india budget 2012-13 - analysis by prabhu srinivasan

P r a b h u T S r i n i v a s a n @ g m a i l . c o m

ANALYSIS OF BUDGET 2012-13

(By Prabhu T Srinivasan)

SIGNS OF RECOVERY AFTER A DIFFICULT YEAR

2011-12 would stand out, as one of the toughest years in history, that witnessed several momentous events, such as

downgrades of sovereign ratings of The USA and France, restructuring of leading multinational firms, and monetary

tightening by several central banks which shook the foundations of major global economies, making growth difficult not

only for India, but also for the world at its entirety. Greece debt crisis in Europe, political uncertainty in middle-east, and

the great north-east earth-quake in Japan, tested the strengths of various global economies. Amidst these, India, although

managed to put on a remarkable growth, was not fully isolated from their negative impact.

India’s current estimated GDP growth rate of 6.9% for 2011-12 is relatively low when compared to the 8.4% CAGR

(Compound Annual Growth Rate) seen during 2009-11. The historically high headline inflation level which was

witnessed in 2011-12, caused an environment of tightened monetary policy which eventually affected investments and

consumption during the year, ultimately leading to such slower growth. However, signs of recovery are seen in coal,

fertilizer, cement, and electricity sectors as we enter the first year of ‘India’s 12th five year plan’, which aims at ‘faster,

sustainable and more inclusive growth’.

SERVICE SECTOR & DIVERSIFIED TRADE PARTNERS KEEPS ECONOMY AFLOAT

Growth in India’s GDP is at present contributed largely by the services sector, which is estimated to grow at 9.4% for

2012, along with a 3.9% growth in industrial output and a 2.5% growth in agriculture. We saw a slow-down in industrial

output growth, because of deceleration in private investment, especially due to rising cost of credit. Structural aspects

that led to prolonged food inflation in 2011-12, are now addressed through strengthened food supply chain. Diversified

trade partners, with ASEAN region contributing to 57.3% in 2011-12, (33.3% in 2000-01) is a notable achievement that

protects the country from the difficult situation in the US and Europe. The estimated current account deficit is at 3.6%,

for 2011-12, suggesting a steep deterioration in net-trade movements in the last few years.

Apart from these, there are various other factors and assumptions with which the government has stated its expected

GDP growth of 7.6% +/- 0.25%, for 2012-13.

LOWER SUBSIDIES & HIGHER TAXES TO CONTROL FISCAL DEFICIT

In 2011-12, lower direct tax revenues (chart 1) and increased subsidiaries (chart 2) caused slippage from the government’s

ambitious fiscal deficit target of 3% (chart 3). This has prompted the finance ministry’s decision to call for a rise in

indirect tax and a lower expenditure, mainly through a controlled and systematic reduction of subsidies. Major subsidies

of Indian government are allocated to food, fertilizer, and petroleum industries.

Target is to reduce these subsidies to less than 2% in 2012-13, and subsequently to less than 1.75% in the next 3 years,

which could only be achieved through directed targeting of subsidies, thereby preventing leakages. Newly proposed for

this, is the use of Mobile-based Fertilizer Management System (m-FMS), recommended by the task force headed by

Nandan Nilekani, the chairman of Unique Identification Authority of India (UIDAI). Pilot projects for direct transfer of

subsidy to beneficiary’s bank account have been conducted for LPG, and Kerosene, in various parts of the country.

Much anticipated tax reforms such as DTC (Direct Tax Code) and GST (Goods and Services Tax) are yet to be

implemented and the government remains optimistic about employing these reforms in the next few months. More

interestingly, the government’s plan to set up GST network (GSTN) as a ‘National Information Utility’ is also expected

to become operational by August 2012.


Divestment of CPSEs

One of the innovative tools to generate revenues, recently put into

practice is the disinvestment/divestment of GoI’s shareholding in the

Central Public Sector Enterprises (CPSEs). Target for 2011-12

lowered to INR14,000 crore from the original target of INR40,000

crore, as the government did not find the market conditions attractive

enough to justify sale of shares. For 2012-13, the government has cut

down the budget and expects to raise INR30,000 crore, which still

looks optimistic given the prevailing economic situation. However, at

any point in time, at least 51% ownership and management control

would rest with the government, thus providing the firms with

stability and at the same time, necessary financial flexibility, at par

with the private counter-parts.

FDI in Multi-brand Retail

Although the centre has faced strong opposition from various state

governments for proposing to allow Foreign Direct Investment (FDI)

in Multi-brand retail, the budget still restates the centre’s hope to

achieve consensus among all the political parties with regards to the

issue. But, given the political structure prevailing in the country and

the coalition ruling party system in place, the centre is likely to face

several delays and disagreements while going forward with this.

Nevertheless, it is also valid that the reform can make the food supply

chain much more efficient than the present unorganized model,

addressing the inflationary pressure to some extent.

Rajiv Gandhi Equity Savings Scheme

As a new tax saving investment scheme, the government has

announced that new investors, with annual income less than INR10

lakhs can now enjoy a tax deduction of 50% with a lock-in period of

3 years. However, the investment amount up to which this benefit

can be availed is capped at INR50,000 while investing directly in

equity markets. This will incentivize higher participation of small retail

investors directly in equity markets.

Central KYC Depository

Another stride in the reforms is the scheduled implementation of a

single, central Know Your Customer (KYC) depository to avoid

multiplicity of registration and data-upkeep. If this is implemented,

the hassles on of opening various bank accounts, mutual funds, de-

mat accounts, mobile, internet & cable service provider accounts can

be effectively handled and governance processes would become faster

and easier.

CHART 1: SPLIT-UP OF TOTAL REVENUE TO

GOVERNMENT, SHOWING A DIP IN NON-

TAX REVENUES IN 2011-12 (Y: INR1000 crores)

CHART 2: CHART SHOWING REVENUE

EXPENDITURE (SUBSIDIES) FORMING THE

MAJOR PORTION OF TOTAL EXPENDITURE

CHART 3: CHART SHOWING BOTH ‘REVENUE’

AND ‘FISCAL’ DEFICIT WIDENING IN 2011-12

● ● ●

Did you Know?

Provision for Defense sector at INR193,407 crore

in this budget, is less than two-third of what is

recommended by industry experts

● ● ●


Core Banking Solutions in RRBs

With 81 of 82 Regional Rural Banks (RRBs) successfully migrating to core banking solutions, they have also joined the

National Electronic Fund Transfer (NEFT) system. The government plans to continue capitalization of weak RRBs for

the next two years, thereby ensuring financial inclusion and high integration with the banking system.

INFRASTRUCTURE AND INDUSTRY

India’s long-term focus on infrastructure development is growth oriented as it should be for any developing economy.

The 12th five year plan infrastructure spending projected at INR50 lakh crore also shows the importance and emphasis

the country places on infrastructure, as this is the first and fore-most aspect that catalyzes and enables increase in

production, consumption, employment and hence the over-all economic activity in the country. As a short-term

objective the government has announced a target of ‘Tax-free infrastructure bonds’ of INR60,000 crore in 2012-13

(2011-12: INR8,000 crore). Further, India Infrastructure Finance Company Ltd (IIFCL) will act as the nodal agency to

ensure easy credit for infrastructure projects, through-out the country.

As we aim to create 10 crore jobs in manufacturing sector within a decade, by increasing its contribution to the Total

GDP to 25%, infrastructure adequacy to meet the expansion requirements is a crucial aspect, that if ignored can be a

bottle-neck for the country’s growth aspirations.

Notable Infrastructure Targets Mentioned In This Budget

Additional 8,800 kilometer roads are to be constructed, under National Highways Development Project

(NHDP) within a year.

Delhi-Mumbai Industrial Corridor is to be completed within 5 years. The project receives $4.5 billion funding

from Japan, apart from INR18,500 crore of central assistance.

The government also announced that INR3,900 crore of loans for handloom weavers and their co-operative

societies would be waived.

INR5,000 crore ‘India Opportunities Venture Fund’ to be set up by Small Industries Development Bank of

India (SIDBI) would provide funding for small scale infrastructure projects across the country

AGRICULTURE

As always called the back bone of the Indian Economy, the Agricultural sector’s

importance cannot be ignored, and rightly so, agricultural credit target has been

increased by INR100,000 crore in this budget, to INR575,000 crore for 2012-13.

Credit facilities through the Kisan Credit Card Scheme (KCC), has received positive

response from various groups across the country. The government plans to extend

smart card features to these cards, which would then also be used for ATM

transactions in rural areas.

Another notable aspect related to agriculture is the promotion of Accelerated

Irrigation Benefit Program (AIBP) through an allocation step up by 13%, to approx.

INR14,250 crore. With these various initiatives and priority lending schemes, India is

heading to the second phase of green revolution, yet many agriculture-related

infrastructure requirements are lacking at present to enable a sustainable fast growth

in agricultural production.

● ● ●

Did you Know?

If the primary bread-winner of a

BPL family passes away in the age-

group of 18-64, the family is now

eligible for a government grant

INR20,000, twice as much as what

was awarded previously

● ● ●


INCLUSION

The need for Inclusive growth, in the highly populated and largely rural based

economy of India, has been to some extent addressed through various

initiatives. Some of them discussed in the budget include,

Rural Infrastructure Development Fund (RIDF), which has been

enhanced to INR20,000 crore, with INR5,000 crore exclusively for

warehousing facilities

6000 schools to be set-up in rural parts of the country under the 12th

five year plan

Allocations to Integrated Child Development Service (ICDS), Mid-

Day Meal Scheme and other child-welfare schemes saw strong

growth, as well

GOVERNANCE

The finance minister touched upon the flagship governance project of India, The UID Scheme (Aadhaar), as he

announced completion of issuance of UID cards to 20 crore people till 2011-12 and expects additional 40 crore people

to come under the UID system by the end of 2012-13. In addition to this, the government has also announced a

proposal to lay a White Paper on Black Money in the upcoming parliament session.

TAXES

Direct Tax

Modest Rise in Tax Slabs were announced in this budget, with the exemption limit being raised by INR20,000, to

INR200,000 and 20% tax slab being widened from INR5-8 lakhs to INR5-10 lakhs. This means that an individual with

an income of INR200,000, will now save INR2000 annually and an invidual with an income of INR1,000,000 would

save INR22,000 annually through lower direct taxes, as compared to last year. However, the public had expected a much

steeper rise in slabs, and the budget came as a disappointment to vast majority of the population.

Some of the announcements received a positive response from the investors. One such aspect is, the rise of

‘Compulsory Tax Audit Limit’ to INR1 crore from INR60 lakhs, which is expected to reduce the burden of tax auditing

expenses for many Small scale industries. Another announcement seen favorably, is reduction of Withholding tax on

interest payments to ECBs, from 20% to 5% for certain stressed infra-related industries for 3 years. These direct tax

proposals are estimated to result in a Net Revenue Loss of INR4,500 crore to the government in the year 2012-13.

Indirect Tax

This year, the government has chosen the indirect taxes route to boost its revenues to meet the various planned and

non-planned expenditures, and also reach the fiscal deficit target. This is the reason why we see a rise in service tax rate

from 10% to 12%, with corresponding changes in rates for individual services. (Merit rate, 5% to 6%; Lower merit rate,

1% to 2%)

With the government’s decision to hike the indirect taxes, receiving severe criticisms from the Investor community, the

table below shows some of the sector specific announcements and the market reaction each of them has received.

● ● ●

Did you Know?

‘Himayat’ scheme, introduced in

J&K is estimated to provide skill

training to 1 lakh youths in next 5

years. Entire cost of the initiative will

be borne by Centre.

● ● ●


(In Thousand Crore Rupees)

Revenues & Expenditures 2010-11 A 2011-12 E 2012-13 B

Revenue Receipts 788 767 935

Tax Revenue 569 642 771

Non Tax Revenue 218 124 165

Capital Receipts 409 551 555

Recoveries of Loans 12 14 12

Other Receipts 23 15 30

Borrowings and Other Liabilities 373 522 513

Total Receipts 1197 1319 1491

Non Plan Expenditures 818 892 970

On Revenue Accounts 726 815 866

Interest Payments 234 275 320

On Capital Account 92 76 104

Plan Expenditure 379 427 521

On Revenue Account 314 346 421

On Capital Account 64 80 101

Total Expenditure 1197 1319 1491

Revenue Expenditure 1041 1162 1286

Grants for creation Capital Assets 87 138 165

Capital Expenditure 157 157 205

Revenue Deficit 252 395 350

(3.3) (4.4) (3.4)

Effective Revenue Deficit 165 257 186

(2.1) (2.9) (1.8)

Fiscal Deficit 374 522 514

(4.9) (5.9) (5.1)

Primary Deficit 140 246 194

(1.8) (2.8) (1.9)

Industry Investor Sentiment

Agriculture & Related Sectors Positive

Infrastructure Positive

Mining Nuetral

Railways Nuetral

Roads Nuetral

Manufacturing Positive

Health and Nutrition Nuetral

Environment Negative

Proposed tax relief for labour-intensive sectors

producing items of mass consumption

Lower customs and excise duty on Soya products,

Iodine and Probiotics

Rise in basic customs duty on imports of gold and

other precious metals

Indirect Tax Announcement

Exemption from basic customs duty for setting up

fertilizer projects upto March 2015

Exemption from basic customs duty and

concessional CVD of 1% to steam coal

Exemption from basic customs duty for coal mining

projects

Proposed upgradation of track structure for high

speed trains

Exemption of import duty for certain road

construction material

The various proposed Indirect taxes are estimated to result in a net revenue gain of INR45,940 crore. Therefore, on an

aggregate basis, all the tax reforms announced in this budget are estimated to result in a net gain of INR41,440 crore for

the country.

SUMMARY

Budget 2012-13 has invited more criticisms than

appreciations from the various stakeholders of the

country. Given the unanticipated difficult situation the

global markets are currently in, and the multiple problems

that the Indian economy is facing, such as weakening of

Rupee against US Dollars, High cost of funds, Inflationary

pressures, and High unemployment levels to name a few,

the finance ministry has opted for a stringent budget to

defy these problems and bring the economy back on a

sustainable growth path. I would like to conclude the

analysis with my view that the key lies in implementation

of the plans. Having observed in the past, that

implementation of various initiatives have seen multiple

road-blocks stalling them abruptly, we shall try to learn

from our past to ensure growth and prosperity of the

world’s largest democracy!

● ● ●

Did you Know?

Short-term crop loans will now be

available at 7% per year to farmers,

and at 3% per year to prompt-paying

farmers through ‘Interest-subvention

scheme’

● ● ●

india budget 2012-13 - analysis by prabhu srinivasan

Economy & Finance