wave ovens and mobile phone days, its spokesperson said. ing the segment, prices of accessories may be cheaper if However, “microwave ovens products from Nestle India Ltd, the firms pass on the excise could be cheaper by anywhere Godrej Consumer Products Ltd duty benefits to the consumer. between Rs150 and Rs 500,” and Dabur Ltd, which have “Special additional duty on according to A. Srinivasa, units in excise-free zones, will mobile phones has been rolled director, Vivek Ltd that oper- not be impacted. back. This will benefit the ates a chain of 53 electronic Other companies not in mobile companies which stores in Tamil Nadu and Ban- these special zones could be import packaged mobile galore. impacted but are unlikely to phones,” said Moon B. Shin, V. Ramachandran, director, increase prices of soaps, sham- managing director, LG Elector- sales and marketing, LG Elec- poos and toothpastes for fear of nics India Pvt Ltd. “Abolishing tronics India, does not see any losing sales. the 2% excise duty on mobile significant price cuts on micro- For food products, no com- phone accessories is also waves on account of a custom pany is in a position to pass on encouraging for consumers.” duty cut of 5% on magne- the increased burden as con- Expect prices of refrigerators tron—a key component used in sumers are already facing the and ACs to go up in the coming making microwaves. heat of rising food prices. week as most appliances and Although duties have been According to Anand Ram- electronics makers including reduced on LED lights and anathan, an analyst with audit Godrej Appliances, Samsung water purifiers as well, accord- and consulting firm KPMG, Electronics India Pvt Ltd and ing to experts in the related “The burden of the excise duty LG Electronics India say that it industries, consumers will not hike will be balanced by the will be difficult for them to enjoy any significant benefit rise in purchasing power of absorb the additional cost in a from the change. consumers both in rural and challenging environment. Lower central excise duty on urban areas.” TAX DEDUCTION I, the investor DummyMore tax benefits for you. B Y K AYEZAD E . A DAJANIA in these—besides the Rs70,000 it is unclear whether private ···························· Apart from the Rs1 lakh tax for other tax-saving instru- companies would be allowed deduction that you get under section 80C, you can get I nfrastructure bonds are back, with the Budget giving you one more opportunity to save ments, such as equity-linked saving schemes (ELSS), National Savings Certificates to issu e su ch bonds or the option to raise money by issu- ing bonds will only be given to on income tax. You will now be and Public Provident Fund—to government companies. another deduction of able to invest in these bonds claim a maximum rebate of “Our company also lends to Rs20,000 if you invest and claim a deduction of up to 20%. Taxpayers were also the infrastructure sector, but in infrastructure Rs20,000, besides the existing tax breaks under section 80C. allowed to invest the entire Rs1 lakh—the limit in Section we have to wait for the notifi- cation to see if we are allowed bonds under The new deduction comes 88—in infrastructure bonds. to issue such bonds,” said section 80CCF. under section 80CCF. The 2005-06 Budget Maheshwari. “Retail investors will have scrapped Section 88—along Secondly, the tenure of the one more avenue to participate with Sections 80L, 80CCC, bonds has not been specified. in the infrastructure projects,” 80CCD and 80C—and intro- Typically the tenure of the said Anup Bagchi, executive duced section 80C, which infrastructure bonds sold when director, ICICI Securities. removed individual limits of all Section 88 was around was If your income is, say, Rs8 the categories of tax-saving three to five years. The Budget lakh and you maximize your instruments. has only said the new incarna- investments under section 80C It instead allowed an invest- tion would be “long-term,” and section 80CCF at Rs1.20 ment limit of Rs1 lakh for all without putting a number to it. lakh, you will save Rs4,120 in eligible tax-saving instruments. “They could be for a mini- tax. Since infrastrcture bonds pro- mum of five years or maybe as Money raised from the sale vided returns of between 7% high as 10 years,” said Bagchi. of the bonds will go towards and 7.7%, taxpayers gravitated Also, unlike in the earlier bolstering India’s tottering towards ELSS, which as an version, where interest earned infrastrcuture. equity investment vehicle had from these bonds was also tax- “The concept of issuing the potential to deliver better deductible to a certain extent, infrastructure bonds is good,” returns. the new avatar will not offer said Suneet Maheshwari, chief Friday’s Budget proposals any such benefit as Section 80L executive, L&T Infrastructure have now revived the tax-de- has long been abolished. Finance Co. Ltd. “The Budget ductible infrastructure bonds Interest from the bonds are has incentivized it by giving it a by creating a fresh limit of likely to be taxed at the appro- tax impetus and the money Rs20,000 just for them and put- priate income tax rates. It would be available to infra- ting them separately under a would be interesting to see the structure-lending companies new section. inter est ra tes of these new at a lower cost.” There are two issues to con- infrastructure bonds and how Buying infrastructure bonds sider before buying these competitive they would be. to claim income tax deduction bonds. The fine print says the Budget allows a deduction of is not new. Till 2005, when Sec- bonds will be notified by the Rs20,000 on infrastructure tion 88 of the Income-Tax Act Central government. Expect bonds over and above the Rs1 1961 was in force, you could this to come in a month or two, lakh deduction available under invest a maximum of Rs30,000 industry experts said. Till then, section 80C.
    • L8 SATURDAY, FEBRUARY 27, 2010 www.livemint.com Business Lounge TAX SLABS Income tax slabs to increase Finance minister gives B Y D EEPTI B HASKARAN ried class (individual), his ···························· taxpayers a pleasant income and savings gets surprise by expanding the tax slabs. This C ontrary to expectations, the Budget gave taxpayers a pleasant surprise by broadening reflected in its Form 16. He can simply use his Form 16 and file his returns instead of filing ITR the tax slabs. forms, which run into several would leave more People were not expecting pages and require a lot of data.” disposable income in many changes in the tax propos- Finance minister Pranab the hands of people als until the proposed direct tax code replaced the current taxa- Mukherjee said the tax depart- ment was ready to notify the and would, therefore, tion regime. two-page Saral-II form for indi- increase demand Keeping the minimum vidual salaried taxpayers for the exemption limit intact, the Bud- coming assessment year. get proposal has increased the tax slabs by extending the maxi- mum tax rate of 30% for individ- uals earning more than Rs8 lakh a year against the earlier Rs5 lakh limit. The tax slabs will apply in the fiscal year begin- ning 1 April. “This will result in a larger disposable income in the hands of the taxpayer, which in turn would increase demand. This has been a calibrated move to boost growth,” said Jay Shankar, chief economist, Religare Capi- tal Markets Ltd. “The Budget does pave the way for a partial rollback of stimulus, but at the same time creates a balance by increasing disposable incomes.” For an individual earning Rs5 lakh a year and availing a deduction of Rs1.2 lakh by mak- ing the required investments, the new tax slab would translate into savings of Rs12,600 as he would come under the 10% tax bracket and not the 20% slab. For individuals earning Rs10 lakh or more, the benefit would remain at Rs57,680. “Even though the Budget has not increased the basic exemption limit, expanding the tax slabs will mean sav- ings for taxpayers,” said G. Ramaswamy, vice-presi- dent, Institute of Char- tered Accountants of India, the regulator of auditors. In addition to increas- ing the tax slab, the Bud- get has proposed replac- ing the income-tax return (ITR) forms with Saral-II forms to make the process of filing tax returns simpler. This form is meant for individual sal- aried taxpayers. “ITR is meant for the business class or for individuals who have income from various sources,” said Ramaswamy. “For a sala-
    • www.livemint.com SATURDAY, FEBRUARY 27, 2010 L9 Play Quotes from live chat today I also wish that FM increase I think it’s time we stopped the limit of section 80(C). It is expecting ”benefits for the sal­ seen that most of people have aried class” from the budget been exhausted their limit of That means more of social welfare ­ SUKUMAR 80(C) with EPF and insurance and inclusive growth to justify more Reigning inflation is urgent RANGANATHAN premium only. state regulation? when do we see a need as daily expenses are ­ MEHUL real signal of growth via innovation getting burdensome and entrepreneurships? ­ SAUMYA ­ SANJAY K Good news on direct tax code Pranb promises clarity on fdi Clean tech/ energy development ­ NAVEEN policy; hope issues related to fund & hydro projects ­ budget grandfathering and the banking gets a shade of green sector are sorted out ­ SACHIN ­ SUKUMAR RANGANATHAN Competitive bidding for coal @ssk step by step, setting up blocks is MUCH MUCH better coal regulatory authority was than Ad­hoc coal linkages a much needed first step to ­ SSK clean up the existing mess ­ ANIL PADMANABHAN Infra needs to be revamped but that whats the news on the home would essentially mean taking money loan front? Any scope of relief from other initatives and pulling all for for existing customers? infra only..moreover infra projects rarely ­ IVAN kicks off within time..hence this would result in underutilization of budget ­ ASHISH Property rights for slum dwellers scheme ­ 1274 crore as compared to @Ivan relief continues for 150 crore in previous years ­ states to those with loans upto create a slum free India. So they are Rs 10 lakh. listening to De Soto this one seems to be really an aam ­ MONIKA HALAN ­ ANIL PADMANABHAN admi budget, a substantial impor­ tance and funds for social security for the unorganized sector workers! Kudos Pranab Babu! ­ GEETIKA Pranab Babu ... is stating all alloca­ tion.... wait for his income generation @Geetika i would wait to took measure..... from where all this money at the math before saying this will come ... Increasing Taxes... ?? ­ SUKUMAR RANGANATHAN More burden on AAM Admi ­ Market borrowings 3.45 trillion KAPIL creating space for meeting private demand. Bond prices may rise and relief that excise rise was only push yield down as a fall out. 2% evident ­­ markets would ­ TAMAL BANDYOPADHYAY have fallen had it been more ­ SUKUMAR RANGANATHAN Additional Rs 20,000 deduction allowed on investment in notified infra bonds. Total deduction now This budget is going to create impact of indirect duty changes will is Rs 1.2 lakh too much probelms for aam either increase petrol subsidy burden ­ MONIKA HALAN aadmi because of inflation on oil companies or push up domes­ and price rise tic oil prices. If it is the former it will ­ SREEKANTH burden the fiscal, if it is the latter, it will push up inflation ­ ANIL PADMANABHAN
    • L10 SATURDAY, FEBRUARY 27, 2010 www.livemint.com Play MARKET MOOD Cheers by some, not all The Sensex was up B Y R AVI K RISHNAN ························· 1.08% from the previous close at 16,429.55, down from an intra­day A lower fiscal deficit, an ex- cise tax hike which had al- ready been accounted for and a personal income tax bonanza high of 16,669.25; BSE led to a relief rally as Indian Auto index gained the equities soared 2.5% when the finance minister presented the most Union budget. It was short- lived however as investors pared some of the gains fear- ing inflationary consequences and questioned the assump- tions on government spending increases in the next financial year. The budget did little to change the medium-term out- look, said investors who re- mained positive on the India’s growth story. At the close of trading on Friday, India’s benchmark in- dex, the Sensex, was 1.08% up from the previous close at 16,429.55, down from an intra- day high of 16,669.25, marking finance minister Pranab Mukherjee’s announcement that next year’s fiscal deficit would be capped at 5.5% and at 4.1% in the next two years. The 50-stock Nifty index closed 1.29% up at 4,922.3. The Budget clarified the fis- cal road map, bringing a mea- sure of predictability, which bouyed the markets, said Nan- dip Vaidya, president of equi- ties at India Infoline Ltd, the country’s largest listed broker- age. “The expectations were not very high,” Vaidya said. “The uncertainty is over and the in- tent is clear and positive.” “What the market liked most rally on Tuesday.” “There was a lot of relief and bile spectrum auctions to be of equities at Religare Asset was the fiscal consolidation The benchmark 10-year gov- the the assumptions made on substantial sources of revenue management Company Pvt programme,” said Alroy Lobo, ernment bond closed up 8.5 the revenue side are fairly con- next year. Ltd, which manages Rs13, 283 chief strategist and global head basis points to 7.885%. servative,” said Anoop “There is a fair bit of reliance crore. “But valuations are still of equity assets at Kotak Mahi- G. Chokkalingam, head of Bhaskar, head of equities at on the 3G auction and disin- high and have not dropped to ndra Asset Management Co. equities at Barclays Wealth In- UTI Asset Management Co Ltd, vestment figures and if there’s attractive levels. We remain Ltd, which manages Rs36,781 dia, said the budget left inves- which manages Rs74,510 any slippage on that front, it cautious on Indian equities.” crore. “The deficit numbers tors free to concentrate on the crore. “But investors are con- will be negative,” said Lobo of At the sectoral level, auto were good and there was a fair good macro economic funda- cerned about the assumption Kotak. “The sale of mobile stocks soared the most with degree of short covering.” mentals such as the projected on the expenditure side.” spectrum, which will fetch the the BSE Auto Index up 4.74% The debt markets were en- 7.2% growth figure for this fi- The expenditure hike of 8% government Rs35,000, crore as the 2% excise tax hike was couraged by the lower borrow- nancial year, proposed tax re- is one of the lowest in recent has been delayed for several on expected lines. Banking ing target of Rs3.45 trillion for forms that will kick in next year years thanks to the modest al- months now.” scrips also gained a collective the year, down from the cur- and the thrust on infrastruc- locations for subsidies and de- While the budget is seen as 2.58% after the budget an- rent year’s record Rs4.5 tril- ture, education and health. fence. For instance, the overall positive, investors said they nounced that the RBI was con- lion. “The era of uncertainty is subsidy bill projected for next would look at global factors sidering additional licenses for “The budget is positive for over,” said Chokkalingam. year is 11% lower, while the such as high debt in the Euro the private sector. The top the bond markets,” said G.A. “Barring issues such as a poor sum allocated for the Mahat- zone and banking regulations gainer among the 50 Nifty Tadas, managing director of monsoon or global incidents, ma Gandhi National Rural Em- across the world in the medi- stocks was Reliance Capital IDBI Gilts Ltd. “Although the budget has laid a founda- ployment Guarantee Scheme um term, besides valuations. Ltd -- a banking licence candi- yields rose today because of tion of solid wealth creation.” is only Rs1,000 crore higher “One has to go through the date -- up 7.83% at Rs784.7. It the petroleum price increases, With profit being booked lat- than the present fiscal. fine print, but the signal is of was followed by Tata Motors the borrowing is lower than ex- er in the day, clearly not all in- The government expects as- moving to better fiscal health,” Ltd, which gained 7.21% to pected and we should see a vestors agreed. set sales and high-speed mo- said Vetri Subramanian, head close at Rs715.55. of the government and lower fiscal deficit tar­ short period of time and the focus will shift back gets were also positive surprises for the mar­ to global economic issues, with projections and VIPUL NIRANJAN kets. assumptions in front of us, there would be more VERMA RAJADHYAKSHYA Though the hike in Minimum Alternative Tax clarity about the economy. was unexpected, the cut in the cess on corpo­ There will be an uptick in inflation due to the CEO, MONEYVISTAS.COM rate tax was a welcome move. The rationaliza­ rise in petroleum prices, which as per the eco­ tion of excise and custom duties was along nomics secretary will be less than 0.5%. Howev­ SHORT­TERM TECH­ NICAL INDICATORS Reform oriented and expected lines. The immediate difference is that from now on the Indian markets will not be one of the er, the spiralling effect of this would surely hit sentiment in coming weeks and sooner rather than later the fear of fiscal tightening would SUGGEST THAT balanced budget front runners among the losers as domestic strength will counter the volatile and uncertain global economic scenario. This in itself is a big pop up again to haunt investors. Following the post­budget rally, technical analysis suggests that the worst is over for now THE NIFTY AND THE SENSEX COULD boost to the market as it will prepare the and the market has a very limited downside MOVE UP 4­5% IN L ast year I described the budget by starting in order to achieve the desired results. However, ground for the return of investors to the market. going forward. As far as the trend on bourses is my column “Finally it’s over”. This year I would like to start with: Finally it has uncertainties attached to the limited options available with the government led to nervous­ Subsequently, the current pace of economic growth will help boost sentiment on bourses concerned, it is now pointing upward with a Nifty target of 5,148 in sight. What happened in COMING WEEKS. arrived. For the last several years, it had become ness among investors. further. Indian investors actually needed a turn­ the last two hours of trading on Friday does not rather a trend to see markets falling sharply fol­ This growth­oriented budget has put to rest ing point for the market, which this budget has mean peaking out of the trend as leading indica­ lowing the budget. So this year came as a pleas­ several doubts as it’s forward looking and justifiably delivered. Economic fundamentals tors are in cross­over mode and clearly showing ant contrast. addresses a lot of issues that were haunting will be back in the reckoning ­­ that’s one of the a break­out on the positive side. While the credit goes to the finance minister investors for some time now like the status of immediate impacts of the budget for the mar­ The fact that the rally came on huge volumes, for presenting a reform­oriented and balanced the economic stimulus, the duty structure, gov­ ket. also reinforces the view that there is scope for budget, some part of the post­budget rally can ernment borrowings and the fiscal deficit. On a broader horizon, valuations post tax more gains on bourses and next week should be also be attributed to the fear psychosis of inves­ Special mention needs to be made of direct adjustments will become slightly more attrac­ good. On a broader horizon, short­term technical tors. Investors to a large extent were unduly and indirect tax proposals, which on the one tive, which will also go down well with the mar­ indicators suggest that the Nifty and the concerned about budgetary proposals and their hand have left a good amount of money in the kets as the budgetary proposals have a positive Sensex could move up 4­5% in coming weeks, likely impact on the stock markets. Since the hands of tax payers, while on the other hand, a impact on companies. before they see any significant downside. Indian economy is in a high growth trajectory, confidence­boosting slow rollback of stimulus Though it is fair to assume that the impact of the economic environment has to be supportive measures has also begun. The borrowing target the budget will dominate the market for a very
    • www.livemint.com SATURDAY, FEBRUARY 27, 2010 L11 Play BUDGET MOVES Street smart The Sensex reacted instantly as the finance minister read out the Budget. A lower fiscal deficit and smaller borrowing programme sent the markets soaring, but ended the day at 16,429.55 exacerbated by the fact that information on expen- considered raising allocations with real administra- ditures, in real time, is rarely available. Moreover, tive reforms. This would have included making pro- YAMINI NIRANJAN there is very little information and effort made to visions for block grants to Panchayats, and increas- AIYAR RAJADHYAKSHYA monitor outcomes. ing their powers to monitor and hold local service The problem of poor spending is inextricably providers accountable. The 13th Finance Commis- Centre for Policy Research linked with weaknesses in the nature and form of the implementation structures. In the current sys- sion has made some far reaching recommendations aimed at strengthening local bodies. Budget 2009 THE CHALLENGE IS Governance reforms, not hikes, tem, where centrally sponsored schemes dominate social sector spending, funds arrive at the local level tied to specific guidelines allowing little flexibility to could have leveraged this to strengthen local gov- ernments’ role in implementing social sector pro- grammes. Not doing so is a real opportunity lost. TO ENSURE HIKES IN ALLOCATION were needed accommodate local needs and priorities. Conse- quently, expenditure rarely reflects real needs on the ground. Local governance apart, budget 2010 could have introduced other reforms such as linking pay to per- formance and creating more effective systems for RESULT IN EFFECTIVE Another critical weakness is the incentive struc- monitoring outcomes. SPENDING I ndia’s social sector, including education, health is where budget 2010 falls short ture at the local level. Teachers and doctors for In sum, the budget is much as expected. Some and rural infrastructure, received pride of place in The issue of ineffective expenditure and poor instance are hired, paid, monitored and therefore increases in allocation but increases that are unlike- Pranab Da’s budget speech. After all, as he noted, governance is well acknowledged. In fact, at the accountable only to state governments. It is of ly to have any real consequences in the absences of harnessing economic growth to consolidate recent start of his budget speech, Pranab Da articulated course, unrealistic to expect that the state govern- real governance reforms. In his maiden speech on gains in making development more inclusive is one weaknesses in government systems, structures ment, which is far removed from the schools and becoming Prime Minister, Manmohan Singh prom- of the greatest challenges we face today. And so, and institutions as the third key challenge for India. public health care centres, could be effective moni- ised that the UPA would be a government with a spending on the social sector has increased. With Yet, his budget does very little to address this chal- tors. This is why absenteeism is so high – 25% real reform agenda. “No development agenda”, he budget 2010, the social sector now accounts for Rs. lenge. among teachers and 40% among doctors. said, “can be met if we do not reform the instru- 137,674 crore, or 37% of the total plan outlay for The crux of the problem with governance of Worse, as salaried government employees, they ment in our hands”. Sadly, one term later, the 2010-11. India’s social sector is an incentive structure that are paid regardless of performance. What then are instrument remains much the same. But will these increases result in meeting the significantly compromises accountability for perfor- the service providers’ incentives? Think about it -- if Watch Yamini challenge of inclusive development? No doubt, mance. Take the issue of expenditure. Year after you are paid a salary, not monitored by supervisors, Yamini Aiyar is a senior research fellow and inclusion requires increased allocations. But this is year, large amounts of money remain unspent, as cannot be fired or have your pay reduced under any director of the Accountability Initiative of Ayer analyze only half the battle. The real challenge for India is to reported by the government itself. And yet, year circumstances, would you bother showing up for the Centre for Policy Research. ensure that the increases in allocation result in after year, the annual budget makes increased allo- work? Respond to this column at feed- the budget here effective spending and, therefore, improved out- cations with little consideration for expenditure Under these circumstances, if the budget was to back@livemint.com comes. This requires effective governance and this performance–where then are the incentives? This is really ensure real inclusion it would have seriously
    • L12 COVER SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM ourview Well-designed Budget Fine on paper, the hard part is implementing it under political constraints I t is hard to fault nance minister Pranab Mukher- jee for what he has tried to do in the new Union Bud- does need to get to a scal de cit of 3% of GDP and a zero revenue de cit by 2015. It is no surprise that the stock papers. e nance ministry has implicitly assumed that the Indian economy will grow at 12.5% at current prices in get he presented on Friday. It market perked up only after FY11. Tax revenues are is a ne blend of pragmatism the scal numbers were expected to grow faster than and vision. announced. the economy (18%) and total e pragmatism comes e nance minister is now expenditure is expected to from the recognition that the gunning for a deep cut in the grow slower than the econ- Indian government cannot scal de cit—1.2 percentage omy (8%). is means that continue to live beyond its points. Will it prove to be a the JAYACHANDRAN/MINT means. Public nances had to stretch target? e Indian nance minister has assumed be set right now that the government has been able to a wonderful combination of huge 32% rise expected from than bonds to cover under Indian economy has recov- make a larger scal correction strong tax buoyancy and non-tax revenues, including recoveries is also a step in the ered from the mild downturn. only twice in recent history: spending discipline. disinvestment and auction of right direction— both for the e stated goal of bringing 1991-92 and 2003-04. e And what’s even more third-generation, or 3G, cash ows of the oil compa- down the scal de cit from ability of the current govern- interesting is that the stronger telecom spectrum. nies and as a step towards 6.7% of the gross domestic ment to pull o the trick will tax collections are to come e vision in the Budget greater budgetary transpar- product (GDP) in FY10 to depend on two factors: how from excise and customs comes from some of the ency. 5.5% in FY11 is as welcome as realistic its budgetary duties rather than income tax, reformist hints dropped in the ere are undoubtedly and it is ambitious; but we cannot assumptions are and how well where e ective rates have nance minister’s speech. He inevitably many budgetary help mention that the it can keep spending under been has committed himself to the moves that are either puz- budgeted revenue de cit is control. reduced. On the spending introduction of the goods and zling or which hurt select still 4% of GDP. In other Here’s a look at some of side, Mukherjee hopes to services tax and a new direct groups. at is part of the words, the government will the numbers in the Budget keep a tight leash on revenue tax regime in April 2011. at game. Some of the tinkering borrow up to 4% of GDP in expenditure even as he budg- means India will nally have brings back memories of bud- the new scal year to help eted for an increase in capital a low and stable system of get making in the 1980s. meet its expenses on stu expenditure. taxes—a huge plus. However, the such as salaries, interest pay- ments and subsidies, at a The FM has What this means is that the government is planning for a Mukherjee has suggested that the money collected from overall tenor and promise of the Budget is worthy of time when companies need assumed a scal correction led by a disinvestment would be used praise, given economic and wonderful funds to spending discipline rather for capital spending of social political realities in the coun- increase capacity and the than a cut in capital expendi- sector schemes so as to create try. government should be bor- rowing to build new roads combination of ture or soaring taxes. at makes this scal correction assets. e decisions to give out new bank licences and to e plan has been revealed. Now comes the next and ports. e revenue and primary de cits will have to tax buoyancy plan quite di erent from many o ts predeces- expand the bank branch net- work are some of the moves step: implementation. It may not be as simple as it seems. be watched as closely as the scal de cit is. and spending sors—and seems a bit unreal- istic, given the political econ- to deepen the nancial sector and also promote nancial Does Budget 2010 meet your But the welcome rst step discipline omy inclusion. e promise that expectations, and are Pranab to scal consolidation seems constraints in India. We oil marketing companies Mukherjee’s targets realistic? to have been taken. India should also take note of the would be paid cash rather Tell us at views@livemint.com myview POLICY TRACK sidy numbers—previously taken o the balance sheet—into the budgetary de - cit, which indicates greater transparency later—and this would a ect the scal de cit. Second, there is little delivery on S NARAYAN and, indeed, a greater resolve to get nances in order. e government is promises. e launch of the goods and services tax moves to 2011, and so does also providing enough funds to recapi- the direct tax code. e road map for talize public sector banks, and there are scal consolidation would be placed fifl  fl   no loan giveaways that would a ect their balance sheets. before Parliament only in six months’ time. ere is talk of committees for the On tari s, there is no new taxation, nancial sector, regulators for coal, and and there is only adjustment in the rates a host of other bureaucracy to be grown. F inance minister Pranab Mukherjee started o with a strong political phi- losophy statement that the role of this There is no of taxes already being levied. e reduc- tion in personal income-tax rates would be very welcome for the middle class, ere is no mention of the reform Bills pending in Parliament, and even the word “reform”, perhaps, is hidden government was to create an enabling environment for growth and develop- mention of and there is no increase in service tax rates. Excise duty hikes are modest, and away somewhere, di cult to nd. Allo- cations continue to be used as a surro- ment and to strengthen investments in the social sector. For the rst time, per- pending reform there are customs concessions for spe- ci c sectors in keeping with the budget- gate for action, and even the concern in the speech about poor public delivery haps, this government openly acknowl- edged the importance of market- and Bills; even the ary practice of choosing winners for tar- i bene ts. systems has not led to any actionable programmes. Mukherjee said that more private sector-led growth, and that pub- lic expenditure could not be expected to word ‘reform’ is Altogether, this is a very mature bud- get, balancing requirements of growth than 300 of the recommendations of the Administrative Reforms Commission be the origin of gross domestic product perhaps hidden with social sector spending, ensuring have been implemented, but the citizen (GDP) growth. He followed it up by allocating 37% of all Plan expenditure for away somewhere that in ationary pressures are not exac- erbated. is is, indeed, the very kind of is hard put to locate improvements in administration. the social sectors (perhaps a record), balanced mature document one would On two important issues, in ation and and outlined the concept of a welfare have expected from a seasoned person employment, there is very little. He state by talking about the food security such as Mukherjee. shares the concern with all of us that Act, the new schemes for the unorgan- a surprise, for the general impression is And yet, there is a feeling of opportu- in ationary pressures are high—we ized sector, relie n income tax for the that the Congress party continues to be nity missed, of things not done, and of thought he was the person to do some- lower slabs, and other concessions. socialist in outlook. A criticism here shadows lurking. First, the increase in thing about it. e petroleum price In parallel, in keeping with the strong could be that Mukherjee needs to pro- Plan allocation is very modest—just increases will add to these pressures, as pro-market, pro-liberal statement, he vide public funds for the pro-poor pro- 15%—and given in ationary pressures, will the increase in excise. announced greater disinvestment in grammes, and that has left him with lit- real increases (subtracting for the rate of Finally, there is relie n direct taxes public sector undertakings, opening up tle for other asset formation initiatives, in ation) would be even lower. Agricul- and an increase in indirect taxes, quite o oreign direct investment (FDI) in and hence he is forced to rely on public- ture, for all the fanfare in the Budget, the reverse of what India has been trying retail, more private sector banking private-partnership (PPP) models to give gets only around Rs400 crore to do these last 10 years. Indirect taxes licences, and a complete overhaul of the country the required growth stimu- more—surely a very modest number for are retrograde, a ecting the poor and nancial sector regulations. Simulta- lus. such an ambitious programme. rich alike—a mature economy should neously, petroleum product prices have On the scal de cit, the Budget has Increases in allocation for the national have a larger share of direct taxes. been increased to bring them closer to delivered as promised, with the expecta- highways programme and even the the market, fertilizer subsidies have been tion of a scal de cit at 5.5% of GDP National Rural Employment Guarantee S. Narayan, a senior research fellow at rationalized, there are promises of next year, down from 6.8% this year, and Scheme are fairly small. e numbers the Institute of South Asian Studies, enlarging FDI, and there is an impres- a road map of reductions for the next indicated for revenue Singapore, is a former nance secretary. sion that the government is now open to two years. More importantly, Mukherjee expenditure do not inspire con dence, We welcome your comments at big private sector initiatives. has subsumed below-the-line items such and it is quite possible that these may policytrack@livemint.com is new philosophy comes as a bit of as oil bonds and food and fertilizer sub- have to be revised substantially upwards
    • COVER L13 SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM PROPOSAL PROPOSALS Excise duty on auto components and tyres Excise duty up from 8% to 10%; excise duty on big cars, sport utility increased from 8% to 10%. Interest subvention of vehicles and multi-utility vehicles raised from 20% to 22%; addi- 2% on pre-shipment credit for small and medium tional duty component retained at Rs15,000 for cars of exporters extended to 31 March 2011. 1,500-1,999cc engine capacity and Rs20,000 for passenger vehi- cles with engine capacity above 2,000cc; excise duty of Re1 per IMPACT litre on fuel; customs duty 5% higher; allocation for road develop- No significant impact on the industry. Increase in excise ment up 13%; weighted deduction on in-house R&D spending raised from duty on tyres will be passed on fully to original equipment 150% to 200%; 4% excise duty on electric vehicles; critical parts and assem- manufacturers (OEMs) and replacement segments. A rise blies of such vehicles exempted from basic customs duty, special addi- in excise duty for the auto component sector may be tional duty; countervailing duty of 4% imposed. passed on to automobile manufacturers. However, if absorbed, it will be offset by increase in demand. The IMPACT interest subvention of 2% will have a marginally positive Higher excise duty rates is likely to be passed on to consumers and is par- impact for small and medium exporters engaged in exports tially negative. But this is likely to be compensated by exemptions on personal of auto components. income-tax rates. The government’s thrust on rural and infrastructural development remains a key pos- itive. The increased weighted deduction rate for in-house R&D will encourage higher R&D allocations. PROPOSALS PROPOSAL RBI to consider giving banking licences to private sector companies Increased allocation for power and infrastructure sector; excise /non banking finance companies. Government to recapitalise select duty cut from 8% to 4% on compact fluorescent lamps public sector banks by Rs16,500 crore; additional capital to regional (CFL) and LED lamps; 5% concessional import duty on rural banks. Increase in interest subvention from 1% to 2% for farm- inputs for photovoltaic, solar panels; excise duty waived ers who pay as per repayment schedule, extension of debt on photovoltaic, solar panels, and on inputs required in waiver and debt waiver for farmers extended to 30 June. rotor blades. IMPACT Positive IMPACT Competition is likely to further intensify. Recapitalis- Increased allocation and long-term funding availability ing public sector banks is likely to help around one for power and infrastructure projects will induce more third of these banks. The additional interest rate subvention schemes investment and thereby benefit equipment manufactur- to encourage prompt repayment by farmers should improve credit ers. Focus on energy efficiency and excise duty reduction culture. But b, the government’s borrowing programme for FY11 for CFL will result in improved demand prospects for players remains sizeable and if the credit offtake is more than 15% - 16%, in the lighting segment. Concessional import duty and waiver bond yields may rise and thereby impact treasury profits. of excise duty on photovoltaic and solar panels as well as lower excise duty on inputs for rotor blades will benefit photovoltaic cell and wind turbine generator manufacturers, respectively. PROPOSAL PROPOSAL 2% excise duty hike. Higher allocation for roads, railways, housing, urban infra- structure sectors; India Infrastructure Finance Co. Ltd IMPACT (IIFCL) to continue take-out financing; minimum alternate Increase in outlay on roads, subventions on housing tax (MAT) increased from 15% to 18% of book prof- and focus on infrastructure development should its. boost demand for cement. Increased rural income under National Rural Employment Guarantee IMPACT Scheme will also boost rural housing demand and, The increased outlay and continued in turn, demand for cement. However, increase in take-out financing and refinancing plans excise duty and imposition of Rs50 per tonne cess of IIFCL, and availability of funds through on imported and domestic coal will increase costs, which long-term infrastructure bonds, will aid in will difficult to pass on to consumers given the current faster execution of infrastructure projects. oversupply situation. MAT increase will have negative impact on players with operational build-operate-transfer projects.
    • L14 SATURDAY, FEBRUARY 27, 2010 www.livemint.com Travel PROPOSALS PROPOSAL Increase in weighted reduction from 150% to 200% on expen­ Increase in allocation to power sector at Rs5,130 crore (increase diture incurred on in­house research and development (R&D) of 152%); increase in available long­tem funding through refinanc­ activities, and from 125% to 175% on activities outsourced to ing from India Infrastructure Finance Co. Ltd; increase in alloca­ specific institutions. Partial rollback in excise duty from 8% to tion to renewable energy sector at Rs1,000 crore (increase of 10% (to impact raw material costs). 61%); formation of coal regulatory authority and national clean energy fund; clean energy cess of Rs50 per tonne on both IMPACT domestic and imported coal; increase in minimum alter­ The increase in weighted reduction on R&D activities is a posi­ nate tax (MAT) rates from 15% to 18%. tive and will continue to support higher investments by research­led pharmaceutical companies. It’s a positive for con­ IMPACT tract research organisations as well. The increase in excise Increased allocation to power sector will be positive for duty for raw material will impact the cost structure. Also, an central public sector undertakings. Increase in allocation and increase in petrochemical prices may impact some of the basic excise duty benefits are clear positives for firms in renewable raw material (intermediate) costs, impacting margin. The energy segment. Coal regulatory authority will bring regulatory clarity and introduction of competitive bidding increase in MAT rate, however, is going to increase tax outgo mechanism for allotment of coal blocks will further enable increased participation from private firms. The for few companies that are currently paying lower taxes. increase in MAT and cess on coal are a negative as they will negatively impact profitability of merchant power plants, where costs are not a pass through. PROPOSAL PROPOSALS Nutrient based subsidy (NBS) regime with effect from Increase in allocation for rural development, agricultural­ 1 April . Budgetary provision for subsidy is Rs.52,980 centric and employment generation schemes; reduction in crore (revised estimates for 2009­10) and Rs49,981 personal income tax; increase in central excise duty from crore (budgetary estimates for 2010­11). 8% to 10%; increase in duties on all tobacco products. IMPACT IMPACT The impact of NBS , announced earlier, will be a Increased allocation for rural development and employ­ function of the subsidy provided in the Budget and ment generation is a positive for the sector, since it is the level of increase in minimum retail price to be expected to increase consumer spending. Reduction in achieved by industry players. Efficient DAP(diammo­ personal income tax will benefit the sector by increasing nium phosphates) and complex fertilizer companies disposable incomes. The increase in central excise duty, if should benefit. The budgetary provision for the cur­ passed on to consumers, may lead to some demand con­ rent fiscal may marginally fall short of requirements due traction; increase in duties for tobacco products will to the surge in component prices in recent months. Provision for 2010­11 also adversely affect the segment. appears to be on the lower side. Firms may not be able to pass on the rise in costs to farmers in view of the commitment given to the government for kharif 2010. PROPOSALS PROPOSAL Benefits of 100% investment­linked tax Rs1,270 crore allocated under Rajiv Awas Yojana; deduction on capital expenditure (excluding allocation for housing and urban poverty alleviation land, goodwill and financial instrument) for raised to Rs1,000 crore; 1% interest subvention on building and operating a new hotel (commis­ housing loan up to Rs10 lakh extended to 31 sioned after 1 April) of two­star category March 2011; allocation under Indira Awas Yojana and above, extended from select locations to increased. across the country. IMPACT IMPACT Allocation under Rajiv Awas Yojana will aid slum Bringing the hotel industry within the pre­ redevelopment programmes. Moreover, extension of the view of investment­linked tax deductions scheme of 1% interest subvention on housing loan up to Rs10 lakh could promote balanced (across categories) (where the cost of the house does not exceed Rs20 lakh) will continue to incremental investments in fresh inventory, reducing the provide a boost to affordable housing. On the rural front, increase in alloca­ supply–demand gap in the country. Benefits of increased government tion under the Indira Awas Yojana to Rs10,000 crore will help reduce the thrust on infrastructure/roads to trickle down to the tourism industry prevailing shortage in rural housing. However, these allocations will not sig­ over the medium to long term. The increase in MAT rates will, how­ nificantly impact the organised housing sector. ever, have an adverse impact.
    • www.livemint.com SATURDAY, FEBRUARY 27, 2010 L15 PROPOSAL Travel PROPOSAL Minimum alternate tax (MAT) rate has been increased Customs duty on setting up of “digital head­end” reduced from 15% to 18% while surcharge has been reduced to 5%, waiver of 5% SAD proposed. Customs duty on from 10% to 7.5% for Indian companies. imported digital masters of films, and music and gaming software rationalised to include only IMPACT cost of medium. The impact of the Union Budget 2010­11 on the IT sec­ tor is negative. The increase in MAT rate will offset IMPACT any benefits resulting from the decrease in sur­ The impact of the Union Budget 2010­11 on the charge and will affect the players’ cash flows. The media sector is positive. The input cost for mul­ impact of MAT will be higher for tier­II players ti­service operators will decrease as a result of the cut compared to tier­I players. in customs duty for digital head­ends. The rationalisa­ tion of customs duty on imported digital masters of films will enable proliferation of digital content in the country. PROPOSAL PROPOSAL Increase in excise duty from 8% to 10%; Levy of cess on coal Basic customs duty of 5% restored on crude petroleum, 7.50% on petrol and (Rs50 per tonne). diesel and 10% on other refined products. Central excise duty on petrol and diesel hiked by Rs1 per litre each. IMPACT Increase in excise duty will result in an increase IMPACT of around Rs2,000 ­ Rs2,500 per tonne in The revised duty structure will marginally increase the aluminium, zinc and lead prices, and import duty differential for refineries, leading to a Rs7,000 – Rs8,000 per tonne in copper marginally higher refining margin, which is a prices. The cess levied on coal will increase positive for standalone refineries, including the cost of production of aluminium. However, greenfield projects currently being set up. the increased cost of production and price increase Higher import duty and excise duty is negative on account of rise in excise duty will be passed on to buy­ for oil marketing companies as gross under­recoveries ers due to favourable expectation of demand growth. Hence, will increase. But the post­budget hike in fuel prices will the overall impact on the non ferrous metals sector is neutral. largely negate the impact. Increase of MAT is marginally negative for some large oil and gas companies and new refinery projects. Five per­ cent import duty on crude oil is positive for upstream companies, as they will be benefited in an import parity based pricing regime. PROPOSAL PROPOSAL Exemption from additional duty of customs (special CVD) No announcements made. of 4% on waste paper and paper scrap IMPACT IMPACT The overall impact on the domestic petrochemical Impact on the domestic paper industry is neutral. industry is neutral with no changes announced in While the exemption of additional duty of customs of the excise or customs duties of petrochemicals. 4% on waste paper and paper scrap will reduce raw material costs for paper manufacturers, players will be unable to retain this benefit and are expec­ ted to pass it on.
    • L16 SATURDAY, FEBRUARY 27, 2010 www.livemint.com Travel PROPOSALS PROPOSALS Budget allocation for road projects increased by Introduction of competitive bidding for allocation of 13.5% to Rs19,894 crore in 2010­11, incremental coal block and a regulator for the domestic coal sec­ disbursement of Rs25,000 crore over the next tor, a cess of Rs50 per tonne on coal, a 2% increase three years by India Infrastructure Finance Com­ in excise duty, focus on infrastructure, housing and pany Ltd ( IIFCL) under its takeout financing urban development scheme and import duty exemption for specified machinery used in construction. IMPACT The setting up of a coal regulatory authority and the IMPACT introduction of a competitive bidding process for alloc­ The increased outlay will favourably affect companies ating coal blocks will help in the development of the involved in road construction. The takeout financing sector, which, in turn, will benefit the steel industry, through IIFCL would facilitate the availability of long term capi­ for which coal is a key input. However, the Rs50 per tal. The increase in MAT rate from 15% to 18% will have an adverse tonne cess on coal and the 2% excise duty hike will adversely impact. Excise duty hikes in cement, petrol/diesel will also push up affect the profitability of steel companies. The proposals for costs for the sector. Import duty exemption for specific equipment sectors such as infrastructure, housing and urban develop­ will provide some respite. ment are also likely to boost steel demand. PROPOSAL PROPOSALS There are no specific proposals in Union Budget 2010­11 for MAT increased from 15% to 18%. Exemption from basic, the sugar industry. countervailing duty (CVD), and special additional duty (SAD) to include battery chargers, headphones; Exemption of SAD IMPACT extended to mobile phones not imported in pre­packaged No impact on the industry. form. IMPACT The impact on the telecom services sector is negative. The increase in MAT will negatively impact the profitability of tel­ ecom services providers. The duty exemptions will result in further reduction in mobile handset prices. However, the impact will be marginal as mobile handsets and accessories are already very affordable. PROPOSALS The exemption from basic, countervailing duty (CVD), and special additional duty (SAD) on components and accessories of mobile handsets has been extended to include battery chargers and headphones. The government has also extended the exemption of SAD to mobile phones that have not been imported in pre­packaged form. MAT increased from 15% to 18%. IMPACT The increase in MAT will negatively impact the profit­ ability of telecom services providers. The duty exemp­ tions will result in further reduction in mobile handset prices. However, the impact will be marginal as mobile handsets and accessories are already very affordable.
    • TRAVEL L17 SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM If I were FM Industry leaders across sectors spoke to Mint 1. If you were nance minister about what they wanted out of the budget, what would you address as an answering three basic questions: immediate priority this budget? 2. In a ve year time frame, what would you implement now that would show results in 5 years? 3. Coming to your own sector, what is the one thing you would like addressed this budget? Right click to pause/stop VINAYAK CHATTERJEE AJIT GULABCHAND GAUTAM THAPAR SHIVINDER MOHAN SINGH RANA KAPOOR Feedback Ventures CMD, HCC Chair/CEO, Avantha MD Fortis CEO & MD, Yes Bank HITESH OBEROI JOSEPH MASSEY KAPIL MEHTA SHACHINDRA NATH RUSSEL PARERA COO Naukri.com MD & CEO, MCX-SX CMD, DLF Pramerica COO, Religare CEO, KPMG SANJAY UBALE SANJEEV BIKCHANDANI SANJAY AGARWAL VINOD JUNEJA RANU VOHRA MD/CEO, Tata Realty CEO/Founder, Naukri CEO, Spicejet MD Binani Cements MD & CEO, Avendus Capita RAVI SUD S. VISHWANATHAN V. BALAKRISHNAN H.M. BANGUR SUMANT SINHA CFO, Hero Honda Dty. MD Toyota Kirloskar Sr VP & CFO, Infosys MD, Shree Cement COO Suzlon
    • L18 SATURDAY, FEBRUARY 27, 2010 www.livemint.com Books
    • BOOKS L19 SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM PLAY THE BUDGET Which FM are you? What kind of budget would YOU make if you were Finance Minister? Would you be pro­reform, pro­labour, or simply populist? See the different outcomes of the game and then try playing it for yourself to see which category you fall under. (PLAY GAME) Click here to view slideshow 3. PRO GROWTH: A pro growth budget seeks to maintain the Indian growth story. You want to use your budget to keep incomes grow­ ing, and growth rates at a high rate. This might have implication in terms of overall policy reforms and fiscal defi­ cits. But with global econo­ mies still sluggish, it is a pru­ dent move. Yashwant Sinha’s budget of 1999 might seem PRO REFORM: familiar. You have chosen a budget that ignores political pressures and seeks to being prudence to the way the government spends money. You have made steps to increase income, control expenditure, undo decades of faulty pol­ icy and allocate money to the sectors that matter. This could be a land­ mark budget. Like Chidambaram’s budget of 1997, or Manmohan Singh’s budget of 1991. 4. PRO INDUSTRY: Your decisions will make the industry lobbies happy. This can bring in more invest­ ments, create more jobs and help to fuel growth. In may not make complete political sense, with some of the work­ ing class and poorer sections sceptical of your decisions. But like Yashwant Sinha in 1999 or Chidambaram in 1997, busi­ nesses will be very pleased. 2. PRO LABOUR: The people of the country is what matter most to you. Your budget will make their lives better, even if it means taking a hit on the deficit and reforms sides. There is a little bit of a Robin Hood at play here in the way you channel income from one side and use it to help the poor and the working class. You look to repeat Chidambaram’s budget of 2004.
    • L20 SATURDAY, FEBRUARY 27, 2010 www.livemint.com Culture Farming is dead; long live subsidies B Y S IDDHARTH S INGH quintal, his gross revenue adds And he is reluctant to use biofer- eld,” he adds. ···························· up to Rs28,350. If his input costs tilizers or, even better, leave part “I am worried how could you At the Central level, a wholly F aridkot (Punjab): Avtar Singh is a child of Independence. When, as a six-month-old tod- are accounted for, his return is a tidy Rs20,650 per acre. Does he, and most farmers like him, pro- of his holdings fallow to allow them time to recover. “I cannot a ord that. Any fall in yield or physically transfer the subsidy to a farmer. In a country where land records are poor, doing this di erent set of concerns takes over. Keeping in ation in check requires that the Union govern- dler he came to India in early test too much? leaving a part of my eld fallow will be di cult.” ment have a ready reserve of 1948, his family was almost pen- Life is more complicated than will sink me.” ere are other options, such foodgrains to douse the re niless. By dint of hard work, the that. Singh has a huge loan to at’s the case all over Pun- as transferring money directly to when prices rise. It is easy to do way most Punjabis of the era repay. He purchased a tractor jab, India’s granary. farmers through their bank so if grains can be purchased built their fortunes, the Singhs some years ago. He also has to After almost 40 years of relent- accounts. But there are compli- easily from surplus states. e managed to acquire 23 acres of borrow money for operational less use, Punjab’s soil is addicted cations. Many farmers lease land political costs of not doing so land. at was in 1965 when the costs (or working capital in to chemical fertilizers. If their and farm it. I and records are as can be high: in ation is politi- going was good. Today, that industry lingo) every season use is curtailed, foodgrain out- incomplete as Badal says, it will cally expensive. It also makes landholding has fragmented as it from the local grain commission put will fall drastically. e con- be a challenge to identify farm- great sense to keep powerful has passed down generations. agent. is usually happens at sequences for the country’s food ers who pay for fertilizers and farm lobbies, represented by the start of every sowing season. security and Punjab’s prosperity use them. regional parties in Punjab and e interest alone eats up much cannot be underestimated. Physical, door-to-door hand- Haryana happy: ey get to keep Singh himself owns 8 acres of of his returns. In Punjab, the A chain o rrationality ing out of money by state gov- their constituents happy, while land. His brothers and their chil- interest rate on loans from mon- ere is an entire chain, from ernment o cials (either those of the Union government has dren own the rest. Singh’s farm eylenders is in the range of 24% Singh upward to the state gov- the revenue department or the enough ammunition to ght is irrigated, a big bene t in a to 30%. Public sector bank are ernment to the Centre that development bureaucracy) in ation. ere are few incen- country where most agriculture rather reluctant to lend money draws bene ts from the current could turn out to be self-defeat- tives to change the existing sys- is rain-fed, but he is caught in a for these purposes. Even if they state of a airs. Most subsi- ing in the face of corruption and tem. vicious cycle of rising costs and are willing, their paperwork and dies—food, fertilizer and ine ciency. e costs, of course, are stag- near-stagnant farm income. His formal requirements often oil—can be explained by per- gering. Food and fertilizers sub- Mint's reporters is a story of millions o armers in defeat farmers. verse incentives at each link in e issue is not that o armers sidies alone accounted for Punjab, Haryana and other areas As a result, Singh tries to farm this chain. alone. ere is a symbiotic rela- Rs1.02 trillion. As for the ecologi- touched by India’s Green Revo- his land more intensively. His In Singh’s case, for example, tionship between the Union and cal costs, they simply cannot be traveled across lution—the 1970s movement that stressed on irrigation and use of urea (a popular fertilizer) per acre has almost doubled: one bag of urea costs him Rs246 and one of DAP, Rs470. e sub- state (Punjab and Haryana) gov- ernments when it comes to food calculated. “Our land had 24 elements/ the country to the use o ertilizers to increase farm produce. from roughly one-and-a-half bags per acre 15 years ago to sidy per bag on urea is at least Rs530 and that on DAP, Rs1,030. purchases. At this level, farmers are only incidental to the story. micronutrients when intensive cultivation (had) begun in nd out more “I don’t understand what went wrong. Today, I get almost 20 close to four bags now (one bag equals 50kg). His use of DAP is price di erential is one big factor in the nutrient imbalance ese state governments levy taxes on the grains purchased by 1962-63. ere was shortage of only one or two such elements. times higher yield than when I (diammonium phosphate, in Punjab. the Food Corporation of India. Today, excessive subsidization of about the began farming in 1965. Yet, I barely manage to save anything another fertilizer, but a more expensive one) has remained ere is broad agreement about this. In Chandigarh, the At one point of time, some years ago, these taxes and levies on the chemical fertilizers has ensured that very few farmers use natural implementation at all,” the former headman of Kameana village in Punjab’s almost constant at one bag per acre. He rarely uses potassic fer- state capital, Punjab’s nance minister Manpreet Badal agrees Union government’s purchase of foodgrains amounted to nearly fertilizers. e result is that in many parts of Punjab, soil is of various Faridkot district says. Also See Mint’s complete cov- tilizers. e result is a greatly skewed NPK (so called after the that “”price di erentials are leading to a skewed nutrient 12.5% of the total value of pur- chases in Punjab. ese were a de cient in as many as 16 micro- nutrients. You can see the eco- government erage of Budget 2010 chemical symbols for nitrogen, ratio”. source of perennial friction logical costs for yourself,” says A look at the costs incurred by phosphorous, and potassium) e Union government, as between the state government Sucha Singh Gill, an agricultural him and the monetary returns ratio. e ideal NPK ratio is part of a larger objective to and the Centre. ey also economist and former professor schemes in the from farming shows why. On average, Singh ends up spending 4:2:1. In Singh’s case, it is close to 4:1:0. e average in Punjab, reduce the bill for fertilizer sub- s idy , w hi ch i s e s t i m a t e d a t funded expenditure by the state government. e higher the of economics at Punjabi Univer- sity in Patiala. run up to the Rs7,700 per acre on inputs such as fertilizers, pesticides and was close to 3.71:1:0 in 2006-07. Rs49,980 crore this year, is con- sidering a nutrient-based sub- amount of grain bought, the greater was the amount garnered Badal, too, is aware of the problem and argues for realistic budget. Click labour while cultivating rice of the non-basmati variety. His Singh is an experienced farmer and should know the sidy scheme for fertilizers, even a direct cash transfer of the ferti- by the state governments. So, from the perspective of the policy choices. “ Ultimately you have to decide the cost o ood,” yield per acre is around 27-28 harmful e ects of excessive use lizer subsidy to farmers. states, it makes sense to push for he says and adds that “we have here to read quintals (1 quintal equals 100kg). In nominal terms, his of chemical fertilizers, but his behaviour indicates otherwise. Neither may work, says Badal. “Logistics would be my worry. constant increases in output, even if their ecological and other to look towards eastern India for food. Punjab and Haryana will the whole series. returns look impressive: With the prevailing minimum support “It works. If I use more urea, the yield improves. If I won’t do so, it Who is going to evaluate what every farmer uses and how much costs increase with every passing year. not be able to meet the food requirements of the country.” price for rice of Rs1,050 per will fall drastically,” he argues. fertilizer is required in every