Spending plan fails to impress India INC

Dubai Disappointing economists, business leaders and the stock market, India's finance minister Pranab Mukherjee Friday presented the Federal budget 2012-13, which made a feeble attempt, at best, to reduce the ballooning fiscal deficit.

The budget set a fiscal deficit target of 5.1 per cent of gross domestic product (GDP) for the fiscal year, down from an expected 5.9 per cent in the current year. This year's figure, however, ended far above the 4.6 per cent it had originally targeted in its budget a year ago.

"A fiscal deficit of 5.9 per cent is too big. Fiscal austerity measures including cuts in government expenditure and measures to ensure better tax collection have not been defined. Net revenue loss of Rs4.5 trillion (Dh329 billion) is certainly alarming," said Bharat Butaney, President of the Indian Business and Professional Council, Dubai.

Mukherjee said he expected the Indian economy to grow by 7.6 per cent in the next fiscal year, up from an expected 6.9 per cent in the current year but below the 8.4 per cent growth of the previous fiscal year.

"We are disappointed with the budget because it assumes a relatively high, 5.1 per cent deficit in the 2012-13 fiscal year. We also think that growth target is a bit too optimistic," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole, Hong Kong.

The 30-stock Bombay Stock Exchange index Sensex closed 244.61 points down at 1,7451.24.

High on subsidies

Analysts said the budget did not make a serious effort to rein in subsidies. The finance minister announced that from 2012-13 while subsidies related to food and for administering the Food Security Act will be fully provided for, all other subsidies would be funded to the extent that they can be borne by the economy without any adverse implications. He said that the government will endeavour to restrict the expenditure on central subsidies to under 2 per cent of GDP in 2012-13 and over the next three years, it would be further brought down to 1.75 per cent of GDP.

"The market was hoping for a lower deficit for the next financial year, so disappointing from that perspective. India continues to have the largest fiscal deficit within emerging Asia, hence expect this to weigh on the rupee," said Jonathan Cavenagh, foreign exchange strategist at Westpack, Singapore.

In the budget estimates for 2012-13, gross tax receipts are estimated at Rs10.76 trillion, a 15.6 per cent increase over the budget estimates and 19.5 per cent over the revised estimates for 2011-12.

After devolution to States, the net tax to the central government in 2012-13 is estimated at Rs7.7 trillion.

The total expenditure for 2012-13 is budgeted at Rs14.9 trillion. Out of this this, the plan expenditure is budgeted at Rs5.21 trillion which is 18 per cent higher than the budget estimates of 2011-12. The revenue plan expenditure is estimated at Rs4.2 trillion. Capital plan expenditure will be Rs1 trillion of which Rs874 billion will be under the central plan. Thus, total budget support for the central plan in 2012-13 will be Rs3.9 trillion.

The tax proposals are guided by the need to move towards the Direct Tax Code (DTC) in the case of direct taxes and Goods and Services Tax (GST) in the case of indirect taxes. For now it appears that the DTC has been deferred from the planned implementation on April 1, 2012.

Individual income up to Rs200,000 will be free from income tax; income up to Rs180,000 was exempt in 2011-12. Income above Rs500,000 and up to Rs1 million now carries a tax rate of 20 per cent; the 20 per cent tax slab was from Rs500,000 to Rs800,000 in 2011-12. A deduction of up to Rs10,000 is now available for interest from savings bank accounts. "It is difficult to see the raising of the personal income tax exemption limit from Rs180,000 to Rs200,00 as anything more than tokenism. It is certainly not relevant to the aspiring Indian middle-class home buyer. The expected exemption limit of Rs300,000 would have had some significance," said Anuj Puri, chairman and country head of Jones Lang LaSalle India .

While no changes have been made to corporate taxes, the budget proposes several measures to promote investment in specific sectors. In order to provide low-cost funds to some stressed infrastructure sectors, withholding tax on interest payments on external borrowings is being reduced from 20 per cent to 5 per cent for 3 years. These sectors are power, airlines, roads and bridges, ports and shipyards, affordable housing, fertiliser and dams.

The budget attempts to widen the service tax base. All services will now attract service tax except those in the negative list. The service tax rate is up from 10 per cent to 12 per cent.

Exemptions and other tax implications