Pranab Mukherjee blames supply chain problems for rising food inflation, but announces long-term initiatives that will not resolve the problem of the aam aadmi quickly enough
Finance minister Pranab Mukherjee has attributed galloping food prices to "shortcomings in distribution and marketing systems". Presenting the Union Budget in Parliament today, Mr Mukherjee also called on state governments to review the Agriculture Produce Marketing Act (APMC), which farmers say is responsible for lower prices for their produce.
The finance minister dwelt at length on the matter of inflation, however, some experts felt that the Union Budget was long on announcements, but fell short on tackling high food prices.
The finance minister said, "The recent episode of inflation in vegetables and fruits has exposed serious flaws in our supply chain. The government regulated mandis sometimes prevent retailers from integrating their enterprises with farmers. There is need for the state governments to review and enforce a reformed Agriculture Produce Marketing Act urgently."
The director of APMC Mumbai, Ashok Walunj, speaking to Moneylife said, "If he feels that there should be review, we are ready to accept whatever changes. They should have a discussion with us on the issue."
The finance minister said a decision has been taken to create 20 lakh metric tonnes of storage capacity under the Public Entrepreneurs Guarantee (PEG) Scheme through modern silos. Accordingly, 2.6 lakh tonnes of capacity will be added by March 2011, based on existing sanctions, and this will go up to 40 lakh tonnes by March 2012.
"There is a shortage of storage capacity of 32 million tonnes and even conservative estimates put the immediate investment requirement at Rs10,000 crore," said Sanjay Kaul, managing director and chief executive officer, National Collateral Management Service Limited. "The grant of infrastructure status to this sector will provide a major fillip for investment in this vital sector."
An official with an institute that tracks vegetable prices, said that "the proposal to increase storage capacity is a positive step, though the institutes-both government and private-should be more focused on their management strategies which are often faulty. For example they don't know how much would be procured and how much storage space will be needed for the produce. Hence the problems of shortage of supply and high prices."
The finance minister announced various initiatives to tackle rising food prices, topmost of them all was to boost agricultural productivity. Some of the measures are to invest in cold storage projects, build mega food parks, creating vegetable clusters, promoting higher production of cereals like bajra, jowar and ragi and upgrading the processing technology. About Rs3,000 crore is to be provided to NABARD, in phases, to strengthen cooperative societies. "This initiative would benefit 15,000 cooperative societies and about three lakh handloom weavers," the minister said.
But expert are critical that the Budget does too little to solve the issue of food prices. Shashi Panikar, professor of economics at Mumbai University says, "The finance minister has done too little for the common man who is facing the brunt of rising food prices. Even in taxation there is no major relief. All these announcements of cold storages, food parks, are very long term in nature. They are insufficient to combat the problem of food inflation."
On the APMC issue, Mr Panikar said, "Even about the APMC Act, the finance minister only said that state government should look into it, but he did not give any road map, which is what people were expecting."
The finance minister also announced the direct transfer of cash subsidy for kerosene and fertilisers, to people living below the poverty line in a phased manner, to ensure greater effectiveness and better delivery.
Mr Kaul, CEO of National Collateral Management Service, feels that this subsidy initiative should have been extended to food subsidy as well. "The announcement to pilot test cash transfers in place of grant of subsidies for kerosene and fertiliser is another excellent initiative, but it would have been even better had this initiative been extended to food subsidies as well which currently do not reach the intended beneficiaries."
The Union Budget has disappointed the life and general insurance sectors
Healthcare to become expensive due to increased service tax. The government on Monday proposed imposition of 5% service tax on treatment in private hospitals, paid either by individuals, insurance companies or firms. The service tax will be applicable to diagnostic tests of all kinds. All government hospitals shall be outside this levy.
The Union Budget has proposed to step up the plan allocations in 2011-12 for health by 20% to Rs26,760 crore. The Rashtriya Swasthya Bima Yojana (RSBY) which provides basic health cover to poor and marginal workers, is now being extended to the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) beneficiaries, beedi workers and others.
In 2011-12, it is proposed to further extend this scheme to cover unorganised sector workers in hazardous mining and associated industries like slate and slate pencil, dolomite, mica and asbestos, etc. There is not much else on insurance in the Union Budget 2011.
According to Dr Amarnath Ananthanarayanan, chief executive officer and managing director, Bharti AXA General Insurance, "From a general insurance perspective there is very little the Budget offers. For this sector, we were expecting more reforms for financial inclusion, empowerment of women and benefits for senior citizens. While for the banking sector there is a greater thrust on capital infusion for ensuring capital adequacy, we expected a similar proposal for the increase of FDI (foreign direct investment) to 49%. Currently for us it's a wait and watch (situation) on what further defines liberalisation of the policy."
"The personal tax exemption for senior citizens and the introduction of the new special senior citizen category with even higher tax exemption is a positive. However, this remains restrictive. Some of the core issues relating to funding for retirement as well as ways to address problems caused by rising health care costs-especially for the elderly-have not been addressed. Rural propositions are more focused on the agricultural sector. Micro insurance products should ideally have been exempted from service tax. This would have triggered penetration of the insurance sector into the rural markets," he added.
"With the rising medical inflation, it's disappointing that the 80 D benefits remain unchanged and neither are there any significant attempts made to increase health care infrastructure. This will lead to increased healthcare costs and consequently a rise in health insurance premiums."
The Union Budget has proposed that services provided by life insurance companies in the area of investment should brought under the tax net on the same lines as unit-linked insurance plans (ULIPs). It proposes to expand the scope of legal services to include services provided by business entities to individuals as well as representational and arbitration services by individuals to business entities. There shall, however, be no tax on services provided by individuals to other individuals.
According to Amitabh Chaudhry, chief executive officer and managing director, HDFC Life, "There are changes proposed in the levy of service tax payable by insurance companies. On both conventional plans as well as ULIPs, increased service tax becomes effectively borne by the policyholder.
"The Budget did not outline anything on a separate tax exemption limit for life insurance. We expected a separate limit of Rs50,000 for life insurance premium, apart from the deduction u/s 80C of Rs1 lakh and Rs20,000 for infrastructure bonds. The time limit of 8 years is available for carry-forward of tax losses, the same should have been relaxed for life insurance companies, since this industry has a very long gestation period of 8 to 10 years. However, that did not happen," Mr Chaudhry added.
According to Nageswara Rao, chief executive officer and managing director, IDBI Federal Life Insurance, "The finance minister's announcement that the Insurance Bill will be considered in this session is a great boost to the insurance industry. It will empower the Insurance Regulatory and Development Authority (IRDA) to introduce forward-looking regulation to promote sustainable growth of the industry. The Bill gives a lot of flexibility to IRDA in framing regulations."
"The life insurance industry has been asking for pension annuities to be made tax-free. We are disappointed that the demand has not been met. However, we are happy that the basic exemption limit for senior citizens has been increased. The senior citizen age limit has been reduced to 60 years with basic exemption limit of Rs2.5 lakh and a very senior citizen category has been introduced at age 80 and above with exemption limit of Rs5 lakh. This will help seniors to enjoy pensions in their retirement years without any tax impact if they are within the exemption limit. But to develop the pension market completely, annuities need to be made tax-free. We hope that the Direct Tax Code (DTC) will ensure the same," Mr Rao added.
"The Budget has made a modification in the service tax on fund management charges due to which some of the guaranteed ULIPs would attract higher charges. However, guaranteed products would continue to be attractive to customers," he said.
Hybrid vehicles enjoy a concessional excise duty rate of 10 percent. However, import dependence for their critical parts/sub-assemblies is still quite high. The Union Budget proposes to grant specified parts of such vehicles full exemption from basic customs duty and special CVD. In addition, a concessional rate of excise duty of 5% is being prescribed to incentivise their domestic production.
The Indian automobile market is the second fastest growing in the world and has exhibited nearly 30% growth this year. Globally, substantial investments are being made in the field of hybrids and electric mobility.
To provide green and clean transportation for the masses, the National Mission for Hybrid and Electric Vehicles will be launched in collaboration with all stakeholders.
According to Dr Ananthanarayanan, "It's high time there is a move in encouraging the growth of alternative vehicles. The National Mission for Hybrid and Electric Vehicles is the first step. But the success of this will depend on the action plan that will be laid out for inducing the growth of India as a manufacturing hub."
NCC Infrastructure Holdings may go for equity dilution in the next six to nine months
NCC Infrastructure Holdings Ltd, a wholly-owned subsidiary of Nagarjuna Construction Company Ltd, may go for equity dilution to raise fund for its Krishnapatnam power project, a senior company official said.
Y Dakshina Murthy, executive vice president (finance) of NCC, however, did not specify what percentage of equity will be diluted to raise how much.
The NCC Infra, which has five road and three power projects under its belt may go for equity dilution in the next six to nine months.
The company has already invested Rs150 crore in the project so far and another Rs100 crore will be invested before the end of this fiscal to complete the procedure that would enable the company go for financial closure.
"Major fund requirement is for Krishnapatnam power project. It requires equity of Rs1,800 crore. We have 55% share and require Rs950 crore. For financial closure we require Rs250 crore. We have already put in Rs150 crore. Another Rs100 crore will be invested by the end of this fiscal. For balance requirement we are looking at possible equity dilution," YD Murthy said in a press conference.
On Monday, Nagarjuna Construction ended 1.36% up at Rs100.60 on the Bombay Stock Exchange, while the benchmark Sensex gained 0.69% to 17,823.40