Saturday, March 16, 2013

A Responsible Budget within a Restricted Space albeit some Worries on the Expenditure-Revenue Math

The Indian Union Budget for fiscal year 2013-14 has been termed as a responsible budget under difficult circumstances, but a disappointment to those who were expecting extraordinary measures to jump-start the economy. Fiscal deficit in the current financial year has been contained to 5.2 per cent of GDP; this averts any immediate crisis in terms of a sovereign rating downgrade, but has led to a decade low quarterly GDP of 4.5% in the final quarter of 2012, with plan expenditure meant for developmental projects slashed by over rupees 90 thousand crore. With very little room for fiscal stimulus, the Budget has concentrated on infrastructure development and inclusive growth, the most demanding issues at present. Pressing issues like stimulating domestic savings and channeling those to the capital market have also been addressed within the Budget. Some tax responsibility has also been shifted to those who are better equipped to pay.

The Budget included several measures to spur investment both in markets and by corporations, including an incentive on investments in plant and machinery exceeding Rs.100 crore and extending tax breaks for small companies that grow larger, and an expansion of tax-free bonds for infrastructure and broadening of the scope of the newly introduced RGESS. Emphasis was given to foreign investment, with investor registration norms also being simplified.

However, while there is no opacity in the figures, all agree that the revenue projections are overstated in some areas; slippages are expected in tax revenues and the disinvestment target that hinges on stock market sentiment. Non-plan expenditure could also overshoot the target on account of subsidies and any disruption in oil prices.

Following are some highlights of the Budget:

The Budget estimates *Fiscal deficit at 5.2% of GDP in current FY and at 4.8% of GDP in 2013-14 *Net market borrowing at 4.84 trillion rupees in 2013-14 *Major subsidies bill at Rs.2.48 trillion (up from Rs.1.82 trillion) *Petroleum subsidy at Rs.650 billion 2013-14 as against revised Rs.968.8 billion for 2012-13 *Food subsidies at Rs.900 billion against revised Rs.850 billion in 2012-13 *Total budget expenditure at Rs.16.65 trillion, with Plan expenditure pegged at Rs.5.55 trillion *Direct tax proposals to yield Rs.133 billion, indirect tax proposal Rs.47 billion.

The Budget allocates *Rs.2.03 trillion, including Rs.867.4 billion capital expenditure to Defence in 2013-14 *Rs.801.9 billion to rural development *Rs.270.5 billion for agriculture *Rs.140 billion capital infusion in state-run banks in 2013-14 *Rs 100 billion for incremental cost for National Food Security Bill over and above food subsidy

The Budget proposes *No revision of personal income tax slabs; relief in first bracket through tax credit of Rs.2000 for earnings up to Rs.0.5 million to benefit 1.8 crore people *Home loans upto Rs.2.5 million to be allowed an additional deduction of Rs 1 lakh. *Surcharge of 10% on income exceeding Rs.10 million a year; only 42,800 people have declared such income *No change in basic customs duty rate of 10% and service tax rate of 12% *Surcharge of 5% to 10% on domestic companies whose taxable income exceeds Rs.100 million *Capital allowance of 15% to companies on investments of more than Rs.1 billion *STT on equity futures to be reduced to 0.01% from 0.017 % *CTT on non-agriculture futures contracts to be introduced at 0.01% * Zero customs duty for electrical plants and machinery *TDS at the rate of 1% on the value of the transfer of immovable properties where consideration exceeds Rs.5 million; agricultural land to be exempted *a 20% final withholding tax on profits distributed by unlisted companies to shareholders through buyback of shares *to raise import duty on certain luxury items (cars) and certain other items to boost domestic manufacturing *to issue inflation-indexed bonds *to move to revenue-sharing from profit-sharing policy in oil and gas sector *to allow FIIs to use investments in corporate, government bonds as collateral to meet margin requirements *to allow insurance, provident funds to trade directly in debt segments of stock exchanges *to allow FIIs to hedge forex exposure through exchange-traded derivatives *to treat foreign investors with stake of 10% or less as FIIs; any stake more than 10% will be treated as FDI *to make mutual fund equity schemes eligible for RGESS.

Get detailed highlights with our March-2013 issue of E-Updates.