Indian Budget for 2011-12 not likely to be pro-market
Munira Dongre 15 February 2011

In the Union Budget for FY12, there are likely to be cuts in excise duty exemptions and more services may be made liable to be taxed. The government may also reduce the tax burden on the middle class, at least to a small extent

There is an agreement that while announcing this year's Budget, the three biggest challenges that the government faces are-the large deficit, high crude prices, and high inflation.

Most market watchers believe that to get government finances in order (the government is facing a fiscal deficit of 5% in FY12) the government will have to widen and deepen the tax net. There are likely to be cuts in excise duty exemptions and more services will be made liable to be taxed.

However, in a smart move, the government may reduce the tax burden on the middle class-at least to a small extent. Diesel price decontrol is unlikely in the Budget session.

The government is very aware of the perception that reforms have slowed. However, it may not do too much about this since state elections are round the corner in Tamil Nadu, Kerala, and West Bengal.

On the positive side in FY11, revenues are expected to be higher due to higher tax collections. However, expenses are expected to shoot up due to higher subsidies too-food, fertiliser, and oil. The total subsidy bill could touch about Rs2 trillion in FY11.

Certain fiscal expansions in recent years are irreversible and can only keep going higher-the main being the Pay Commission revisions and the Mahatma Gandhi National Rural Employment Guarantee Act (scheme), which is now linked to inflation.

It is unlikely that any government which is in power will find it prudent to disband the Mahatma Gandhi NREGA scheme and it is here to stay. It is India's answer to the unemployment dole or social security in Western countries. The NREGA allocation is expected to increase.

The government's borrowing in FY12 is likely to be Rs3.75 trillion-Rs4.0 trillion. This year, divestment is not likely to cushion the impact of a burgeoning expenditure account due to higher subsidies.

The government may have to go through a massive cost-cutting exercise. In any case, with the spate of scams and scandals erupting over the last 12 months, it is perceived that it will do the image of the government a lot of good if it at least announces cost-saving measures by the ministers and the bureaucracy.

An extension of the sunset clause on tax exemptions for Software Technology Parks may not happen. Excise duties on cigarettes may be hiked further, even after they have been hiked in the last two years. A few months ago it looked liked another hike was unlikely. However, such complacency is no longer there-a 7%-10% hike looks likely (it was hiked 15%-17% in the last Budget).

Excise duty may be hiked for cars. On the other hand, excise duty may be cut on food products.

In the last Budget, the government increased excise duty by 2% for passenger vehicles, two-wheelers and commercial vehicles and increased the weighted deduction for research & development from 150% to 200%. It had also reduced income tax rates, which helped drive auto sales indirectly.

Since a lot of hue and cry has been made about inflation being supply-side and mainly due to shortage (of vegetables, pulses & grains), agriculture is likely to be in sharp focus in this Budget. There has been talk that India needs a "second Green Revolution" and it is likely that the government will make allocations in that direction.

Economists have also pointed out that most of the government expenditure in the last 4-5 years has been consumption driven-subsidies, welfare schemes-but has not gone into capacity creation, which has only increased supply-side pressures, another driven of inflation.

It is likely that in this Budget, the government will finally take this criticism seriously and go big in the direction of capacity creation. In this direction, it is possible that project awarding (especially roads) will gather pace.

Within taxes, it is very likely that the government will introduce an amnesty scheme for people to come and declare their black money-this will provide an immediate shot in the arm for revenues.

For the banking & financial sector, the government could provide more tax breaks on longer tenure deposits to increase mobilisation. Banks could be allowed to raise money through infrastructure bonds-while this will be good for banks, it will be negative for Infrastructure Finance Companies.

It is possible that import duties on crude could be brought to zero from the current 5%. Capital goods manufacturers are lobbying strongly for import duties on power equipment for mega-projects. However, since this also escalates the costs of projects, it may not be implemented.

In telecom, it is possible that an import duty may be imposed on handsets to encourage local manufacturing. Service providers that provide bundled imported handsets (especially BlackBerry) could be affected. Some amount of liberalisation in Foreign Direct Investment (FDI) norms for retail could happen-especially pertaining to cold storage. FDI norms may also be liberalised for radio, direct-to-home, and cable.

In real estate, it is likely that there could be an increase in the income-tax deduction for home loans . It is also likely that interest subvention of 1% on loans of up to Rs1 million on property of Rs2 million will be extended by another year. There is also a slim chance that tax holidays for developing affordable housing (Section 80IB) could be reinstated.

For infra companies, in the last Budget, the government had increased the Minimum Alternate Tax rate from 15% to 18%. It had affected companies putting up projects under special purpose vehicles-this is unlikely to change in this Budget.

Market players do not expect urea to be brought under the Nutrient-Based Subsidy regime in this Budget. Nothing much is expected on the goods & services tax front either. For the Railway Budget, the market does not expect fares to go up, despite the fund crunch. 

k a prasanna
1 decade ago
I have a different view. The budget will be good for the market, for the simple reason, the image of the government, after so many scams has taken beating. There will be an effort to make the market move positively.
Replied to k a prasanna comment 1 decade ago
I see where you coming from but what I feel is government is only a taker of what happens to the market and economy, at the moment. Fiscal Deficit & Inflation are the results of reforms not executed by the Govt., and preventive measures not taken!

They would like to keep the buoyant markets as they have a list of stake sale lined up... and positive market sentiment is a must! The best they could do is facilitate execution of GST, DTC, etc. as soon as possible... better FDI norms to attract FDI... and build more long term fundamentals of the economony!
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