Union Budget 2011: Market gives a tepid response to the FM’s tightrope act
The paltry rise in general individual tax exemption limit was a blow; the rest of the Budget continues to lean more towards ‘populist’ than ‘reformist’, but the FM has successfully skirted outright criticism both ways
The market is always right-after initially rising as much as almost 300 points, the Sensex drifted lower and ended with a tame 122-point gain-indicating that the Budget was ho-hum at best. The biggest sectoral gainers were FMCG, realty, and capital goods (the largest Budget beneficiaries) and while none of the sectoral indices really fell badly, IT and healthcare were sluggish. This seems about as good a report card of the Budget as any.
Finance Minister Pranab Mukherjee\'s initial comments made it clear that while he believes that growth is returning to its former trajectory, government support is still needed and it is still early to withdraw this completely-this is why he probably did not hike some excise duties as expected. His comments also clarified that for the rest of their term, the focus of the government will remain in putting more resources into the hands of the rural Indian-populism at the cost of reform is likely to continue for the rest of the term, although not ostentatiously.
With inflation being the biggest bugbear for the UPA government (the second being corruption), a clear shift in focus towards agriculture was also seen-most of the inflation was due to a poor distribution system, greater demand for grains, fruits, and vegetables with rising income levels, and a shortfall in supply with lesser land under cultivation due to rampant urbanisation.
Mr Mukherjee used the words "Green Revolution" and introduced initiatives for agriculture development such as developing 60,000 \'pulses\' villages, improving palm oil production and vegetable clusters. He also announced a whopping Rs1 trillion rise in target of credit flow to farmers from Rs3.75 trillion in FY11 to Rs4.75 trillion in FY12. The FM also announced a 3% interest subsidy to farmers (against 2% earlier) making the effective rate of interest for farmers at 4%.
The biggest negative from an individual\'s perspective was the low hike in exemption limits for general taxpayers to only Rs1,80,000 from Rs1,60,000. This is not anywhere near the optimistic figure of
Rs3,00,000 that was being touted around, nor near the realistic assumption of around Rs2,40,000.
However, on the flip side, the FM did create a new \'80 plus\' category eligible for exemption up to Rs5,00,000. He also extended the additional deduction of Rs20,000 for investment in long-term infrastructure bonds by one more year. One more positive was that he reduced the qualifying age for senior citizens from the previous 65 years to 60 years and enhanced the exemption limit slightly from Rs2,40,000 to Rs2,50,000 for them.
While the fiscal deficit targets have been lower than expected, the market does not seem fully ready to believe that these will necessarily be met. The FM pegged the FY11 deficit at 5.1% and indicated that for FY12 he expects 4.6%; 4.1% for FY13, and 3.5% for FY14. At 4.6% deficit in FY12 (amounting to Rs4.13 billion), the net market borrowing of the government would be Rs3.43 trillion, which is lower than expectations of between Rs3.75 trillion and Rs4 trillion.
The market seems to be reasonably happy that the FM said he would introduce a Constitution Amendment Bill in the current session of Parliament to pave the way for the Goods and Services Tax (GST) regime. 1 April 2011 was the original date intended for the rollout of the GST, but nobody realistically expects it to actually happen by this date. The market is also happy that the FM is keen on keeping up the momentum in divestment-he maintained a target of Rs400 billion for divestment in FY12 against an achievement of Rs221 billion in FY11 (incidentally, the FY11 target was Rs400 billion too).
A positive for the mutual fund industry is that they will now be able to accept money from foreign investors who meet KYC (know your customer) requirements for equity schemes (earlier only FIIs and sub-accounts registered with SEBI and NRIs were allowed to invest in mutual fund schemes). This should open up a whole new class of investors for Indian mutual funds.
Another positive is that the FII limit for investment in corporate bonds (with residual maturity of over five years issued by companies in the infrastructure sector) has been raised to $40 billion now-also, since most of the infrastructure companies are organised in the form of SPVs (special purpose vehicles), FIIs will now be permitted to invest in unlisted bonds with a minimum lock-in period of three years, but will be allowed to trade amongst themselves during the lock-in.
For corporate India, the biggest positive was the reduced surcharge of 7.5% from 5%. There was a host of good news for the banking and construction sectors-the loan limit on priority home loans was upped to Rs2.5 million versus Rs2 million and a 1% interest subvention on home loans up to
Rs1.5 million was announced.
For PSU banks, Rs60 billion will be provided for recapitalisation-however, this is much lower than the Rs202 billion provided in FY11. PSU banks will be allowed to issue tax-free infra bonds worth Rs300 billion.
To attract foreign funds to finance infrastructure, the FM allowed special vehicles in the form of notified infrastructure debt funds-interest payments on the borrowings of these funds will be at a reduced withholding tax rate of 5%, instead of the current rate of 20%, and the income from such funds will be exempt from tax.
One positive for the fertiliser sector was that it will now be considered an infrastructure sub-sector. However, not much was announced as far as extension of the NBS regime to cover urea, except a perfunctory statement that it is "under active consideration of the Government." Adequate allocation was made for industry and infrastructure sector at Rs2.14 trillion, up 23% on FY11 and 48% of Plan expenditure. Another positive was tax-free bonds of Rs300 billion to be issued by various government undertakings (Rs100 billion each by the Indian Railway Finance Corporation and the National
Highways Authority of India and Rs50 billion each by HUDCO and ports).
Other positives included no excise duty on equipment for UMPPs, excise duty on auto and cigarettes remaining unchanged, lower customs duty on micro-irrigation equipment, import duty on gypsum and petcoke (key raw materials for cement) reduced from 5% to 2.5%, ship-owners allowed duty-free spare parts import, and stainless steel scrap now exempt from basic customs duty.
For FMCG manufacturers, Central excise duty on sanitary napkins, baby, and adult diapers was lowered from 10% to just 1%.
Talk about environment was very muted in the Budget-this strengthens the market view that environment minister Jairam Ramesh has been asked to soften his stance and clear pending projects on the fast track.
The biggest negative was the raised minimum alternate tax (MAT) rate from 18% to 18.5%. The government is now set to levy MAT on developers of SEZs as well as units operating in SEZs. The IT sector took a double hit-MAT on SEZs and withdrawal of tax exemption under Section 80IA and 80IB (even the construction sector will be hit by the latter).
No changes were made for taxes in the oil sector-there were hopes that excise would be brought down for petrol and diesel. However, judging by the level of subsidy budgeted (just Rs200 billion), the market widely expects that diesel prices will be deregulated sooner rather than later-the general direction of the government seems to be to provide less indirect subsidy and more direct subsidy in the hands of the people.
The Budget raised service tax on air travel and levied a 10% excise duty on branded garments, which will prove negative for retail. Iron Ore ad valorem duty was hiked to 20% from 15%, which is negative for NMDC and Sesa Goa. Hotels providing accommodation above Rs1,000 per day (per unit) will now have to pay service tax. Again, air-conditioned hospitals with more than 25 beds are under the service tax net-a negative for Fortis Healthcare and Apollo Hospitals.
The market was expecting some sort of an amnesty scheme for tendering in black money-this was expected to increase the government\'s coffers significantly. However, the FM just skirted around this topic but did not introduce any concrete scheme to bring back this money into the system.
Interestingly, the government has decided to let go of smaller tax disputes-however, it did not specify just how small. It has apparently dispatched instructions raising limit of tax effects below which tax disputes will not be pursued in higher Courts of Appeal.
The Central Government to introduce an amendment to the Fiscal Responsibility and Budget Management Act, laying down the fiscal road map for the next five years.
States to eliminate revenue deficit and achieve a fiscal deficit of 3% of their respective GDPs by 2014-15.
Public Debt Management Agency of India Bill in the next financial year.
Will finalise the direct taxes code for its enactment in this financial year.
Direct transfer of cash subsidy to people (for food and fuel) living below poverty line in a phased manner. The system will be in place by March 2012.
The RBI is planning to issue the guidelines for banking licences before the close of this financial year.
Central Electronic Registry under the SARFAESI Act, 2002-this Registry will become operational by 31 March 2011.
The Companies Bill introduced in Parliament in 2009 to be introduced in the Lok Sabha in the current session.
The National Food Security Bill will be introduced in Parliament during the course of this year
- To amend the Indian Stamp Act \'shortly\'.
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