The Reserve Bank of India has left the key rates unchanged. Repo rate remains unchanged at 8.75% in the policy review on 15th March 2012. Probably, RBI would have sensed the UPA government’s inability to present a bold budget to bring in economic reform, and therefore, it has suspended the further relaxation in policy rates. Stock market has shown a negative move on the pause in stance taken by the RBI few months back to ease the monitory policy. Again, there is great possibility of last-minute changes in the budget looking at the conflicts from the UPA allies. FM may probably choose to avoid a bold and reform centric budget as a defensive step to avoid opposition from the allies.
What Pranab Da will bring in his briefcase now after the Railway budget boomeranged?
Budget is considered as one of the most significant economic events of any country. Likewise, in India, being not an exception to that, Budget announcement from the finance minister is very important for corporate, individuals, investors, and common men. For Corporate, budget is important as it sets the direction of their future business actions while for individual, especially for taxpayers, it provides information about how their hard-earned money is spent across the various heads and what will be the tax charge on their income in the upcoming financial year. An investor foresees how the government provides more facilities and creates investor friendly environment through its budget initiatives. A common man, like investors, seeks information about the facilities and development in the country. Although the desire and point of view to analyze the budget is different for different people, collectively it can be summarized that each of these groups wants to know how the economy is performing and how it is expected to perform in the future.
What could be there for the common man?
Common man is expecting some relief in the form of tax rebates. A widely heard demand from the common man this time is to raise the minimum threshold of being taxed to increase to INR 300,000. The demand for an increase in the minimum investment threshold in tax saving instruments to INR 200,000 is also on cards. Currently, a person can invest INR 100,000 under section 80 C of the income tax act in the tax-saving investments. Furthermore, tax-free investments limit in infra bonds to INR 40,000 from current level of INR 20,000 is widely expected. With this, the current budget is seen as a mid way between the current Indian tax regime and the implementation of Direct Tax Code (DTC). If implemented, these steps will leave more income in the hands of households leading to higher income, consumption, and saving. The steps, however, may lead to increase in inflation levels as it is expected to enhance the purchasing power of the households.
How the fiscal health is likely to be pan out?
On the fiscal front the finance minister has to walk on a tight rope seeking right balance between the fiscal health of the country and the power boosters for the growth engines. The fiscal deficit levels for 2011-12 are set to miss the targeted 4.6% by a wide margin this time, and the same is expected to be above 5% levels in FY2012-13 as well. The subsidies for fertilizers are continued to remain high in the upcoming year where as the high price of brent crude, continue to hover above $125 levels, is likely to keep pressurizing the fiscal health with mounting fuel bill. Higher prices of some of the significant import goods such as gold and jewellery are expected to put an additional burden. Although some additional revenues from railways and expected revenues from spectrum sales are likely to provide some relief, these factors are unlikely to push the deficit below 5% levels. However, the revenue from rail budget is not conformed at this stage looking at the opposition by trinmool congress (TMC).
The impact on industries is likely
The budget 2012-13 is expected to hold a significant impact on the industries as Indian government may take a step to increase excise across the sectors. A similar increase in customs too cannot be ruled out. In addition, import duty on power equipment can be beneficial for the domestic power companies such as Larsen and Toubro (LT) and Bharat Heavy Electricals Ltd (BHEL). Added to that, some sop may be announced for domestic telecom equipment manufacturers while a significant increase in duty on cigarettes is almost on cards. The budget may also pave a way for some populist measures on the front of employment generation and infrastructure. Furthermore, the push provided to encourage manufacturing in the country, during the last budget, may remain in focus during this year’s budget as well.
The budget may remain neutral for the services sector
The services’ sector contributes over 60% of the country’s total gross domestic product. However, there are fewer expectations from the same from the current budget. Among the wish list, streamlining and clarity on various taxes coupled with some rationalization on Minimum Alternative Tax (MAT) are sought in Budget 2012-13. However, a positive can be seen for the Information Technology companies as the fiscal deficit remaining above 5% may keep INR under pressure against other currencies.
Summary
With the measures mentioned above the budget is likely to be extremely beneficial for the common man, put some pressure on the industry, and may remain neutral on the services’ sector. The current political debacles on the rail budget, where the presenting rail minister had to resign from his post within a day of the budget speech, and new rail minister was appointed, is likely to keep the government in a dilemma. The government may remain cautious on announcing any reform measures such as GST and DTC.