Rightly or wrongly, expectations had risen after the presentation of the railway budget that finance minister Pranab Mukherjee would bite the bullet and present a bold national budget. However, under the present circumstances, he has presented a practical plan.
The infrastructure sector was crying out for policy initiatives to attract investments, and Mukherjee has obliged. The doubling of issuance of tax-free infrastructure bonds to Rs 60,000 crore to be issued by the infrastructure sector will reduce funding constraints and boost investments. The reduction in withholding tax on interest payments on external commercial borrowings (ECBs) to 5% from 20% is expected to reduce cost of borrowings for sectors such as power, airlines, roads, bridges and ports. In addition, the inclusion of sectors such as irrigation, oil, gas and liquified petroleum gas (LNG) storage facilities and oil and gas pipelines, and fixed network for telecom towers and telecommunications under the viability gap funding scheme will increase investments in these sectors.
The power sector, too, has reason to smile. In a move that will significantly lower raw material costs, the basic import duty on coal, compressed natural gas (CNG) and LNG has been abolished. To ensure that power projects have adequate supply of coal, Coal India Ltd has been asked to sign fuel supply agreements with those power plants that have long-term power purchase agreements with distribution companies and will get commissioned within the next three years. Power companies will be allowed to raise ECBs to part-finance rupee debt of existing power projects. Moreover, the extension of a sunset clause by one year for a 10-year tax holiday and additional 20% accelerated depreciation in the first year also bodes well for power projects.
Some industrialists have appreciated Pranab Mukherjee’s budget calling it a bold one given the political and economic conditions prevailing in the country.
Industry leaders from T he Bird Group, EssarPorts tell us about how the budget has affected the infrastructure sector.
As has been the case in the past few budgets, the focus on the social sector has been maintained. The outlays on most social sectors have been increased significantly, as has the allocation for agriculture. There are some measures in banking and capital?markets,?too, although?not?as?much as the industries would have liked.
The budget suggests that the core sectors and manufacturing are showing signs of recovery and that the economy is turning around, and stated that it was necessary to take hard decisions to improve the macroeconomic environment and strengthen domestic growth drivers. But the hard steps needed are clearly missing.
The government overshot its fiscal deficit target for 2011-12 by a wide margin, even more than the most pessimistic estimates. However, it has reiterated its commitment to fiscal consolidation and has forecast a lower fiscal deficit of 5.1% of gross domestic product (GDP) in 2012-13. This target is based on what we believe are unrealistic growth projections and an ambitious target on subsidies. In our view, the fiscal deficit is likely to be closer to 5.5% of GDP during 2012-13.
To its credit, despite strong pressures, the budget emphasizes the government’s long-term objective to control and eventually reduce subsidies. In 2012-13, the budget hopes to keep overall subsidies under 2% of GDP. While the food subsidy target looks achievable, the fuel and fertilizer subsidy target can be achieved only if the government increases retail end-product prices sharply.
Given the quantum of fiscal deficit and the government’s higher gross borrowing programme for the year, the pressure on inflation is likely to be maintained. If one also takes into account that supply-side issues have not been effectively tackled in the budget, interest rates are unlikely to decline as much as earlier envisaged.
On the taxes front, Mukherjee did the expected. There was no major tinkering with direct taxes, which was perhaps an unrealistic expectation in the current scenario. On indirect taxes, he did what was expected, which is hiking the service tax and widening the net, and increasing the basic excise duty, effectively withdrawing the stimulus package that was provided earlier. The increase in indirect taxes will add to the inflationary pressures and will further limit the reduction in interest rates. So we expect the interest rates on 10-year government securities to be 7.5-7.8% by March-end 2013 as against our earlier estimate of 7.3-7.5%.
The removal of the cascading effect on dividend distribution tax is a step in the right direction. However, the lowering of securities transaction tax by 20% is only for delivery-based transactions and will not have a major impact, as these account for a small portion of overall trading volumes.
The budget speech is over. How well the initiatives that have been announced are implemented is now the key to its success.
Mukesh Agarwal is senior director at Crisil research
Crisil, leading Indian rating agency, majority owned by S&P, partnered with Mint to analyse the impact of the budget on industry.
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