There was near unanimity among analysts about what the Budget 2012-13 needed to address: lay down a credible road map for fiscal consolidation, ensure revival of the investment cycle that has virtually grounded to a halt, and spell out the key priority areas in terms of policy action and reform. Equally, the expectations were muted, given the magnitude of the challenge involved as well as the lack of political space to introduce reforms—highlighted by the extraordinary drama surrounding a modest hike in rail fare after several years. Of particular interest was also what the government’s approach to the populist entitlement programmes would be, given the series of electoral reversals in the recent past.
At the end, the budget was devoid of any big bang announcements and stuck to achieving fiscal consolidation realistically possible under the prevailing circumstances, though there are some doubts about the growth figures budgeted for. There are a number of directionally positive statements on the need to rein in subsidies and effect cash transfers in areas such as fuel and fertilizers, although the ability to stick to the subsidy cap of 2% of the gross domestic product (GDP) remains to be seen. The disinvestment target has been kept at a modest Rs 30,000 crore.
Lack of a definite time frame for the introduction of the relatively less controversial direct taxes code (DTC) is a disappointment, although the goods and services tax (GST) still requires consensus to be achieved with the states. There have been a number of small steps in the area of infrastructure, such as the extension of the viability gap funding mechanism to support public-private partnerships, doubling of the amount to be raised through tax-free bonds and wider use of external commercial borrowings (ECBs) in sectors such as roads, power and civil aviation. Measures like allowing qualified foreign investors in the corporate bond market and withdrawing the dividend distribution tax will also have a positive impact on some companies.
With the Union Budget out, RBI’s SubirGokarn talks about the fiscal consolidation measures taken by the finance minister and the inflationary impact of indirect taxes.
The budget has introduced a few steps with regard to indirect tax collections, including a calibrated increase in tax rates and expanding the tax base to boost collections. In line with our expectations, the peak rates of excise duty and service tax have been increased by 2 percentage points, to further roll back the stimulus measures that had been provided previously. Moreover, the introduction of a negative list for service tax, input tax credit for various services, and measures to enhance the alignment between excise and service taxes will aid the transition to GST. The changes regarding personal income tax were largely along expected lines, and will only provide a limited boost to consumption growth. The allocation for food subsidies will likely need to be enhanced after the introduction of the National Food Security Act. Whether the allocation for fuel subsidies is adequate will critically depend on the global prices of crude oil and the ability to increase fuel prices. The 22% increase in plan expenditure is welcome as is the provision of funds for recapitalization of banks.
The budgeted fiscal deficit of 5.1% of GDP in 2012-13 is substantially higher than the rolling target of 4.1% of GDP set previously. However, the former represents a reasonably realistic assessment of the fiscal situation given the changing dynamics. Nevertheless, the main challenges to achieving even the targeted fiscal deficit remain economic growth falling short of the optimistic 7.6% forecast made by the government and the fuel and food subsidies exceeding the budgeted levels.
There are no major gains for the corporate sector and given the magnitude of the fiscal deficit, chances of a meaningful reduction of interest rates in the first half of fiscal 2013 appear uncertain. In fact, yields may harden following the announcement of a higher-than-expected net market borrowing of Rs 4.7 trillion. Some sectors will be adversely affected because of the increase in excise duty, although it was on expected lines. Minor relief has been provided to some stressed infrastructure sectors in terms of a reduction in withholding taxes. Also, reduction in import duty on steam coal will provide some benefit to the power sector. The rise in investment-linked deduction of capital expenditure to 150% for select sectors and in weighted deduction of 200% for research and development expenditure is also a marginal plus.
Overall, the key challenge will be the government’s ability to jump-start the investment cycle and revive investor confidence, and one would hope that steps designed to achieve those goals are being contemplated through administrative actions over the year.
Anjan Deb Ghosh is the head (corporate sector ratings), ICRA
Icra Ltd, leading Indian rating agency and an affiliate/associate of Moody’s Investor Services, partnered with Mint to analyse the impact of the budget on industry.
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