India’s Financial Budget is about to be announced shortly on 16th March 2012. The current financial status of the economy indicates a need for hard stance on economic reforms, but it would not be easy for the government to execute such a plan. Every sector is expecting from the Finance minister of India to announce a favorable budget and a booster package for the whole economy.
Before we jump into the budget expectation, lets checkout the current pulse of the various sector:
| Sector | Problems |
| Telecom | Suffering from 2G Fever |
| Banking Sector | Capital Insufficiency and weak finacial inclusion in rural part |
| Infrastructure Sector | Funding problem and increased input cost |
| FMCG | Future of Retail FDI not clear |
| IT | Weak International Demand of Softwares |
| Metal and Mining | Coal shortages |
| Oil and Gas | Very high rate of petroleum import |
| Power | Coal shortages and high input cost |
Fiscal Deficit, Taxes and Investors
The fiscal deficit has reached to more than 92 percent of the target budget in December 2011. It clearly put pressure on the subsidy allowed by the government under various schemes. The PM’s Economic advisory council’s report has suggested an increase in the indirect taxes, urea prices to be decontrolled and petroleum prices to be out of the subsidy list as a measure to consolidate the fiscal deficit. Disinvestment program may also speedup in coming financial year, and the platform for such a program may be announced in this budget.
Further, it is expected that FM (Finance Minister) would increase the excise duty and Service Tax to 12 percent from the current 10 percent level. Since crude price is already high in the international market so government may not take the way of increasing import duty on crude oil this time. Cigarette may again see an increase in tax this time.
Already it is under the news and recommended to the government to increase the deduction under the Section 80C from Rs 1 Lac to 1.5 Lac. It is also expected that government would include Banks fixed deposit under Section 80C with some lock in restrictions.
With the application of ADHAR UID system, it is expected that government would take measures to cut various subsidy programs to stop the illegal leakages in subsidy and offer a direct cash subsidy to the individual.
Special Attention to some important areas would be required in this budget such as legislation on mining and land acquisition for proper utilization of resources and stopping illegal mining. Budget allocation to the defense would be another thing to watch out, as recently China has announced 11% increase to its defense allocation, and it is expected that India would also follow the neighbor country to maintain the regional power balance.
The recent 75 basis point rate cut in CRR by the RBI is showing mood of the Indian economy to grow fast. Looking at the high crude bill and inflation concern, it would not be so easy for RBI to ease the interest rate unless it is very much assured. Few month back Mr. Manmohan Singh paid huge emphasis on next green revolution, and it gives a clue about a huge bundle of offers in the upcoming budget for the agriculture sector. This offer may come as cheap loan, technical supports, and irrigation facilities or through any other mechanism, but it is for sure that no subsidy would be there in this package.
Now lets checkout the budget expectation on various fronts including different sectors:
| Sector | Head | Segment and Category | Current | Expectation | Effect |
| Automobile | Excise | Two Wheeler, Small Car, commercial vehicles, three wheelers and other light vehicles | 10% | Increase of 2% | Negative |
| Large Cars and Utility vehicles | 22% + Rs15000/Vehicle | Increase of 2% | Negative | ||
| Diesel Specific Charges on Vehicles | NIL | Fix Rupee/vehicle based tax | Negative | ||
| Banking | Fixed Deposit (Tax Saving) | Lockin Period | 5 Year lockin | 3 Year Lockin | Positive |
| Maximum Investment Limit | 1 Lac | 1.5 Lac | Positive | ||
| FD with maturity of 3 year | Tax benefit | No Tax Benefit | Interest income to be treated as capital gain | Positive | |
| Capital Goods Sector | Import Duty on Power Generation Equipment | Import Duty | No Import Duty on Mega Power Projects | Levy of Import Duty | Positive for domestic capital goods company |
| Cement Sector | Excise Duty | Tax and duty | Excise at 10% advalorem + 160 /ton if cement price above Rs 190/bag else Rs80/ton if price below Rs190/bag | Increase of 2% | Neutral |
| Import duty on Pet coke | Input Cost | 2.5% on pet coke and 5% on thermal coke | Removal of Import duty | Positive | |
| FMCG | Excise | Excise duty | 10% | increase by 12% | Negative |
| Media | Excise | Excise duty | 5% | Removal of Excise duty | Positive |
| Entertainment Tax | Taxes | Variable statewise | Bring Closer to GST | Positive | |
| Metal and Mining | Import duty On Mangenese Ore | Import Duty | 2% | Increase by 3 % | Positive for domestice Mangenese ore company |
| Export Duty On Iron Ore | Export Duty | 20% | Decrease Expected | Positive for Mining Companies | |
| Import Duty On Coal | Import Duty | 5% | Duty to be Removed | Positive for metal companies | |
| Oil and Gas | Import duty on LNG | Import Duty | 5% | Duty to be Removed | Positive |
| Refineries | Tax Holiday | Available | To be continued for new projects | Positive | |
| Subsidy | Subsidy | Available | To be Reduced | Positive for oil and gas sector | |
| Power | Tax Benefit | Tax | Deduction Under Sec80-IA | To Continue with Sec80IA | Positive for Power Sector |
| Import duty on Equipment | Import Duty | NIL | 19% for Mega Power Projects | Negative for power generation companies | |
| Import duty on coal | 5% | Expected to removed | Positive | ||
| Infrastructure | 80 C Benefit | Tax Benefit | IT exemption on home loan principal repayment upto Rs 1 Lac | Increase upto Rs 2 Lac | Positive |
| Section 24 benefit | Interest on home loan | Exemption upto Rs 1.5 Lac | 2 Lac | Positve | |
| FDI | FDI in multi brand Retail | Not available | FDI to be allowed upto 51% in multi brand retailing | Positive |
Is it going to be a Reform Centric Budget?
There’s no doubt that it is a difficult decision to the government to opt between a populist budget and the reform centric budget. The present fiscal deficit is expected to cross 5.5% marks. The subsidy on fertilizer is expected to touch Rs 1 trillion levels whereas budget expectation was Rs 50000 crores. The Crude oil price is hovering around $ 120 per barrel, which has gradually increased the annual average cost of crude oil procurement. Now Mr. Pranab Mukherjee has to decide on the matter of passing the increased cost to consumer directly or to continue with subsidy policy. The recently concluded elections in the five states have weakened the decision-making power of UPA government. The world economy is still under deep slow-down phase and under this situation, FM cannot take the risk of upsetting the recovery of Equity market by taking any contradictory step. Improving health of Equity market is a bright hope for FM to recover the economy from the present fiscal deficit problem by way of opening FDI in more areas. In this situation, FM is expected to avoid any controversial or hot issue that can put a question mark to the government’s stability. Hence this budget would be a repetition of a populist budget with a rescue reform to contain the deficit.
Whether it’s a populist budget or reform centric, it is going to decide the pace of Indian economy in short and long term. Till then, let’s wait for the real show to begin on 16th March 2012.