budget 2012

part one budget 2012

The Budget as it happened
Budget 2012 Pranabs effort is a mouse. Forget pizza, order some booze Experts: FM has been open and transparent says Parekh

The verdict:
Tinkerer Pranab has missed the bus so whats new? FMs fiscal number is bull; UPAs options are now lose-lose Budget 2012: Thank you, Pranab-da, for not doing something worse Budget 2012: Do we need a 1990s crisis to shock us into reforms? Experts: Budget 2012 scores on realism, tanks on reform What Anna Hazare liked and didnt like about Budget 2012 Budget 2012: This is a token. No bold policies Budget is a missed opportunity: Birla Group Budget 2012: Big gains for fertiliser cos but investors unimpressed For Pranab-da, the unkindest cut came from Shochin Indian budget lacks game changing reforms: US industry

Budget Fallout
Budget 2012 and Pranab Mukherjees ethical deficits Will Vodafone ever get its money back? Vodafone tax: India Inc. wary about retrospective taxation Vodafone case: Can govt legally change tax law? Budget 2012: Why not withdraw tax breaks to companies? Why Budget 2012 makes that Aadhaar card important

Breaking down the Budget

Dissecting Budget 2012 with Firstpost Tax exemption limit hiked to Rs 2 lakh Service tax: Your bills will jump. So will inflation Budget 2012 power sops will trim your future electricity bills Budget 2012: Everything in your living room just got costlier Budget 2012: If you buy a house, you will be FMs tax collector

part Two run-up to the budget

Some suggestions for Pranab-da
Union Budget 2012: The speech that Pranab should make Budget 2012: What Pranab could borrow from Manmohans 1991 speech Who must the government tax this Budget 2012?

Budget Primers
Budget 2012 primer: Tackling the fiscal deficit

Expert View:
Budget 2012 must rein in populist spending Budget 2012 must strike a balance between revenue and expenditure Either way - its inflation, baby! Cutting subsidies is key to fiscal correction: Surjit Bhalla Cut oil subsidies first to tackle fiscal deficit: Crisil Murthys budget wishlist: FDI, jobs and education infra

Part one

Budget 2012

The Budget as it happened

Budget 2012 Pranabs effort is a mouse.

Forget pizza, order some booze
Its less than 25 minutes to the budget. Dont fasten your seat-belts, yet. Pranab-da hasnt done anything wrong yet.
R Jagannathan, Mar 16, 2012

AST WORD: Sorry, folks. This is not the big bang the market was hoping for. Its a whimper. As Pranab Mukherjee concludes his speech, its clear that there have been no serious efforts to fix anything. Fuel and fertiliser subsidies have not been cut. Fiscal consolidation is a mixed bad. Higher taxes will raise inflation by a bit. This budget wont achieve much. Your tax reliefs are piddly. Forget the pizza. Order more booze to drown your sorrows. 12.45: Gold buffs heres your comeuppance. Basic customs up on gold doubled. Also on platinum. Sin taxes also up on big bang some cigarettes and bidis. Small customes cuts on cigarettes, too. 12.43: Its becoming clearer that budget will do nothing to change the course of the economy. It is all incremental stuff so far nothing to set the Hooghly on fire (Mamata di, please note), or the Jamuna, for that matter, or the Mithi (Mumbaikars, please note). 12.42: No change in peak customs duty of 10 percent but in customs the exceptions are the rule. So dont worry about this number. 12.40: Overall service taxes raised to 12 percent. This will surely push up inflation since services account for 59 percent of the GDP. General excise also up to 12 percent. Big cars to cost more excise up from 22 to 24 percent. Market should know fiscal consolidation means some pain. 12.36: Bollywood exempted from service tax in some copyrighted stuff. 12.35: Here comes the big blow. Service tax to have negative list only 17 services exempt. Your five-star barber may apply service tax before giving you that Amitabh Bachchan cut. (See our earlier story on this) 12.30: A bit more for markets. Securities transaction tax (STT) the stock exchange toll fee for buying and selling share is cut by 20 percent. Just crumbs for traders. STT is now 0.1 percent for delivery trades. 12.25: Finally, taxes. Rs 2 lakh zero tax, Rs 2-5

lakh 10 percent, Rs 5-10 lakh 20 percent and above Rs 10 lakh 30 percent. Interest income from banks tax-free upto Rs 10,000. No change in corporate taxes. 12.20: The big number, fiscal deficit at 5.9 percent thats 1.3 percent higher than 2011-12 budget estimate. Next years figure is 5.1 percent. 12.15: Ah, black money. He plans a white paper on black money. That sounds like tough action. FM says taxman can reopen your foreign accounts for 15 years. Except more bribe calls if you have opened than Swiss account. 12.10: Chidambaram is all ears trying hard to understand what Mukherjee is saying. FM should ask Omita Paul to send him a transcript. 12.05: Money for National Rural Health Mission (NRHM) increased to Rs 20,820 crore. Thought Mayas henchmen had already had their fill of this cash? Kushwaha, saab, whats going on? 12.00: Barah baj gaya - and hes still droning on and on about rural stuff, infrastructure, etc. Lok Sabha guys begin to nod off. Everyone is waiting for the real stuf taxes, prices, concessions, the big blows Death where is thy sting? 11.55: Food security Sonia Gandhis dream plan is coming up. Rs 15,800 crore for nutritional support for children, even more for mid-day meals. More foodgrain storage to be created. 2 million tonnes of capacity. The rats at least should be celebrating. 11.45: Agriculture next. Outlays, outlays, blahblah. Last time he put Rs 300 crore in several agri-schemes and green revolution stuff. He said every scheme got Rs 300 crore since 3 was his lucky number. We know what luck he finally got last year. With luck like his in 2001-12, when he missed every economic target despite a bountiful monsoon, who needs back luck? Another loo-break is in order. 11.41: Airline industry sops coming up Vijay Mallya, Air India, listen carefully they can now raise external commercial borrrowings, and FDI will probably be allowed in aviation.

All this is pie in the sky. This means instead of soaking SBI and Indian banks, airlines can sink American and European banks. Fat chance. Aviation is a stretcher case need surgery. It is not amenable to revival by aspirin. 11.40: Power sectors coal problems are solved, he says. Coal India will be fleeced to feed power plants. 11.35: Here comes the infrastructure bit. Infrastructure debt funds being set up. Telecom towers will get viability gap funding so now Niira Radias conversations can be tapped easier by the tax department and leaked to Open and Outlook mags. Rs 60,000 crore infra bonds coming up next year. Tax-free. So load up on it before it goes out of fashion. 11.33: He is going to recapitalise banks with over Rs 15,000 crore so that they can bail out Vijay Mallya and other aviation and other losers.

11.22: He plans to raise Rs 30,000 crore from disinvestment this year. Presume LIC wont be expected to bail him out again as in ONGC. Direct Taxes Code and Goods and Services Tax are still in the future. 11.18: Pranab says he will provide for food subsidy, but economy may have to pay for the other subsidies. This is big, if it means petroleum deregulation, or something else. He is also talking cash transfers to the poor. Subsidies will be cut to 2 percent of GDP, and 1.7 percent in three years. If he does this, prepare for inflation to shoot in short run. The market is smelling a hard budget, and is cautiously optimistic of the fiscal decficit. 11.16: He is saying Indias inflation is largely structural does that mean he is throwing up his hands on the problem? But he says average inflation next year will be lower. The Lord be praised. But he said that last year, too. But wait, he has begun talking about crude prices and fiscal consolidation. Does this mean he will raise diesel prices? 11.15:Heres comes the pain. Hes talking of hard decisions. Surely hes not talking about Mamata-di? Dinesh Trivedi must have shared parts of the budget speech with him or viceversa. 11.10: He said the usual thing. When anyone says growth is slowing, he will say rest of world is growing even more slowly. India is andhon me kaana raja.

11.32: New Rajiv Gandhi equity scheme to lure retail investors investing directly in equity. Rs 50,000 limit will get 50 percent income-tax deduction. He is probably beginning to soften up the markets - before hitting them with some bad news. A minor gain for small investors: they can e-vote in companies. Not that they can stop the rot and loot by management when government is busy doing the same in public sector companies like ONGC. 11.30: Mike isnt working but he wants to read previous two paras. Speech rolled back. But we didnt miss anything.

11.07: He starts speech again, but you didnt miss anything. Hes talking about Mid East and crude oil. We know all that. 11.05: Usual ruckus. How can budgets be interesting without MPs making themselves hoarse with objections. FM called then petulant children yesterday, he needs new descriptors today 11.00: Hes there. Speech in hand, glass of water at hand. As Pranab rises to present his budget, put on your seatbelts. But just a small window of opportunity for loo breaks, ordering that pizza (dont worry, Domino will deliver in 30 minutes, and by then the FM wouldnt have

got to the stuff we really want to hear about: taxes, and prices of things we want to buy. 10.55: Only five minutes to go before H-Houd and Pranabs BS. BS is not short for what you think it is its budget speech. Forget you and me. The first guy the FM has to please is Subbarao of RBI Subbu. If, at the end of his speech, we get to know that the Guv called up the FM and said Subbu khush hua the markets will break into a jig. 10.50:Questions, questions before FM grabs his speech booklet, and sips water before reading the stuff. Will he please the markets? Will there be something for the aam aadmi? Will he do Soniajis bidding or do a Dinesh Trivedi on his boss? And what will Kolaveri Didi do if he raises fuel prices? Will she explode? To be sure, the only guy who will be watching the budget like a hawk is Reserve Bank Governor Duvvuri Subbarao. He has already told the FM in coded language that only central bankers and FMs understand that if the budget does not make serious efforts to close the budget gap raise diesel prices, cut subsidies, etc, things you and I dont like Subbu will hold back on cutting interest rates. Goodbye cheaper home loans, et al. Yesterday, the Guv was in Kolaveri mood and refused to cut rates.

10.45: On tenterhooks. What will Pranab-da do? Even more scary. You know what happened to Dinesh Trivedi. PM complimented him on the rail budget and he is getting the sack. Hope nothing like that happens to Pranab-da. If Manmohan Singh pays him the highest tribute, hes done for. 10.30: Okay folks, here we go. It is just 20-25 minutes to the start of Pranab-das seventh budget, billed as a make-or-break one. Its nothing of the kind. Life will go on. But if we dont keep saying this, you wont watch TV or log in to Firstpost, or think the budget is a big deal. The markets are still in positive territory they obviously dont know why they are celebrating. If Pranab does something sensible fix the budget, raise taxes or cut expenses someone or the other will be hurt. The markets will be moping after the budget whether it is a good one or bad. But dont worry. They will get over it in the coming days. There is too much money chasing stocks this year. If you ask the cognoscenti, this is what they will say they want to see from Pranab-da: fiscal consolidation (code for cutting subsidies and expenditure), something to cheer business and get it to start investing (tax cuts, tax cuts, tax cuts), clear signals on reforms (foreign investment, FDI in retail), a bone or two for the markets (STT cut, and only a moderate increase in long-term capital gains taxes), and at least a few crumbs for ordinary taxpayers (you and me).

transparent says Parekh

As Finance Minister Pranab Mukherjee presents his seventh union budget we bring you what experts are saying
FP Staff, Mar 16, 2012

FM has been open and

Experts:

:00 pm: Depak Parekh: I believe the GDP growth numbers may even be underestimated. FM has been honest, open and transparent. what I like best about his speech was his honesty and fairness. Shankar Sharma of First Global: I dont care what budget has done for the stock market. It is a 2 sq km area of India. It should do something for the 2 million sq km of India. Growth number: 7.6 percent understates the potential. He has played the game of expectation management very well. If RBI steps in and lends a hand with a 150 basis point reduction in interest rates, it will trigger growth. Last year, Anna Hazare movement took away 1 percentage point growth of GDP Madhusudan Kela: The numbers in this years budget look more real than from last years budget. it is exactly in line with what the market was expecting. No negative surprises, even if there are no huge postitve surprises. 10:55 am : And we now go live to the Lok Sabha with the budget. Can barely hear Pranab Mukherjee over the other MPs though. 10:50 am : Shankar Sharma defends himself with a straight bat. Its not deficit that counts, but debt. And on that count, India is smoking hot, he says. He says the problem is the RBI. The RBI is the villain of the piece, not the FM. It has killed growth, which has killed revenues, which has widened the deficit, Sharma says Now, it says circularly, that unless you cut fiscal deficit, I will not cut rates. We dont want to question Mint Steet because we think it descended from heavens But we think its okay for us to spit on politicians, he says. 10: 37 am : Deep within him FM wants to see GST on the agenda. GST is good for India. It might not be a 2013 event but one we may see in 2014 , says the calm and composed Ms Kidwai of HSBC. She receives rare praise from Arnab Goswami for sparking off a debate. Meanwhile Shankar Sharma of First Global goes pro-government and says that this government has managed to bring inclusive growth, despite

lowering deficits. What more can you expect it to do? he thuders. We are at a low level of public debt. that is what counts, Sharma says. Fiscal deficit is a meaningless number., he says. Wonder if Pranab Mukherjees budget will reflect the same sentiment. Market analyst Ramesh Damania says that the governmnet needs to do what Googles claims : do no evil He tears into Shankar Sharma though. Whether Shankar likes it or not,markets are focussed squarely on fiscal deficit, he retorts. Given the lack of performance last year, market will question the credibility of the Finance Minister, Damania says. Raamdeo Agarwal of Motilal Oswal comes out swinging in support of Shankar Sharma. Monetary policy more important than fiscal policy right now, he says. 10:33 am: There are two years to national elections and the government can take measures to further growth, Naina Lal Kidwai of HSBC. I would hope that all our ministers from parties set the agenda for growth and we can achieve 7 percent growth else will slump to 6 percent which is bad for all, she says Lord Meghnad Desai takes on the politicians and says that politicians need to get the messsage. Says all MPs are populists and should say that they should say they will not tolerate measures that slow down growth. New CII President Hari Bhartia expects some move on FDI in aviation and retail but says no control on subsidy is a disappointment. His remedy: let market determine oil prices. But he too is bullish on the budget and expects the FM to present a strong,pro-reform budget. 10:25 am : Now the corporates present their side. The Finance Minister needs to be generous on his announcements on GST so that the proposal goes through, says Adi Godrej Chairman of Godrej Industries. Fortis Chairman Malvinder Singh is betting on finance minister Pranab Mukherjee biting the bullet this time. He expects that the Union Budget 2012 will be pro-investment and progrowth.

10:20 am: Chetan Ahya of Morgan Stanley on CNBC says that it is important to monitor how the deficit target will be met, stressing that execution will be more important than estimates. While it has pegged the fiscal deficit target for FY12 at 6 percent, it has lowered its estimate for FY13 at 4.9 percent. Since bringing down the fiscal deficit is the main concern for the government, Ahya feels the government will not add any additional schemes this year, which would only add to its woes. He also does not expect the government to even increase the food subsidy allocation this year. 10:15 am: Bibek Debroy: There is a bigger elephant than the ones that Swami Aiyar mentioned and that is food subsidy Pranab will under-budget expenditure on food subsidy bill 10:00 am: Swami Aiyar says I expect government to come up with rosy projections whether that is credible is the key issue. Will Mukherjee say anything about raising fuel prices in the Budget? I dont think so Economist Jim Walker: RBI wont be cutting interest rates any where near as what the markets expect Economist Jim Walker Unfortunately, we will hear a lot of platitudes. He has told us he has lost a lot of sleep But he doesnt have the means to bring deficits under control. He may not deliver. Swami Aiyar: Game being played between RBI Governor and Pranab Mukherjee but elephant in the room is fertilizer and fuel subsidy

9:35 am: On Times Now Sanjeev Sanyal, Deutsche Banks Global Strategist says that India has to get serious about its fiscal house. We need to do something about taxes, need to increase tax-GDP ratio significantly, he says adding that there are a huge number of things to be done and quickly. We cannot expect the budget to resolve all governance issues but a strong message from the budget would help, he says. On ET Now NK Singh, former IAS official and JD-U MP, says the fundamentals of the economy are fragile and the fiscal deficit is high. Unless important macroeconomic measures take place and investor confidence is reasured, markets will remain fragile. He says that India will not be well served by creeping forward with a slow growth rate and our poverty compulsions cannot accept low growth 9:20 am: On Times Now, Swaminathan S Aiyar says that Pranab Mukherjee will be unwise to assume he can present a full-year budget in 2013, given the prospect of early elections. Perhaps he can, perhaps he cant. Aiyar says 2012 could be the last big budget of the UPA government. In that context, this years budget becomes less difficult than originally envisaged. As the budget draws closer and expectations rise from Finance Minister Pranab Mukherjee we get you what experts are saying across the television channels.

The verdict:

the bus so whats new?

Pranab Mukherjees seventh budget has missed an opportunity to fix things. He is getting more revenue, but his expenditure side holes remain
R Jagannathan, Mar 16, 2012

Tinkerer Pranab has missed

ountains of expectations always deliver a mouse. And so it was with Pranab Mukherjees make-or-break budget. He neither made much of the opportunity nor broke anyones back by trying to do too much. The net verdict is this: Revenue has been beefed up, but expenditures are not quite in check. Thus, fiscal consolidation is still one-sided. Big reforms have been given the go-by. Small crumbs have been thrown at the middle class in terms of tax relief, but the price increases due to the raising of excise and service taxes will more than neutralise this gain. The macro numbers first: the big thing that was expected from Mukherjee was a sharp drop in the fiscal deficit, which he delivered, by bringing it down from 5.9 percent in 2011-12 to 5.1 percent. A big drop by0.8 percent is good news, but the devil will be in the detail: how did he achieve it? The chances are he will miss the target once again because the cut is being achieved through raising taxes the net additional taxes from customs, excise and service taxes will be Rs 45,940 crore while the crumbs on direct tax concessions equal Rs 4,500 crore. The net tax gain for Mukherjee: Rs 41,440 crore.

hike in excise and service taxes to 12 percent, and the extension of service tax to every nook and cranny of the economy only 17 services are exempt. Revenues will certainly go up. The concessions are fleabites: an increase in the tax-free exemption limit to Rs 2 lakh thats a Rs 2,000 tax relief per individual. Rs 10,000 of interest earned from banks will be tax-free, but this is more a sop to banks who are screaming about tax-free bonds and high payments on post-office schemes that are taking away customers. Senior citizens have been spared the payment of advance tax but this is like making life easier, not about providing more money in the pocket. The salaried and the old can say thanks, but no thanks. All this would have been tolerable in a difficult year if Mukherjee had really taken the axe to big-ticket waste. But the FM has simply not taken the tough decisions to cut expenses. While he talked of raising petro-fuel prices which may happen outside the budget, and get Mamata Banerjees back up once again his subsidy bill is still looking huge: Rs 43,580 crore on fuel, Rs 77,794 crore on fertiliser, and Rs 75,000 crore on food subsidy. Thats a clean Rs 1,96,000 crore-and-odd. Any bets this wont be the final bill when Mukherjee presents his next budget (assuming UPA is around and he is still FM)? Quite obviously, Sonia Gandhis Food Security Bill is inadequately funded. Also, there is a good chance that fuel subsidies will be higher if the world economy rebounds and oil prices stay high. According to current estimates, oil industry under-recoveries on subsidised diesel, cooking gas and kerosene are upwards of Rs 1,40,000 crore annually. Even if one assumes that a part of the money comes from ONGC, Oil India and Gail as it does now the Rs 43,580 crore provided for fuel subsidies will be grossly inadequate assuming international prices stay at the current level. If diesel prices are raised to make up for the short-fall, and excise and service taxes are up,

The question is: in a period of slowing growth, will his revenue projections really live up to expectations? When last year he missed almost all targets? The big money (at least, what is planned) is coming from an across-the-board two percent

it means inflation will get a cost push acrossthe-board. If this happens, what are the chances that the Reserve Bank of India will cut rates fast? Duvvuri Subbarao will not be amused. Which is why he held back on the repo rate cut on Thursday. Now he may play hard-to-get in the April monetary policy, too. As things stand, the diesel under-recoveries are at Rs 12.17 per litre of diesel, Rs 28.66 per litre in kerosene, and Rs 439 per cooking gas cylinder. If prices are raised to cover even half the level of losses incurred by the oil marketing companies, we are going to have higher inflation and possibly street battles led by Mamata & Co. Kolaveri Didi will be on the warpath, not to speak of a whole host of Kolaveri Dadas in the opposition parties. Assuming prices are not raised, the budget defi-

cit is likely to go through the roof again as it did last time. Either way, whether the deficit goes up or not, prices will go up. This will dent GDP growth rates which the Economic Survey had pegged it at 7.6 percent on Thursday. One can kiss goodbye to that. To mollify the poor, who will surely be upset over inflation, token soak-the-rich taxes have been imposed on large cars (excise up and also customs), gold and platinum. Sin taxes are up on cigarettes and bidis. But it is the budget arithmetic that will go up in smoke. Pranab-das efforts are neither here nor there. At the end of the day, its clear that this is not a budget that will fix the deficit problem, or build business confidence where investment will revive in a big way. Pranab Mukherjee has more or less missed the bus.

UPAs options are now lose-lose

FMs fiscal number is bull;

The FMs fiscal deficit is a piece of fiction, even if he raises oil prices. The UPA is in a lose-lose situation no matter what the FM does this year.
R Jagannathan, Mar 19, 2012

his is a lose-lose year for the UPA and its finance minister. No matter what the finance minister does, he is going to miss all his targets and slow down growth and boost inflation. Pranab Mukherjee knows this, and this is why he has chosen to mug Vodafone even after it won a verdict in its favour from the Supreme Court in January. In fact, so crass is his chase for money this year that he has not only proposed retrospective changes in the law to nullify the Vodafone verdict, but also inserted a clause to make sure that even if the government loses again, it does not have to return the money already paid by Vodafone pending the judgment. (Read Menaka Doshis eye-opening analysis here). Mukherjees eagerness to collect his Vodafone dues, or at least keep what it has already collected in advance, can be understood only in the context of the miserable state of his finances, and the weak prospects ahead of the economy this year. The truth is the 7.6 percent growth target pencilled in by the finance minister is simply not going to happen whether he achieves all his targets on revenues or expenses or not. Lets start with one number: the fiscal deficit of Rs 5,13,590 crore is 5.1 percent of GDP, assuming the GDP at current prices grows to Rs 10,159,884 crore. The GDP will surely get there, not least because price increases will inflate the number. However, this is the main problem: at current crude oil prices, the total losses of the oil marketing companies will be around Rs 2,13,000 crore when Mukherjee has provided only Rs 40,000 crore for fuel subsidies, says a Business Standard report. If the government has to make good Rs 2,13,000 crore, and only Rs 40,000 crore has been provided for in the budget, that leaves a gap of Rs 1,73,000 crore. And we are not even talking about other subsidies like fertiliser and food where too the provisions look inadequate.

The Rs 1,73,000 crore deficit figure needs to be added to the official fiscal deficit of Rs 5,13,590 crore and what we get is the stupendous figure of 6.7 percent of GDP. The fiscal deficit figure of 5.1 percent is clearly a piece of fiction. Such real fiscal deficit 6.7 percent cannot but result in more inflation and slower growth. Slower growth means less revenues which again means a higher fiscal deficit, and higher inflation. But a few caveats are in order. The first caveat is that the actual fiscal deficit figure will be lower since ONGC, Oil India and Gail will be forced to fork out 38 percent of this Rs 2,13,000 crore subsidy bill. If we take around Rs 80,000 crore as their share of subsidy payments to the oil marketing companies, and Rs 40,000 crore is already provided for, it means the balance of Rs 93,000 crore has to be raised either by price increases or be added back to the fiscal deficit figure shown in the budget. If we do the latter, it takes the fiscal deficit figure right back to 5.97 percent even higher than what Mukherjee reported on 16 March for this year (5.9 percent in 2011-12), despite forcing through a flawed ONGC share sale to drum up his revenue numbers. However you look at it at the higher oil subsidy number or the lower one the fiscal number put out by the finance minister is a load of bull. Plus, the point is this: even assuming the number is lower because ONGC picks up a big part of the tab, ethically the fiscal deficit is the difference between the governments expenditure (and payables) minus its revenues. Even the subsidies paid by ONGC are really a part of the fiscal deficit since the government owns two-thirds of ONGC. Just because you force someone else to pay your bill, you do not become fiscally prudent. The second caveat is about assumptions: what if global oil prices fall? In this case Mukherjees subsidies may be lower, and he might well achieve his numbers. This cannot be ruled out, but will he? Ask your-

self: if the US is reviving, and the worst is over for Europe, will oil prices fall or stabilise or rise? In any case, if the US dollar strengthens due the economic recovery, will oil cost more in rupee terms or less for us? Given that we do not have endless foreign exchange reserves (its now around $294 billion, and a lot of it is really external debt), the Reserve Bank does not have the wherewithal to defend the rupees value. Rs 48-52 to the dollar is a safe assumption for the year, with the rider that it could get worse if oil prices harden.

If prices are not raised, we are still up against something equally bad or worse: slowing growth this year due to higher taxes (over Rs 41,000 crore of new taxes have to be absorbed this year). And remember, we havent even talked about fertiliser prices and food subsidies. The choice for this year is clear: slowing growth and inflation due to higher oil prices or higher fiscal deficits, or both. But consider the choice ahead for next year the last budget before 2014 elections. Unlike this budget, Sonia Gandhi is not going to accept cuts in social spending schemes like NREGA or Food Security. Next year is thus going to be a killer in terms of spending and fiscal profligacy. One can also be sure that in the run-up to the general elections, there will be a huge increase in minimum support prices for foodgrain which is what happened in 2008. Slow growth and inflation this year will be followed by excess spending next year.

So, taking these two caveats into account the ONGC will pay a lot of the subsidies, and the possibility that oil prices may fall what we are still left with is the possibility that diesel and cooking gas prices may be raised, assuming some degree of political consensus is achieved. A sharp rise in fuel prices will be deflationary it will slow growth and push up short-term inflation. The additional cess on ONGC oil will push up refinery costs increasing the possibility of higher subsidies.

Whichever way we look at it, the economy is in a lose-lose situation. This means Pranab Mukherjee will be go down in history as someone who left the economy in ruins despite his best efforts. He may have made heroic efforts to keep the UPA in power for a while longer in the face of trouble with allies (Trinamool, DMK, etc), but he will not ultimately be able to rescue the UPAs fortunes. The UPA is in a lose-lose situation, Pranab-da or no Pranab-da.

for not doing something worse

Pranab misses his Big Bang moment, plays realist instead by making the right noises, and tinkering on some areas, Mukherjee has avoided any major negative backlash from markets and India Inc
Sourav Majumdar, Mar 16, 2012

Thank you, Pranab-da,

Budget 2012:

inance minister Pranab Mukherjee has clearly let go of the one big opportunity he had to make a Big Bang impact and re-establish his boss Prime Minister Manmohan Singhs credentials as a major reformer. Instead, what Mukherjee has done is to make the right noises, tinker with the tax structure and talk about fiscal consolidation. Not a Big Bang by any yardstick, but perhaps a clear admission that the governments hands are tied given the political compulsions. But some market experts have taken the announcements on the capital market side and the eventual transition to the much-awaited goods and services tax (GST) regime well. Also liked by the market and the corporate sector, perhaps, is the finance ministers signal that he has taken on board concerns on fiscal consolidation and his realistic approach to the fiscal deficit. Enam boss Vallabh Bhanshali, for instance, told CNBC-TV18 immediately after the budget speech that he would rather have a finance minister who does not promise the moon and talks of realistic targets. ICICI Bank chief Chanda Kochhar calls the Budget pragmatic, believable, credible. Pranab Mukherjee seems to be saying yes, times are bad he spoke of last year (which is still this year till March 31) being the year of recovery interrupted early on in his speech and then moved on to presenting the fiscal deficit number of 5.9 percent for FY12, a full 1.3 percent slippage from the promised 4.6 percent number. In fact, the 5.9 percent is even higher than market guesses which had reckoned he would overshoot it by about 1 percent. However, he has promised to bring it down to 5.1 per cent in 2012-13, down 80 basis points (100 basis points make 1 percent), something which was praised by C Rangarajan, the chairman of the Prime Ministers Economic Advisory Committee. Mukherjee has, of course, made the right noises. He has put forward a five-point programme of what needs attention, among them a focus on domestic demand driven growth recovery; creating conditions for rapid revival of high growth in private investment; addressing supply

bottlenecks in agriculture, energy and transport sectors, particularly in coal, power, national highways, railways and civil aviation, and talks of the need for to use Reserve Bank Governor Duvvuri Subbaraos favourite word a credible roadmap. Alongside, he has made some moves on the capital and debt markets front. He has also provided some relief on the personal taxes slabs, and allowed external commercial borrowings (ECBs) for working capital for the beleaguered aviation sector, subject to a cap of $ 1 billion. Some steps proposed to be taken for deepening reforms in the capital markets have been taken, including simplifying the process of IPOs and allowing qualified financial investors (QFIs) to access Indian bond market. There is a new law coming for microfinance companies, a new scheme for bringing in retail investors into the capital market through a special scheme and an emphasis of electronic issuance of shares to deepen the market.

He came up with what Firstpost had been talking about applying the service tax to all services barring a negative list of 17 and hiking service tax from 10 per cent to 12 percent. Withholding tax on ECBs has been brought down to 5 percent from the earlier 20 percent for some stressed sectors. But in the end, it turned out to be too little at a time when what was widely expected of the finance minister was some big moves on subsidies and clear statements on the general direction of economic reform.

Instead, he merely reiterated the fact that there is a continuing attempt to arrive at a consensus on FDI in multibrand retail and an attempt to move towards 49 percent foreign holding in the aviation sector. He, however, said there would be an endeavour to keep central subsidies under 2 percent of GDP in 2012-13. Over the next 3 years, this would be further brought down to 1.75 per cent of GDP. This statement itself has warmed the hearts of corporates and markets. Perhaps, given the general economic and political environment Mukherjee presented his

budget in, the absence of any overtly populist moves and of any nasty surprises scores in his favour. At the time of writing this article, the 30-share BSE Sensex was down by around around 1 percent just a wee bit disappointed, but not spectacularly so. However, marketmen are still poring over the fine print of the budget, and who knows, they may come up with some more surprises.

Do we need a 1990s crisis

Budget 2012:

to shock us into reforms?

Individuals who earn Rs 100 and spend Rs 150 wont usually get even a credit card. But Indias profligate government thinks it will get by.
Latha Venkatesh, Mar 17, 2012

he budget has got a near unanimous thumbs down from economists and analysts but very few have indicated what the finance minister could have done differently. No, I am not seeking to hold a brief for the ace politician. All I am saying is that while we overtly worry over the fiscal deficit, we are all conscious he is working in a milieu of political deficit. Pranab Mukherjee doesnt have the financial elbow room to implement the socialist diktats of the Congress leadership. And he doesnt have the political elbowroom to go for bold reforms. The budget doesnt show the political will to tax enough and distribute goodies nor does it restrain the fiscal deficit enough to allow the private sector to grow. The profligacy of the second UPA is serious and my fear is we may have to go through another 1990-like crisis to shock us into reforms. The fiscal deficit, when seen as a percentage of GDP, may seem controllable. But the right way to look at it should be how much extra are we spending compared to our revenues. Up until 2008, our deficit was 20 percent of our revenues, i.e. if revenues were Rs 100, expenditure was Rs 120. In FY09 (2008-09), apparently because of the global crisis, but equally because the UPA wanted to come back to power, our expenditure was 61 percent more than our revenues. In FY10 it dropped to 47 percent more than our revenues. In FY11 our expenditure was 46 percent more than our revenues, despite revenues getting a boost from the sale of spectrum. In FY12, we have spent a huge 65 percent more than our revenues. And in FY13, supposedly after serious efforts to curb the deficit, our expenditure is budgeted to be 52 percent more than our revenues. Individuals who spend more than 50 percent of their revenues, wont ever be given a credit card by a bank. What is becoming clear is that like some compulsive, spendthrift borrowers, the Indian government is unable to control its expenses or raise revenues. Until recently growth or perceived growth was tenuously bridging the gap between revenues and expenses. But now that growth is under serious threat.

One big threat to growth is coming from the receding capex (capital expenditure). The governmental dis-saving has led to Indias savings and investment rate dipping by 4 percentage points in the past four years. The governments own capital account expenses have fallen from 23 percent of total expenses in 2005-06 to around 13 percent. For the current year the government budgeted 13 percent of total expenditure as capital expenses. The revised budget shows that only 11.8 percent was spent in the capital account. The railways are the best example of a serious dearth of government investments that is hugely pressuring the country. The ability of Coal India to supply coal to power plants is stymied as much by a lack of rakes as by a lack of new mines. Cement was an industry with overcapacity until recently, but prices could be raised in many pockets since rakes werent available to move cement to many quarters. The government has not found the money to expand the rail infrastructure. It nowhere has the will to privatise it. The other major threat to growth is inflation. While global factors are fanning commodity inflation, the spendthrift UPA, with its yawning fiscal deficit is doing a much better job. The bond market greeted the budget with yields shooting to nearly 8.5 percent. There is some hope that the RBI will cut rates in April. But with such a deficit, high global liquidity and so much left to be done to correct administered prices, it is tough to expect the RBI to oblige. Deputy Governor Subir Gokarn may have sounded appreciative of the governments tax increases to bridge the deficit, but if month-onmonth core inflation rises, as it well may, the RBI may find itself postponing the much awaited rate cut. In which case growth gets postponed that much more. For the moment it doesnt appear growth will do much better in the coming year. Politically, another year of the lameduck UPA could mean more populist policies. An earlier election can well mean a 1997-type third front government at best or a period of fractured mandates and frequent elections. Clearly the political deficit looks set to persist as much as the fiscal deficit.

Finance Minister Pranab Mukherjee announced that the government will try and bring down subsidies to 1.7% of GDP in the next three years.
FP Staff, Mar 16, 2012

Experts: Budget 2012 scores on realism, tanks on reform

inance Minister Pranab Mukherjee proposed trimming the governments subsidy burden and call for speeding the pace of economic reforms, has been received well by industry experts. The government has made a clear cut attempt to contain subsidies at 2 percent of GDP. C Rangarahan, chairman of the Prime Ministers Economic Advisory Council said that since subsidies have the impact of increasing the total expenditure beyond the budgetary allocation, Pranabs budget is a define attempt to contain subsidies. Experts, however, felt that even though the budget did not introduce any big-bang reform, it is a realistic budget, aimed at curtailing the fiscal deficit. Moreover, the increase in excise and service taxes were expected and are pragmatic moves.

Uday Kotak, executive vice-chairman and managing director, Kotak Mahindra Bank finds Budget 2012 as a realistic one. However, he feels that fiscal deficit will put pressure on government borrowing program ahead. The market too did not expect a hike in oil prices or an FDI nod in aviation or retail. Also investor-friendly proposals like the doubling of tax-free bonds cheered the market, which is up around 90 points post the budget announcement. Post the budget, bond yields too went up by 8.4 percent. The key, however, going forward will be if the government can actually execute these measures.

What Anna Hazare liked and didnt like about Budget 2012
We pick the anti-corruption crusaders mind for what he approved and disapproved of in Pranab Mukherjees budget.
FP Staff, Mar 16, 2012

(Disclaimer: While we wish Anna Hazare was available to give us an analysis of the budget, we had to make do with what we believed he would have said. The opinions in this article are purely Firstposts) Pranab Mukherjee has presented a budget today, a long one in which he even quoted Shakespeare. I wish he had quoted an Indian author instead. There are so many here. Or he could have said something from the Gita. Anyway, this is what I liked about his budget: Black money: The finance minister said they will bring back the black money that has been drained out of the economy. That is a very good thing. It will prevent these politicians from taking the money out of the country and preventing the progress of the nation. He has said they will prosecute those who have not paid tax while sending this money abroad and I say that is a very good thing. They should be whippederr face the strongest possible punishments for this . He also said he will present a white paper on black money. He also said that it is compulsory to report money held abroad. Now we will know who all have taken money out of the country. Anti-corruption measures: The minister has said that many anti-corruption measures will be undertaken but he did not talk about the Lokpal. That is not a good thing. He said he will do something about money laundering and benami transactions. I think these are good things but they need to take steps also. They should bring in a strong Lokpal Bill. More excise duty on cigarettes, bidis and gutka: These things are corrupting the youth of the

country. The minister has done well to increase the taxes on all three of them. People should be stopped from using these things and they should only think healthy thoughts. Why he did not increase taxes on alcohol I dont know but. We should have more tax on these things so that people do not have these bad habits. Irrigation plans: The government has decided to spend Rs 300 crore to Vidarbha Intensified Irrigation Development Programme. It is a good thing. He also announced many other plans for improving irrigation. Irrigation is very important to farmers and I have also done a lot of work in this. But the minister did not call me to ask me about tips on things like rain harvesting and other things. I might have been able to help. But a minister is a finally a politician and we cannot trust the politicians of this country anymore. Heres what I didnt like: Less customs duties for international travellers: The minister has raised the duty free allowance for Indians who go abroad from Rs 25,000 to Rs 35,000. Arre what is the need for this? Everything that they want is available in India. They should buy swadeshi products. More service tax on everything: It is a good thing that the Finance Minister has exempted folk artists and charities from service tax but now so many other things people have to pay service tax for. A good thing though is he has exempted friends of mine like Prashant Bhushan from paying service tax since he is an advocate providing service to a non-business entity like ours. Now these is nothing left to say on all this. We will continue our demand for a strong Lokpal Bill and getting back the black money. Jai Hind!

This is a token.
No bold policies
Indian business leaders bemoaned the increases in excise duties and service taxes as inflationary.
AP, Mar 16, 2012

Budget 2012:

ndias government aims to reduce its budget deficit to 5.1 percent of gross domestic product next fiscal year, from 5.9 percent this year by capping subsidy spending and raising taxes, the Finance Minister said in his budget announcement Friday. India had targeted a budget deficit of 4.6 percent for the current fiscal year ending in March and will miss that by a wider margin than many economists had expected. The budget is being closely watched for signs that New Delhi will take credible steps to bring spending in line with revenues and kickstart flagging economic growth. Expectations that the ruling Congress Party would use Fridays budget to announce bold economic reforms have waned amid signs of the partys increasing impotence. My expectations were very low given constraints in dealing with a coalition government, said entrepreneur Kiran Mazumdar Shaw. This is a token budget. No bold policies.

exports, have also made the ruling party look weak. Finance Minister Pranab Mukherjee said the government would allow greater foreign investment in Indias fund-starved aviation and power sectors, as well as in corporate debt. But he took no steps to raise caps on foreign investment in retail, aviation or insurance, which investors have long lobbied for. Mukherjee said India will improve the quality of government spending by cutting subsidies to under 2 percent of GDP. This year, subsidy spending swelled from unexpectedly high global oil prices, which increased the cost of Indias fuel and fertilizer subsidies, he said. Mukherjee said the government hopes to raise 300 billion rupees ($6 billion) from selling stakes in state-run companies next fiscal year. India raised about 140 billion rupees ($2.8 billion) from such asset sales this year, against an initial target of 400 billion rupees ($8 billion). Mukherjee sounded an optimistic note on growth, saying growth will accelerate to 7.6 percent next fiscal year, up from 6.9 percent this year. Indian business leaders bemoaned the increases in excise duties and service taxes as inflationary. Sudhir Kapadia, a partner at Ernst & Young, said tax increases were required to control the fiscal deficit. He said the governments deficit reduction projections remained optimistic.

A key coalition ally, Trinamool Congress Party leader Mamata Banerjee, reacted with fury to the announcement this week of a modest hike in railway fares, the first in eight years. Banerjee called on the government to fire the railway minister, who comes from her own party. Other recent policy flip flops, on foreign investment in retailing and on a ban on cotton

From a macro tax policy perspective there was little choice, he said. We should be realistic about it. The benchmark Sensex index was up 0.3 percent in midday trade in Mumbai.

Budget is a missed opportunity:

Birla Group

The government, hard-pressed for cash, proposes to levy additional indirect taxes of Rs 45,940 crore for 2012-13 at a time when the industry is facing slowdown in demand.

PTI, Mar 16, 2012 inflationary implications, he said. The government, hard-pressed for cash, proposes to levy additional indirect taxes of Rs 45,940 crore for 2012-13 at a time when the industry is facing slowdown in demand. deficit is still high which is disappointing. Things are going to become costlier for final consumer, Godrej Group Chairman Adi Godrej said. Assocham President R N Dhoot said that he was expecting that the personal income tax exemption limit would be raised to 2.5 lakh per annum. It is not done which is disappointing. However, certain initiatives like liberalising the external commercial borrowing (ECB) rules and boost to investment particularly in infrastructure sector were hailed by industry leaders. The BSE benchmark Sensex was almost flat during mid-day after the Budget was unveiled.

ew Delhi: As Finance Minister Pranab Mukherjee resorted to mopping up more taxes, a disappointed India Inc today said his Budget is a missed opportunity and would have cascading impact on inflation and consumer demand. It is not going to stimulate growth in the economy, Ficci President R V Kanoria said. CII President B Muthuraman said he was expecting much more and the excise-related proposals would push up prices. However, the steps to control fiscal deficit would augur well for the economy. The Budget is a missed opportunity, Siddharth Birla of C K Birla Group said. Biocon CMD Kiran Majumdar Shaw expressed fears the Budget would be inflationary. Harshpati Singhania of J K Group echoed similar views. Increase in excise duty will have

Big gains for fertiliser cos but investors unimpressed

Budget 2012:

The Union Budget 2012-13 is expected to have a positive impact on the fertiliser industry that is expected to benefit from cheaper farm credit.
Sanjit Oberai, Mar 17, 2012

he Union Budget 2012-13 is expected to have a positive impact on the fertiliser industry that is expected to benefit from cheaper farm credit. According to research firm Crisil, fertiliser demand is set to get a boost on account of cheaper credit availability to farmers. The government will provide interest subvention to farmers who make timely payments of farm loans, effectively lowering the interest rates. Although the government has extended investment-linked benefits for increasing urea production in the country, made fertiliser companies eligible for viability gap funding and exempted customs duty on imports of capital equipment, additional investments in urea plants will depend on domestic gas allocation, says Crisil. The reduction in basic customs duty on some water-soluble fertilisers and liquid fertilisers could also increase their use, which again benefits fertiliser players.

The governments decision to exempt basic duty of 5 percent on import of capital equipment for fertiliser expansion projects will be positive for companies planning urea investments. This is expected to benefit companies like Chambal fertilisers, RCF, Tata Chemicals. (see table for overall proposals). The government has also pegged the fertiliser subsidy at Rs 60,900 crore for the next financial year ending March 2013 compared with the revised estimate of Rs 68,000 crore for the current year ending March 2012 . Nevertheless, investors seemed unimpressed. Shares of Zuari Inds, Fertiliser & Chemicals Travancore, Khaitan Chemicals & Fertilisers, Bharat Fertilisers, Deepak Fertilisers & Petrochemicals, Gujarat Narmada Valley Fertilisers Company reported a 2-5 percent fall yesterday.

For Pranab-da, the unkindest

cut came from Shochin

Why the finance minister had to deal with the brickbats while the man with the bat was the showstopper on Budget Day.
Sourav Majumdar, Mar 17, 2012

t seems fortune plotted against Pranab Mukherjee to rob him of his thunder on budget day this year. As if the disastrous state election showing wasnt enough, the Dinesh Trivedi-Mamata Banerjee drama, with Trivedi turning into an unlikely hero overnight with his bolder-than-expected Railway Budget, came as an added show-stealer. But the biggest blow of all for Pranab-da was Sachin Tendulkars hundredth century, bang on Budget Day, over a year after the Master Blaster scored his last hundred. Couldnt Shochin (a true-blue Bong pronunciation of the name) have chosen another day to mark his stamp in history? Here was poor Pranab-da, hemmed in from all sides, trying his level best to save UPA-2 from near collapse, and the cricketing legend who everyone thought was never going to get to that 100-century mark comes up and steals whatever thunder Pranabda had left. In fact, by most accounts, the budget was hardly on anyones mind as it became clear that perhaps this time, Sachin Tendulkar, would not flatter to deceive and would get to that elusive milestone. Worse, by the time Pranab-da was coming to the end of Part II of his speech, it became clear that this budget was far from the Big Bang which many hoped he would come up with. After all, it was an occasion which was set up for him. Backroom manoeuvres suggest that the UPA may be keeping a Plan B in place in case Mamata Didi walked off in a huff, and Dinesh Trivedi had set the stage for some possible outof-the-box moves as well. But Pranab-da flattered to deceive. In the initial part of his speech he did make the right noises on fiscal consolidation, unveiling five objectives which the government needed to address in the coming fiscal year to set things right. These

contained the right words: focus on domestic demand-driven growth recovery, address supply bottlenecks, and create conditions for the rapid revival of high growth in private investment. But, despite his admission that mere words were not enough, Pranab-das budget scored high on rhetoric, realism and good intent, but low on actual action on the ground. How exactly would he achieve the target of restricting central subsidies to under 2 percent of GDP in 2012-13 and further to 1.75 percent over the next three years? Theres no clear indication. I am determined to contain the increasing subsidy burden through measures including increased targeting. Brownie points for intent, once again. But just that, unfortunately. By the time people began understanding the fineprint better, Sachin had inched closer to that elusive landmark, and eventually got there. Reports coming in from everywhere by text messages and on social media suggested most offices had shrugged off the banality of the budget and got busy cheering the master for his feat. Pranab-da was left facing the brickbats for letting a big opportunity go by, for being a sore loser and seeking to tax Vodafone-like deals retrospectively (a move most feel may face a tough legal challenge) and for levying a cess on ONGC while asking LIC to buy ONGC stock before the move. A headline in The Economic Times perhaps summed up the mood on Saturday: On budget day, Sachin scores, said the paper, while another related headline said FM plays safe on a flat pitch. Not cricket, Mr Mukherjee may feel. But why blame Shochin, Pranab-da, when you clearly lost the plot and couldnt play what could have been a historic knock?

Indian budget lacks

game changing reforms:
US industry
The US India Business Council (USIBC), in an unusual short reaction, called Union Finance Minister Pranab Mukherjees Union Budget measured but without game-changing reforms.
PTI, Mar 17, 2012 ashington: The US industry has said Indias Budget for 2012-13 lacks the much-needed game changing reforms and called for a transparent taxation policy to attract more foreign investment. The US India Business Council (USIBC), in an unusual short reaction, called Union Finance Minister Pranab Mukherjees Union Budget measured but without game-changing reforms. Pranab Mukherjee The council noted it expects the coming Budget Session of Parliament to deliver on key reforms that would signal to foreign investors that India remains steadfast in its objective to achieve strong economic growth and expand global trade. Several policy announcements, especially in taxation, raised concerns, USIBC said. Given continuing apprehension about the anaemic global economic recovery, Indias policy environment must compete aggressively for international investment. For foreign inves-

tors to have confidence in India, a predictable and transparent tax environment is essential, USIBC President Ron Somers said. USIBC encourages the Government of India to support the Supreme Court decision on Vodafone and avoid any regressive policy changes. The 2012-2013 Budgets progressive reforms in civil aviation, infrastructure, and capital markets should not be undercut by inconsistent tax policy, Somers said. However, the council welcomed the liberalisation of FDI and external commercial borrowing in civil aviation, as well as allowing qualified foreign investors to directly invest in corporate bonds. It also hailed an increase in defence spending at a time of essential national security and technology cooperation. Diane Farrell, Executive vice president of USIBC, said: Predictability is vital for attracting and keeping the foreign investment necessary to attain the growth projections stated by Mukherjee.

Budget Fallout

Mukherjees ethical deficits

Budget 2012 and Pranab

By raising the cess on oil just after selling ONGC shares in the market and by seeking to change the Vodafone case ruling, the FM is setting very bad precedents
R Jagannathan, Mar 17, 2012

y any serious standard of ethical or moral conduct, Finance Minister Pranab Mukherjees Budget 2012-13 can be faulted on at least two counts. First, he was in ethical breach of market regulator Sebis insider trading regulations, which require corporate insiders to refrain from market purchases or sales when they are in possession of undisclosed price-sensitive information. The finance minister probably knew that the budget would impose a cess on domestically produced crude but still went ahead with the ONGC disinvestment earlier this month. Second, he has proposed changes in tax law that will essentially overturn a Supreme Court judgment in the Vodafone tax case by making the amendments retrospective all the way to 1962. This is nothing but an effort to change the rules of the game after losing the match fair and square. Lets take the first one first. In the budget, Pranab Mukherjee imposed an additional cess of Rs 2,000 tonne raising it from Rs 2,500 to Rs 4,500 a tonne on domestically produced crude oil under the provisions of the Oil Industry Development Act, 1974. The government is certainly within its rights to hike the cess. However, it came barely two weeks after it sold nearly 5 percent of ONGCs shares through an offer for sale on the stock exchange after Sebi specifically created a window to enable such a sale. There were very few investors keen on ONGC at that point. If investors had known about the forthcoming cess, the share sale would have flopped even more miserably. In any event, the finance ministry ultimately got Life Insurance Corporation (LIC) to bail out the issue. In the share sale, not only did LIC have to buy ONGC shares at a premium to market prices, but it was also found to have been buying ONGC in the weeks before the sale date almost like what a crooked promoter would do to rig prices. Only LIC knows if this was done purely in policyholders interests or at the bidding of higherups in the finance ministry.

But the budget cess takes the cake. The finance ministry which was the party most interested in the ONGC stake sale surely knew this cess hike was coming. Unless it claims the idea came up after the stake sale, this would amount to withholding crucial price sensitive information from investors ahead of a share sale. The only ethically right course of action for the finance minister to take assuming it wanted to set high standards of corporate governance, which, of course, has manifestly not been the case would have been to defer the ONGC stake sale till after the budget. There is also another issue: would LIC have bought up so many of ONGC shares if it knew the cess was coming? ONGC, Oil India and Gail the three public sector production and exploration companies already bear a huge share of the fuel subsidy burden that rightfully belongs to the budget. Now, there is also the cess to reckon with. The FM has added insult to injury. The Indian Express notes that LIC has been made to bleed after rigging. In the Vodafone case, the Supreme Court ruled in January that the company did not have to deduct tax at source (TDS) on its purchase of Hutchison Essar shares in an offshore deal. The court held that since the tax provisions were not applicable to a deal that done offshore, Vodafone did not have to deduct tax on the capital gains made by Hutchison. However, the budget not only clarifies that capital gains will have to be paid on share transfers done offshore where the underlying asset in an Indian one, but that this applies retrospectively all the way to 1962. The explanatory memorandum accompanying the budget says: For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India. As a clarification for the future, this is fine. But

retrospectively? The Supreme Court judgment on Vodafone was hailed because it set the principle that if the government wants to tax something, the law should explicitly provide for it so that foreign investors knew what they had to do. By trying to backdate the law, the government is not only trying to claw back the money it lost in the case, but is trying to say that it can change the rules at its sweet will. Fereshte Sethna, lawyer in the Vodafone case, has blasted the governments move as unconstitutional. He said: While prospective legislation was a clear route available to the government of India, it has chosen instead to pursue enacting of retrospective legislation that is harsh, oppressive, excessive, arbitrary and (with) penal consequences, hence rendering it liable to be declared unconstitutional. An era

of unwarranted tax uncertainty has potentially been ushered in vis-a-vis foreign investors into India. Firstpost agrees that this is ethically untenable, and will achieve the exact opposite of what the Supreme Court intended of providing foreign investors a clear set of rules. The rules are being put in place after the event, and the Financial Times notes that it will further dismay international investors already downhearted by the countrys unpredictable regulation. Surely, for a country which needs more investment, the finance minister could have avoided displaying this kind of ethical deficit? The Vodafone case will surely end up in court. For a government that has been repeatedly singed in recent court verdicts, this is clearly an unnecessary distraction.

get its money back?

Heres the twist whether Vodafone is spared the effect of retrospective amendments or successfully challenges them in court, it may never get all its money back.
Menaka Doshi, Mar 19, 2012

Will Vodafone ever

fter a four-year long court battle and several crore rupees spent on advisory and lawyer fees Vodafone won a longpending tax battle when the Supreme Court said its purchase of an Indian telecom company from Hutch was not taxable in India. For the last four years the tax fraternity in India has been divided into two camps. One, that believes that since the underlying asset was Indian, the Hutch-Vodafone transaction must be taxed in India. The other believes that the way Income Tax Act, 1961 is worded does not support an Indian tax claim on an overseas

transaction. The pro-revenue lot were deeply disappointed with the Supreme Court decision. In online debates considerable vitriol has been splashed on the judgment, the Chief Justices activist views on FDI and alleged issues of conflict regarding his sons employment with Ernst & Young have all been hot topics of discussion. A review petition has been filed by the Government and its fate was eagerly awaited. But now that may not mean much. Because the Government has proposed to change the tax law in order to tax Vodafone-like transactions retroactively.

That means after winning a four-year long tax battle Vodafone may still end up a loser. Unless. PAST PRECEDENT Senior tax counsel Dinesh Vyas believes that even if the Finance Bill is passed and the retrospective amendments come into force Vodafone maybe spared (without having to mount a challenge) because he says In the past, whenever the retrospective amendment was brought in to deal with an SC judgment, that particular SC matter which was decided, was excluded specifically. The National Agricultural Co-operative Marketing Federation of India (NAMFED) case (2003) makes a mention of this principle Such curative legislation does not in fact touch the validity of a judicial decision which may have attained finality albeit under the preamended law. The same principle has been relied upon in other cases as well. For instance the Supreme Courts decision in the S.R. Bhagwat & Ors vs The State Of Mysore on 12 September, 1995 cites this A Constitution Bench of this Court in the case of Cauvery Water Disputes Tribunal (1993 Supp. (1) SCC 96(II) had to pronounce on the validity of Karnataka Kauvery Basin Irrigation Protection Ordinance, 1991 by which an interim order passed by a statutory Tribunal supported by the decision of this Court dated 26th April 1991 which had ruled that the Tribunal had power to consider the question of granting interim relief since it was specifically referred to it, was sought to be displaced. Sawant, J., speaking for the Constitution Bench held that the said provisions were unconstitutional and ultra vires. In paragraph 76 of the Report the following observations were made : The principle which emerges from these authorities is that the legislature can change the basis on which a decision is given by the Court and thus change the law in general, which will affect a class of persons and events at large. It cannot, however, set aside an individual decision inter partes and affect their rights and

liabilities alone. Such an act on the part of the legislature amounts to exercising the judicial power of the State and to functioning as an appellate court or tribunal. So Mr. Vyas says Vodafone maybe spared but that may not be the case for other offshore transactions leading to the indirect transfer of Indian assets they may be assessed/re-assessed under the retrospective amendments. He also indicated that the proposed amendments in the Budget may bring cases as old as 16 years under scrutiny. ELP Managing Partner and tax lawyer Rohan Shah concurred with that. SUCCESSFUL CHALLENGE? Senior tax counsel Porus Kaka believes if Vodafone chooses to do so (once the Finance Bill becomes law) it could successfully challenge the retrospective amendments because (Mr. Kakas opinion paraphrased by the author) - They are not clarificatory amendments as is being made out to be but substantive amendments - They do not meet the tests laid out by the Supreme Court (reasonable being one such test) The National Agricultural Co-operative Marketing Federation of India (NAMFED) case (2003) offers some guidance on retrospective amendments The legislative power either to introduce enactments for the first time or to amend the enacted law with retrospective effect, is not only subject to the question of competence but is also subject to several judicially recognized limitations. The first is the requirement that the words used must expressly provide or clearly imply retrospective operation. The second is that the retrospectivity must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional. The third is apposite where the legislation is introduced to overcome a judicial decision. Here the power cannot be used to subvert the decision without removing the statutory basis of the decision. MONEY BACK! But heres the twist whether Vodafone is spared the effect of retrospective amendments or successfully challenges them in court, it may

never get all its money back. Remember, it had deposited Rs 2500 cr with the Income Tax department. The remaining Rs 8500 cr of tax was paid via guarantees and those guarantees were placed with the Supreme Court (Vodafone has confirmed to the author). The reason why it may not get its money back lies in Item 113 of the Finance Bill. The item, criticised for its breathless length, is harsher in what it attempts to do. It is draconian and pointed mostly at Vodafone. It seeks to deny any refunds to Vodafone and the like, irrespective of any court order. Here try reading it 113. Notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any authority, all notices sent or purporting to have been sent, or taxes levied, demanded, assessed, imposed, collected or recovered or purporting to have been levied, demanded, assessed, imposed, collected or recovered under the provisions of Income-tax Act, 1961, in respect of income accruing or arising through or from the transfer of a capital asset situate in India in consequence of the transfer of a share or shares of a company registered or incorporated outside India or in consequence of an agreement, or otherwise, outside India, shall be deemed to have been validly made, and the notice, levy, demand, assessment, imposition, collection or recovery of tax shall be valid and shall be deemed always to have been valid and shall not be called in question on the ground that the tax was not chargeable or any ground including that it is a tax on capital gains arising out of transactions which have taken place outside India, and accordingly, any tax levied, demanded, assessed, imposed or deposited before the commencement of this Act and chargeable for a period prior to such

commencement but not collected or recovered before such commencement, may be collected or recovered and appropriated in accordance with the provisions of the Income-tax Act, 1961 as amended by this Act, and the rules made there under and there shall be no liability or obligation to make any refund whatsoever. Well known Chartered Accountant T P Oswal says if 113 comes into force Vodafone will be denied any refund. Unless it challenges 113 in court and wins, Vodafone may have to bid adieu to the Rs 2,500 crore deposited with the Income Tax Department. The bank guarantees should have been cancelled by now or will be returned by the Supreme Court and so, that amount may revert or has already reverted to Vodafone. Lucky! The Finance Ministry has launched multiple attacks on the Hutch-Vodafone transaction and other such indirect transfers in the hope of collecting large tax amounts. I wonder how the Supreme Court will view these desperate attempts? And whether Vodafone will ever get all its money back? But the bigger worry is the number of retrospective amendments in this Finance Bill. More than 20! Through these the Government is trying to invalidate a score of important tax judgments it has lost in the past few years. What message does this send to the tax payer? That it is pointless to honestly argue your tax position in a court of law because a win may mean nothing. And then we wonder why so many Indians and Indian businesses are always looking for a way out or some manner in which to influence tax policy and implementation!

Vodafone tax: India Inc. wary about retrospective taxation

Supreme Court ruled that under existing rules, Vodafone was not liable to pay tax on the deal.
Sindhu Bhattacharya, Mar 18, 2012

s the industry saying that a transaction involving acquisition of Indian assets, which has not been taxed anywhere else in the world, should not be taxed in India either? Finance secretary RS Gujral wanted to know from industry representatives today when there were repeated queries on the possibility on Vodafones acquisition of Indian mobile phone assets in 2007 being taxed retrospectively. Are you saying that this transaction should not be taxed and instead excise duty should be raised from 12% to 14%? Gujral asked. Gujrals math works thus: The Vodafone deal, if taxed, would yield the government anywhere between Rs 35,000-36,000 crore. This is quite close to the amount the government could raise by hiking excise duty limit from 12% to 14%. As of now, the Budget proposes to raise excise to 12% from 10% earlier. From Gujrals answers, it appears possible that Vodafone may eventually have to pay tax to Indian authorities. Budget 2012-13 has proposed retrospective changes in tax rules and these directly impact Vodafones $2.2 billion tax case. This January, Vodafone won a five-year legal battle against Indias tax office in a Supreme Court ruling which said authorities did not have jurisdiction to tax the companys 2007 acquisition of Indian mobile phone assets. But tax professionals now say that the potential law change, which goes contrary to the SC ruling, could come in for challenge. The tax department has sought a review of the SC verdict. The review petition is yet to be heard by the court. On persistent queries from industry representatives on the Vodafone case and their apprehen-

sions that this could act as a deterrent to other foreign investment, Gujral said, Why should such a transaction not be taxed anywhere in the world? This is not an issue of double taxation and all we have said is that the company should remit 10 percent withholding tax on the amount when transaction was not taxed anywhere else in the world. So does this mean the executive and the judiciary will be at loggerheads on this issue? Gujral said the clause on taxation with retrospective effect does not indicate any uncertainty in Indian business environment and was unlikely to impact FDI inflow. Two days back, Vodafone had said in a statement it was examining the proposed rule change with its lawyers, but believed there would be no impact. We do not believe this retrospective change in tax law should have any impact on the final judgment handed down by the Supreme Court in our tax case. We continue to have faith in the Indian judicial system, the company had said. In the Vodafone case, Indias tax office had argued the companys deal to buy the local mobile phone operations of Hutchison Whampoa was liable for tax because most of the assets were in India. Vodafone, the worlds largest mobile operator by revenue, had argued that Indian tax authorities had no right to tax the transaction between two foreign entities. Supreme Court ruled that under existing rules, Vodafone was not liable to pay tax on the deal.

legally change tax law?

Vodafone case: Can govt

The government on Friday proposed retroactive changes in its tax rules, prompting speculation that Vodafones $2.2 billion tax case could be reopened
Reuters, Mar 17, 2012

he government on Friday proposed retroactive changes in its tax rules, prompting speculation that Vodafones $2.2 billion tax case could be reopened, although a senior government official denied the government was looking to raise any fresh demand on the British mobile phone giant. Still, tax professionals said the potential law change is likely to come in for challenge. They have amended the law because the Supreme Court found the law deficient on some

grounds, said Neeru Ahuja, a partner at Deloitte Haskins & Sells, referring to the Vodafone case. Now of course the issue is: can the government legitimately do this, she said. Vodafone in January won a five-year legal battle against Indias tax office in a Supreme Court ruling, which said authorities did not have jurisdiction to tax the companys 2007 acquisition of Indian mobile phone assets.

The tax department has sought a review of the Supreme Court verdict. The review petition is yet to be heard by the court. In its annual budget presented in parliament on Friday, the finance ministry proposed changes in several tax rules on a retroactive basis to 1962, which some experts took as a clear indication that the government was looking to tax the Vodafone deal and other mergers. The way they have proposed this law, everything they can look at again. They have completely changed the law with retrospective amendment from 1962, said Ahuja. Finance Secretary RS Gujral later told reporters that there was no question of raising any fresh tax demand on Vodafone, but referred to the review petition filed by the tax office in the Supreme Court. Separately, Vodafone said in a statement it was examining the proposed rule change with its lawyers, but believed there would be no impact. We do not believe this retrospective change in tax law should have any impact on the final judgment handed down by the Supreme Court in our tax case. We continue to have faith in the Indian judicial system, the company said.

In the Vodafone case, Indias tax office had argued the companys deal to buy the local mobile phone operations of Hutchison Whampoa was liable for tax because most of the assets were in India. Vodafone, the worlds largest mobile operator by revenue, had argued that Indian tax authorities had no right to tax the transaction between two foreign entities. Indias Supreme Court ruled that under existing rules, Vodafone was not liable to pay tax on the deal. The proposed amendment in tax rules may also be also significant for other multi-national companies including Kraft Foods, SABMiller and AT&T Inc, which also face potential tax demands in India over cross-border deals. Another Indian finance ministry official, who declined to be identified, said the government intended to tax such cross-border deals and estimated total tax dues of 350-400 billion rupees under the proposed law change. Dinesh Kanabar, deputy CEO and chairman of tax at KPMG called the proposed retrospective amendment in tax rules a big negative. If an assessee gets an answer after years of litigation only to find the law amended retrospectively, why litigate?, he said.

Why not withdraw

tax breaks to companies?
The size of revenue forgone through tax breaks is twice as big as the subsidy bill. Isnt this the place to start fixing the fiscal deficit?
Yogi Aggarwal, Mar 17, 2012 he budget presented by Pranab Mukherjee on 16 March was notable for having had to be worked out under difficult circumstances. A government under siege from one of its own allies and under threat of being reduced to a minority does not have many options. It is to Mukherjees credit that he made the best of his limited options and tried to present a budget that tried to continue with government spending on programmes and subsidies for the poor. He has promised to limit the fiscal deficit to 5.1 percent despite it having vastly overshot last years target of 4.6 percent to reach an esti-

Budget 2012:

mated 5.9 percent. Is the deficit target credible? The answer to that question will determine whether we go in for another year of high inflation and low growth or whether we are able to make it comfortably to the growth level of recent years. Though the finance minister has brought back excise duties to the level they were before the 2008 crisis much more also needs to be done than has been announced to see that the deficit stays at just 5.1 percent and does not overshoot the target.

Everyone agrees that there has to be a more forceful cut in subsidies. What is little realised is that tax exemptions given over the years lead to a far greater loss to the exchequer than subsidies and these would have to be rationalised, and many of them cut so that the deficit is controlled. Last year the gross subsidy bill was Rs 217,000 crore, of which the major subsidies of food, fertiliser and petroleum amounted to Rs 209,000 crore, up 27 percent from the previous years Rs 165,000 crore. This was largely due to an increase in petroleum and fertiliser subsidies by Rs 49.000 crore because of the increase in crude prices. The only sensible way to handle this is what is done all over the world. Petrol, diesel and LPG prices are directly linked to the price of crude. For a short time during the NDA government, this was also the practice here but now it seems to have been discarded for fear of the vocal middle-class, including many of the readers of this website, whose interests are defended by the media and most political parties. Its about time the middle class stopped expecting protection, especially since it is more prosperous than it ever was in the past. What is needed is that subsidy for petroleum products should be fixed per unit volume, and then let the prices change every week along with the change in international oil prices. At present, the underrecoveries on petroleum products are Rs 12 per litre of diesel, Rs 29 per litre of kerosene and Rs 440 per cylinder of LPG. These could easily be lowered to cut subsidies. Though this year the finance minister has provided for crude prices to be around $ 115 a barrel, these are likely to be higher and beyond the governments control. Any rise in crude oil prices beyond this level would again throw subsidy calculations out of gear unless the amount of subsidy per litre of kerosene or diesel or per cylinder of LPG is fixed. This should be the policy even if diesel prices rise in tandem with international ones and lead to inflation. At least we will know where the in-

flation is coming from rather than go into denial mode. The expenditure on schemes like NREGA or the food security bill is another matter. They put money or foodgrains in the hands of those living at subsistence levels. Apart from having the effect of helping lift such families from poverty, they lead to higher consumption of basic goods. This is good for the economy as it puts money back into circulation into company sales. One valuable budget proposal was to double customs duty on gold imports from the ridiculously low 2 percent to 4 percent. Gold imports, at an astounding $50 billion, are the second largest imports into the country after oil, and twice the value of machinery imports. This one step alone would give around Rs10,000 crore annually to the government, and could easily be raised further without any increase in smuggling since the reward for it would be less than the risk faced. A little known fact relates to the revenue foregone by government from companies because of various deductions offered. A document released along with the budget papers, Revenue forgone under the Central Tax System: Financial Years 2010-11 and 2011-12 makes some interesting revelations. The benefit to companies from deductions in customs duties is an amazing Rs 270,131 crore, which is nearly twice the actual customs duty collected of Rs 153,000 crore. Similarly the excise duty foregone is Rs 212,167 crore, some 50 percent more than the Rs 146,000 collected. In direct taxes paid by companies and individuals, the revenue foregone is Rs 93,612 crore, while corporate tax payable was Rs 228,158 crore. The total revenue foregone is Rs 575,910 crore, more than twice the subsidy bill of Rs 217,000 crore. Some of the deductions offered were probably necessary at the time they were introduced, but the finance ministry could surely trim them down. These should be easier to cut than subsidies. Unless, that is, it fears the corporate sector even more than it does the middle class.

Aadhaar card important

The Finance Minister has given a boost to the UID scheme with a budgetary allocation and allowing subsidies to be given based on it. While the IT industry has cheered for it, there are concerns as well.
FP Staff, Mar 17, 2012

Why Budget 2012 makes that

f you havent applied for the Aadhaar card yet and were wondering about how serious the government is about the project, Finance Minister Pranab Mukherjee has laid all doubts to rest. Pranab Mukherjee has allocated Rs 14,000 crore for the scheme which aims to provide unique identification numbers to every citizen in the country. The sanctioned amount is expected to aid in the enrollments of around 40 crore Indians by June 2013. The Aadhaar platform is now ready to support the payments of MG-NREGA; old age, widow and disability pensions; and scholarships directly to the beneficiary accounts in selected areas, Mukherjee said while delivering his budget speech. An important feature the government is hoping to use the Aadhar numbers for is the transfer of subsidies directly to people who need it most and prevent wastage. The Finance Minister spoke of a pilot project on in Mysore under which LPG cylinders for cooking were being sold at market rates and the subsidy that buyers were eligible for was being directly transferred into their bank accounts based on their Aadhar numbers. This scheme allowed the government to allot subsidies to buyers depending on their economic status. There are similar projects for direct transfer of subsidy for kerosene in Alwar, Rajasthan and to validate ration cards in Jharkhand. Similar schemes will be rolled out in 50 districts across the country. The IT industry has come out in support of the governments plan to support the UID scheme

as they believe it could provide them with many opportunities to be involved given the number of devices and IT infrastructure needed to carry them out. Scaling up of the Aadhaar project as well as enabling it to support PDS will greatly benefit the common man, Naresh Wadhwa, President and Country Manager, Cisco (India and SAARC) was quoted as saying in the Business Line. The Finance Minister also accepted the recommendations of a task force headed by Nandan Nilekani on transferring direct subsidies related to fertilisers directly to farmers. Under the scheme a mobile- based Fertiliser Management System (mFMS) has been designed to provide information on the movement of fertilisers and subsidies, from the manufacturer to retailer level. To be rolled out nation-wide during 2012, the subsidy due will be initially be sent to the retailer and in a later stage of the project directly to the farmer. However, banks have expressed concerns over the transfer of funds directly to the customers saying they might need to scale up their IT capabilities. They had also expressed doubts over the the Know Your Customer norms being followed by the smaller banks and if identities were being verified properly. Of course there are other opponents to the Finance Ministers plans as well like this group of people in Mizoram who were opposed to the Aadhar unique identification card on the grounds that it was Satans plan to number them as part of his plan to rule the world.

Breaking down the Budget

Dissecting Budget 2012 with Firstpost

FP Editors, Mar 16, 2012 expenditures. Big-bang reform measures were completely missing. The introduction of a negative list for service tax was probably one of the few things the FM got right, although in the short-term, it is very likely to trigger cost-push inflation, both speakers said. Indeed, inflation might not come down in a hurry. Nevertheless, given that the fiscal deficit is being projected at a lower 5.1 percent for the next financial year, the Budget may give some reason for the Reserve Bank of India to cut interest rates (at least as a token gesture) next month. The relief give to the middle class (the income tax exemption limit was hiked to Rs 2 lakh from Rs 1.8 lakh) was also too meagre given the pace of inflation.

damp squib. Thats what the Union Budget was.

Finance Minister Pranab Mukherjee could have done a lot more on cutting subsidies and boosting growth. But he didnt. In a post budget discussion Firstpost Editorin-chief R Jagannathan and Sourav Majumdar, editor of Entrepreneur magazine, summed up the feelings of most people when he said, He (the FM) did a little here, a little there he could have done much more. It was billed as Mukherjees make-or-break budget. As it turned out, he didnt make much of the opportunity nor broke anyones back by trying to do too much. The Budget contained proposals to increase revenues, but spoke very little about curtailing

Tax exemption limit hiked to

Rs 2 lakh

inance Minister aka Pranab da, in his seventh budget speech, today, has hiked the exemption limit for general category individual tax payers to Rs 2 lakh from the earlier Rs 1.8 lakh. This measure will provide tax relief upto Rs 2,000 to every tax payer in this category. He also proposed that the upper limit of the tax slab be increased to Rs 10 lakh from Rs 8 lakh earlier. A 10 percent tax rate has been proposed for the income bracket between Rs 2-5 lakh, 20 percent for those in the bracket of Rs 5-10 lakhs and 30 percent for those earning above Rs 10 lakh. In another relief to individual taxpayers, a deduction of upto Rs. 10,000 has been proposed for interest income from savings bank accounts. This would help a large number of small tax-

FP Editors, Mar 16, 2012 payers with salary incomes upto Rs 5 lakh and interest from savings bank accounts upto Rs 10,000 as they will not be required to file income tax returns. According to CNBC-TV18 experts, salaried individuals who were earning Rs 10 lakh, were were paying a tax of Rs 1.52 lakh. This will now reduce to Rs 1.3 lakhs, a savings of Rs 22,000. The finance minister has also proposed a deduction of Rs 5,000 for preventive health check ups. For senior citizens not having an income from business, an exemption from payment of advance tax has been proposed. The increase in tax slabs was pretty much on the wishlist of experts as persistently high

So will inflation
Ooverall, high service charges, climbing inflation and lower chances of an interest rate cut is not such a great way to start the new financial year.
FP Editors, Mar 16, 2012

Service tax: Your bills will jump.

ts here. A giant service tax net has been cast far and wide on the Indian economy and hauled in a whole boatload of services.

In his Union Budget speech, Finance Minister Pranab Mukherjee announced the widely expected negative list for service tax. The list contains 17 services that will be exempt from tax; every other service will now be subject to tax. In addition, the service tax rate was also raise to 12 percent from 10 percent. The negative list includes services provided by the government, renting of residential dwellings, entertainment and amusement services, urban railways, metered cabs, agriculture and animal husbandry. There is also a list of exemptions covering healthcare, services provided by charities, religious persons, sportspersons, performing artists in folk and classical arts, independent journalists and services by way of animal care or car parking. The tax will raise the cost of several services, but will help the government raise more revenues from a sector that continues to thrive even amid a slowdown in other parts of the economy. Until now, services taxes accounted for a mere 5 percent of the governments (centre and states) revenues. The service tax proposals are expected to yield Rs 18,660 crore, Mukherjee said. Given that the sector has such a huge influence on the economy and has been minimally taxed so far, no one can really complain about a wider tax net. There are two implications of this move: One, it will raise inflationary pressures throughout the economy. Services account for nearly 60 percent of economic activity, so price hikes

in this sector will definitely affect overall prices. That means inflation, which cooled to 6-7 percent in February after raging above 9 percent for most of 2011, will continue to trouble the economy this year. That will add to pressure already simmering on other fronts; oil prices are surging again (which will have an impact on local fuel prices) even as food prices threaten to spurt. Two, the Reserve Bank of India will find it even tougher to cut interest rates if its waiting for inflation to calm down. Now, it may be next to impossible, especially since the government has increased taxes on several goods as well. The excise duty on goods has been raised to 12 percent from 10 percent, which is likely to prompt immediate price hikes from manufacturers. Together, they just make it more difficult for the RBI to cut rates. Given that the government has also not committed to any significant expenditure cuts (there was practically no mention of cutting fuel, fertiliser or fuel subsidies), RBI governor D Subbarao is unlikely to jump at the chance to cut rates next month. The RBI has repeatedly urged the government to get a handle on its wayward finances in the past. However, apart from an assurance of reducing the fiscal deficit to 5.1 percent by the end of the next financial year, there was no road map on how it plans to reach that mark. So, overall, high service charges, climbing inflation and lower chances of an interest rate cut. Not a great way to start the new financial year.

Budget 2012 power sops will trim

your future electricity bills

The power sector has been one of the largest beneficiaries of the budget. It should help moderate future power tariff increases.
Sindhu Bhattacharya, Mar 17, 2012

ew Delhi: Power producers have got enough fuel for growth from Pranab Babu in the budget. Freeing of coal and liquefied natural gas (LNG) imports, extended tax breaks for new projects, permission to replace high-cost rupee debt with foreign borrowings through external commercial borrowings (ECBs) are some of the sop given to the sector. You as a consumer may be saved from an immediate increase in power tariffs due to these reliefs. Even if an increase is effected, it may be lesser than proposed. The budget has proposed duty-free imports of coal and LNG two critical raw materials used in power generation and this will reduce power companies cost of generation on cheaper fuel imports. Which will benefit your pocket, if only in a small way. Power sector experts have welcomed the move, saying that though the FMs tax breaks and other sops to power companies will not really help fuel shortages, they may make power generation costs a wee bit less. Already states such as Tamil Nadu (300 percent) and Andhra Pradesh (90-100 percent) have sought massive tariff hikes in the last few months on rising costs of power generation and their proposals are pending with their respective regulators. Fridays budget may help soften the blow. India imports 45-50 million tonnes of coal each year, which (in calorific terms) means 15 percent of its annual requirements. Going forward, imports are only going to increase further so cheaper imports will also have a long term impact on power generation costs and therefore power tariffs. Even on the fuel supply side, the budget has asked Coal India to sign agreements with power producers besides talking of constituting an inter-ministerial group for periodic review of allocated coal mines. Power producers have got enough fuel in the budget to kickstart sectoral reforms, says Ficci Director (Economy & Research) Soumya Kanti Ghosh.

Speaking to CNBC TV-18, Tata Power Managing Director Anil Sardana said on Friday that the waiver of import duty for thermal power companies will be beneficial for upcoming projects. And the removal of customs duty on imported coal, natural gas, LNG, and incentives for the mining sector will marginally improve coal supply. The budget sops come at a time when 52 power projects, being developed at a cost of about Rs 3.42 lakh crore, could face the risk of default on fuel shortages and environmental hurdles. India is expected to see a capacity addition of 80,000 mw in the 12th Five-Year Plan (2012-17) and a significant chunk would be from private players. The top executives of private power companies had met Prime Minister Manmohan Singh in January to apprise him of sectoral woes. Following the meeting, the Prime Minister set up a Committee of Secretaries (CoS), headed by his Principal Secretary Pulok Chatterjee, to look into the issues. Later the CoS decided that Coal India would sign fuel supply pacts for power projects for a period of 20 years. For power plants that have been commissioned up to 31 December 2011, FSAs will be signed before 31 March 2012, the PMO had said in a statement. Fuel Supply Agreements (FSAs) would be signed for the full quantity of coal mentioned in the Letters of Assurance (LoAs) for a period of 20 years. If the supply is below 80 percent, then Coal India would be penalised, whereas in case the supply is above 90 percent, the company would be provided an incentive. In case Coal India is unable to meet the obligations, the company would have to arrange for fuel through imports or other arrangements. The PMO had also noted that these arrangements would provide relief to power plants with an estimated capacity of more than 50,000 mw.

just got costlier

Finance Minister Pranab Mukherjee proposed a hike in excise duty to 12 percent from 10 percent. It will prompt an increase in product prices from manufacturers, already hit by high input costs.
FP Editors, Mar 17, 2012

Everything in your living room

Budget 2012:

et ready to pay more for a whole host of consumer durables from air conditioners and washing machines to microwave ovens to cameras. Finance Minister Pranab Mukherjee proposed a hike in excise duty to 12 percent from 10 percent in the Union Budget, which will prompt an increase in product prices from manufacturers, already hit by high input costs. For consumer goods companies, it will be the second year of challenging growth after last years dismal single-digit sales growth. The mild income-tax exemption relief is unlikely to help consumer sentiment; any gains from lower tax liability will be offset by the higher prices of most consumer goods. Prices of most consumer goods are expected to rise between 4-6 percent, according to brokerages. Heres a list of some key price changes. Air conditioners: The excise duty hike will push prices higher by about Rs 1,000, according to experts. Washing machines: Prices are expected to go up by at least Rs 600 per unit. A 6-kg, fullyautomatic front-loading washing machine will be more expensive by Rs 1,200 or so. Refrigerators: Prices will go up by Rs 800 or so. A refrigerator costing Rs 10,000 could cost about Rs 400 more. LCD and LED television sets: Expect to see a very marginal price cut here, if any. While LCD and LED television sets have been made exempt from customs duty, the hike in excise duty is likely to offset any cost cuts. Cameras: A 10 percent import duty was imposed on digital still cameras, which should raise price by Rs 1,000-1,00,000. Until now,

digital cameras had been exempt from import duties. Most cameras sold in India are imported. Mobile phones: There has been a reduction in duties on some phone components, so that should bring down the cost of mobile phones marginally. Computers and laptops: These are likely to get more expensive because of the excise duty hike. A additional countervailing duty of 2 percent on imported computers is likely to lift the price of imported computers even higher. Computer peripherals are also likely to face a price hike. Bicycles: If you have a taste for imported bicycles, get ready to pay more because customs duty has been hiked to 30 percent from 10 percent, while customs duty on bicycle parts has increased to 20 percent from 10 percent. That will prompt a 3-4 percent hike in prices. The price of local bicycles will go up by more than Rs 100 per unit, according to a PTI report. Luxury goods: The excise duty will make everything from premium segment cars to cosmetics more expensive. An increase in basic customs duty from 60 percent to 75 percent on completely built units (CBUs) of large cars, multi-utility vehicles (MUVs) and sports utility vehicles (SUVs) permitted for imports will make premium cars costlier by about Rs 1 lakh. Gold: A hike in the customs duty to 4 percent from 2 percent on standard gold, platinum and the increase in on gold jewellery will make gold and platinum jewellery more expensive. Consumers will have to shell out at least Rs 250 on unbranded gold jewellery and about Rs 500 more on gold bars of 10 grams, according to media reports. However, branded silver jewellery has been exempted from excise duty, so maybe its time to splurge on silver.

If you buy a house,

you will be FMs tax collector
Now get ready to become the personal income tax collector for the Finance Minster.
Sanjit Oberai, Mar 17, 2012

Budget 2012:

he Finance Minister in his Union Budget speech on Friday proposed the imposition of TDS (tax deducted at source) on the transfer of immovable properties (other than agriculture land) at the rate of 1 percent for deals worth more than Rs 50 lakh in urban areas and Rs 20 lakh in other areas. The change is expected to be implemented from 1 October, 2012. As per the proposed plan, the buyer has to deposit 1 percent of the sale value as TDS. It is proposed to insert a new provision to provide that every transferee, at the time of making payments or crediting any sum by way of consideration for transfer of immovable property

(other than agricultural land) shall deduct tax at the rate of 1 percent, according to the budget memorandum. The TDS has been imposed essentially to ensure that property transaction details are captured by the registrar, Om Ahuja, CEO, Residential Services at Jones Lang Lasalle, a real estate consultancy told Firstpost. In other property-related proposals, the tax rebate of 1 percent on housing loans up to Rs 15 lakh has been extended for another year. Low-cost homes were also kept out of the service tax net.

Part two

run-up to the budget

Some suggestions for Pranab-da

Union Budget 2012:

The speech that Pranab should make

There is nothing as energising as tax cuts. I am opting for a simple regime where taxes are extremely reasonable and easy to calculate and pay.
R Jagannathan, Mar 15, 2012

Budget 2012-2013
Madam Speaker, I rise to present the Union Budget for 2012-13. Unlike in the past, I am trying to set a new trend of brevity with this budget. I do not plan to make a long speech on the economy and where it is headed when the pre-budget survey is already with you. Last year, I made the mistake of making a budget speech with 13,877 words and I must confess if I was not the one reading it, I would have fallen asleep half-way when the most important parts were at the end of it. This years budget speech is less than a quarter the size of last years but I hope to curtail it even further next year. I seek your indulgence this year. I will also avoid putting in too many figures and outlays in the budget text these are anyway available in the detailed budget documents and only speak about the operative parts that impact us all as individuals and companies and as a society. The broad policy objectives of this budget are as follows: First, to revive growth and investment in the economy by restoring business confidence. Without growth, nothing else can be achieved. Second, to make this growth inclusive by ensuring that all Indians rise above poverty and are well-fed, educated and healthy. Third, to ensure that all the expenditures made in the budget are well spent and not wasted. Fourth, to curb inflation by gradually closing the gap between revenues and expenditure. So let me begin with the first objective reviving business confidence. There is nothing as energising as tax cuts. I am opting for a simple regime where taxes are extremely reasonable and easy to calculate and pay. In personal taxes, I would like to make three far-reaching changes. Given rising costs of living, I am raising the tax-free income limit to Rs 3,00,000 (Rs 3 lakh per annum) for all Indi-

ans. There will be no separate limits for women or senior citizens, but since the limit has been raised for all substantially, everyone will benefit. Next, to promote saving, I propose to club all investments currently deductible from income provident fund contributions, equity-linked savings schemes (ELSS), post office savings schemes, medical insurance, insurance premia, infrastructure bonds, interest payments on home loan EMIs, etc under an omnibus Section 80 C with a total limit of Rs 3,00,000. In other words, if you want to take the whole Rs 3 lakh as deduction on home loan interest, you can. If you want to claim all of it as ELSS investment, you can. The choice is yours. This means anyone earning up to Rs 6,00,000 per annum and who invests half of it in various savings of insurance schemes will be free from tax. This brings me to the next big change: I propose to abolish all tax brackets and impose a flat tax of 20 percent on earnings above the taxfree limit. All perks will be taxed at 20 percent flat as will income. I know many people have developed a living out of creating ingenious perks that are taxed less or not at all, but with the flat tax, we will take all the heartburn out of taxation. We will have a clean, transparent and simple tax system. Inflation is the scourge of the fixed income groups. Since there is no chance that we can abolish inflation permanently and it may not even be advisable to have a zero-inflation economy henceforth the tax slabs will be automatically indexed to inflation. Not entirely, but the tax-free bracket will be raised each year at the previous years average inflation rate minus 2 percent. To give the middle class an inflation-resistant savings instrument, the government of India will launch inflation-index bonds where the rate of interest, to be reset quarterly, will be the previous years average inflation rate plus 2 percent. This brings me to corporate taxes. With a view to reviving business confidence, this year I plan to lenient this year. First, the corporate surcharge of 5 percent is being abol-

ished. Second, I propose to abolish the minimum alternate tax (MAT) altogether. The reason is simple: MAT was introduced in order to tax companies that somehow manage to avoid them by taking refuge under various provisions like setting up shop in backward areas or in export processing zones, or software technology parks, or whatever. The point is, these companies avoided tax because they took the incentives to do what the government wanted them to do. It makes no sense then to tax them for doing what we wanted them to do which is invest for growth. So the 18.5 percent MAT is being abolished with effect from financial year 2012-13.

companies and even the government to raise capital efficiently. This budget will propose two changes in taxes a halving of the securities transaction tax on both shares and derivatives, and the imposition of a long-term capital gains tax on financial assets at 10 percent which is half the flat tax rate of 20 percent, subject to the usual cost inflation adjustment. I am sure the rich will not mind paying this small tax which is not only moderate, but comes over and above the shift to lower taxes in general for all classes of taxpayers. Between them, the hike in service tax and its extension will raise more revenues than I will lose in direct tax concessions to individuals and companies. I, of course, do not expect even direct tax collections to fall since better compliance and economic buoyancy will improve my revenues. This brings me to indirect taxes. Once again, to prepare ourselves for the introduction of GST, excise and service taxes have to be in alignment. So, this year I have decided to align both service and excise at 12 percent. I am sure the restoration of business confidence and the increase in post-tax disposable incomes in the hands of consumers will cause no dent whatsoever in corporate sales due to the hike in service and excise. This brings me to customs duties. Madam Speaker, we have simply too many tax rates and too many duties like basic customs, special duties, and countervailing duties. I would like to simplify with a few important exemptions for agricultural products and products in sensitive sectors like cigarettes, excise, life-savings drugs, and some others which I will not list now. The peak rate of customs duty will be 7.5 percent. The average customs duty on all products will be 5 percent, and countervailing duties will be levied at a rate applicable to central excise on that product. Once GST comes into being, the countervailing duties will rise to the level of state and central GST put together. Of course, the country reserves the right to levy antidumping duties where warranted.

As for the Direct Taxes Code, we will implement it from October 1 this year, after the parliamentary committee submits its final recommendations. I have anyway tried to incorporate some of the suggestions it has made in this budget. India is largely a service economy, with nearly 55-60 percent of our GDP coming from services. Services have been growing robustly, often at 9-10 percent annually. However, it is grossly undertaxed. With a view to expanding the scope of service tax, and also in preparation for a smooth changeover to a Goods and Services Tax once states agree to it, this budget proposes to extend service tax to all sectors barring a short negative list among the sectors excluded will be education and health services, financial services, including stock exchange and banking transactions, and a few others. I also propose to raise the service tax to 12 percent the level it was in the pre-Lehman crisis period. We need buoyant markets to help

What will this do to our domestic manufacturing? I expect our domestic manufacturing sector to become more competitive as it can import cheaper raw materials and export at a cheaper price. There will be some casualties, but the overall gain to the economy will be larger than the failure of a few uncompetitive companies. I expect the changes made in direct and indirect taxes to result in a net increase in revenues, but I am deliberately not trying to quantify it though the budget papers do make estimates of tax revenues since these changes will take some time to work themselves out through the economy. Where needed, both the Central Board of Direct Taxes and the Central Board of Customs and Excise will issue the necessary clarifications and make small changes to the scheme, if warranted. But these changes will put India on the road to 10 percent growth over the next two or three years. The remaining part of my budget speech deals with reforms and structural changes that will improve the quality of both revenues, and expenditures. First, GST. The Goods and Services Tax is the biggest single reform planned by this government, and so we will leave no stone unturned to get it legislated as soon as possible. Some states are objecting to it since they are worried about a potential drop in revenues. I would like to encourage them by making an open-ended promise that for the first three years the Centre will fully compensate them for any revenue losses with the full knowledge that overall we wont have to pay out a single rupee as compensation. I hope they will now agree to introduce GST from next year and make the necessary investments in IT infrastructure this year. Second, black money. Madam speakers, we have expended a lot of energy in the last few years over black money both at home and abroad. While we will continue to make changes in tax treaties with the tax havens like Switzerland and also in our own laws to discourage the creation of black money, we need to do something practical that will actually enable us to get some of this money back and put it to use in our country.

So, despite all the moral hazards involved, I have decided to bite the bullet and propose a tax amnesty scheme for all Indian wealth held abroad without disclosure. Our scheme will be simple to understand and administer. Any Indian citizen remitting money from abroad under this scheme will be issued 10-year bonds in a new India Long-term Infrastructure Fund that will carry no interest. There will be an additional 15-year bond that will carry 1 percent interest. Both bonds will be listed on the stock exchanges and can be traded. Those taking advantage of the scheme will be given immunity from prosecution and roving enquiries on the source of funds. Funds generated from this amnesty scheme which will be open for the next 6 months will be used to fund infrastructure projects. I expect to garner Rs 50,000-1,00,000 crore conservatively.

Third, subsidies. Honourable members will have noted that our subsidy bills are becoming unsustainable. In the past we have tried to protect citizens from price increases, but the net result of this policy has not been lower inflation but higher dependence on imported oil and a fall in production. Three subsidies food, fertiliser and fuel account for over Rs 3,25,000 crore of our annual expenditures and more than two-thirds of our already high fiscal deficit. This is the road to ruin. I propose to start fixing the subsidy problem from this year. In the first stage, I propose to end all fertiliser subsidies which will top Rs 1,00,000 crore this year and instead compen-

sate farmers fully for the higher prices of fertilizers by giving them an above normal increase in minimum support prices. I see two benefits from this: one, the imbalance in the use of urea vis--vis other phosphatic and potassic fertilizers will end. Also, more investments will start flowing into the fertiliser sector, reducing our dependence on imports. However, in the short-term, this will increase our food subsidy bill since the increase in food prices cannot be fully passed on to the poor in one go. We will raise the issue prices of foodgrain sold through the public distribution system in several stages. I expect a rise in the food subsidy bill by around Rs 50,000 crore this year as a result.

who are ineligible from those who are eligible. I see many benefits flowing from this. First, our oil companies will improve their profitability and begin competing for customers. Today, they have no incentive to compete or improve customer service. Many private players will also enter the picture and offer gas at competitive prices. Secondly, higher prices will force people to conserve scarce fossil fuels. The gradual deregulation of diesel will increase road transport costs in the short run, but in order to mitigate the hardships of small truck and bus operators, we are working out an interest subvention scheme under which old vehicles can be replaced by new fuel-efficient vehicles and financed by low-cost loans. Government will subsidise such loans to the extent of 5 percent this year, three percent next year, and 1 percent in the third year. I expect the automobile sector to boom and create many more jobs as Indias ageing fleet of old trucks and buses is replaced with a young, fuelefficient fleet. Levels of pollution in cities should also fall as a result. With these changes in mind, it was not considered necessary to impose a tax on diesel cars, which are anyway more fuel-efficient on the highway than petrol cars.

As for fuel subsidies, we have already deregulated petrol and aviation fuel. The bulk of our subsidies are really in diesel, kerosene and cooking gas (LPG). In diesel, we will move towards deregulation in stages, by raising diesel prices by Rs 2 per litre every second month for the next one year. If international oil prices move adversely, we will also cut some of the duties on fuels to soften the blow. But deregulation will be full and total by 1 April 2013. As for kerosene, we are not touching it now, but as soon every citizen gets a Unique ID, we will consider cash transfers in lieu of subsidy. As for cooking gas, we will do the same, but till then we will limit it to four subsidised gas cylinders for existing connections. Those using more than four cylinders a year will pay the full market price which will be around Rs 800 per cylinder. All new customers will have to pay full market prices till the UID scheme separates those

Fourth, expenditure management. Madam speaker, the bane of our budgeting system is that there is no way to check wastage and corruption bedeviling a huge part of our outlays for various schemes and projects. I am proposing two changes from this year to tackle this endemic problem. One, we will create a permanent expenditure monitoring system both in the finance ministry and in the various spending ministries with the explicit purpose of giving real-time information on what is happening to projects, their state of implementation, cost overruns, etc. This way we can find out if a project is not going to achieve its objectives, and scrap it before it is too late. Moreover, these expenditure cells will also have to achieve certain efficiency ratios consistently and reduce them over time. Else, their funding will be cut and they have to fend for themselves. For example, if we plan to spend Rs 40,000

crore on our flagship Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the cost of administering it should not be more than, say, 5 percent of the corpus, and it should fall over a period of time through internal efficiency measures. This will send a strong message that government is not an endless source of easy money. The second reform we are proposing is that all schemes proposed by the administrative ministries must come with their own funding plan it could be through a cess for road-building, but more often than not, new schemes should be funded through public-private partnerships and appropriate policy changes. Only schemes that will never get funding and are vital to our people should be directly funded by the exchequer. Most important, and this is what will get the fiscal deficit down in stages, we have decided that till we achieve a fiscal deficit of 3 percent of GDP, annual expenditure increases will be kept at half the level of projected revenue growth with the figures being reviewed every quarter. Fifth, revamp of social spending schemes. The flagship MGNREGS is not doing too well, despite improving rural incomes dramatically over the last five years. The main problem is corruption and bad scheme design. In many places the scheme is looking like a dole without creating worthwhile assets that will improve agricultural and rural productivity.

Our party is also committed to Food Security, which has been opposed by many states as being anti-federal. Some members of the National Advisory Council are also unhappy with the centralised structure of the scheme. Taking all the criticisms and suggestions for improvement into account, the central government has decided to merge both social security schemes into one where there is both income generation and food security. Under the revamped scheme, MGNREGS wages will be paid partly in cash and partly in terms of cheap foodgrain. Labour under MGNREGS will be used to build assets for food security godowns, storage, rural link roads, etc. The scheme will also be made into an off-peak agricultural season scheme; during the peak agricultural season, when demand for labour is high, only cheap grain will be supplied to beneficiaries. We are, however, aware that the scheme may not always work as intended, and in true federal spirit, we are willing to fund states which want to implement the scheme differently with their share of the MNREGS/Food Security funding plan. We are also willing to allow the scheme to take a different shape in different states so that after one or two years we know what works and what doesnt. Madam Speaker, with these words, I commend the budget to the House.

What Pranab could borrow from Manmohans 1991 speech

The Union budget has to do the same rescue act for the economy as Manmohan Singhs 1991 budget. So why not borrow words from the original?
FP Editors, Mar 15, 2012

Budget 2012:

inance Minister Pranab Mukherjee will present the 2012-13 Union Budget on Friday. Mukherjee will have a tough time balancing the books with revenues falling dramatically this year even while Sonia & Co are planning a steep hike in social spending next year. At Firstpost, we empathise with Mukherjees predicament. To show that we really care for him, we have even prepared the first draft for the first half of his budget speech, leaving only the final numbers to be filled in by his North Block babus. But we have a confession to make right at the outset. We simply plagiarised a large part of Manmohan Singhs 1991 speech the speech that raised him from humble bureaucrat to Indias most famous economic reformer. Pranab Mukherjee faces the same issues that Singh did in 1991 and the remedies are the same: more reforms, better expenditure controls, reduction of subsidies, lower debt, fiscal consolidation, etc. The only things we have changed are a few numbers, dates and words and references to events in 1991 including Rajiv Gandhis assassination. The words we have introduced are in italics. The rest of the speech (barring the deletions) is as it was in the original. So here goes our scoop of the 2012-13 budget speech if Mukherjee deigns to look at it. BUDGET 2012-13 Speech of Shri Pranab Mukherjee, Minister of Finance March 2012 Sir, I rise to present the budget for 2012-13. 2. The UPA-2 government, which assumed office barely three years ago, inherited an economy lurching towards deep crisis. The balance of payments situation is precarious. International confidence in our economy was strong until November 2010, when various scandals and

corruption started rocking our polity.. Due to the combined impact of political instability witnessed thereafter, the accentuation of fiscal imbalances and the eurozone crisis, there was a great weakening of international confidence in our economy. There has been a sharp decline in capital inflows through commercial borrowing and non-resident deposits. We have been at the edge of a precipice since December 2010 and more so since April 2011. The external current account crisis constitutes a serious threat to the sustainability of growth processes and orderly implementation of our development programmes. Due to the combination of unfavourable internal and external factors, the inflationary pressures on the price level have increased very substantially since mid-2010. The people of India have had to face double-digit inflation which hurts most the poorer sections of our society. In sum, the crisis in the economy is both acute and deep. We have not experienced anything similar in the history of independent India except when I was finance minister in Narasimha Raos cabinet during 1991-96. 3. The origins of the problem are directly traceable to large and persistent macro-economic imbalances and the low productivity of investment, in particular the poor rates of return on past investments. There has been an unsustainable increase in government expenditure. Budgetary subsidies, with questionable social and economic impact, have been allowed to grow to an alarming extent. The tax system still has many loopholes. It lacks transparency so that it is not easy to assess the social and economic impact of various concessions built into its structure. The public sector has not been managed in a manner so as to generate large investible surpluses. Rather, these surpluses have been used to subsidise other unproductive expenditures like diesel, cooking gas and kerosene. The increasing difference between the income and expenditure of the government has led to a widening of the gap between the income and expenditure of the economy as a whole. This is reflected in growing current account deficits in the balance of payments.

4. The crisis of the fiscal system is a cause for serious concern. The fiscal deficit of the central government, which measures the difference between revenue receipts and total expenditure, is estimated at more than 7 percent of GDP in 2011-12, as compared with just 2.55 percent in 2007-08, the penultimate year of UPA-1.This fiscal deficit has had to be met by borrowing. As a result, internal public debt of the central government has accumulated to about 55 percent of GDP. The burden of servicing this debt has now become onerous. Interest payments alone are about 3 percent of GDP and constitute more than 21 percent of the total expenditure of the central government. This is worse than what it was in 1991. Without decisive action now, the situation will move beyond the possibility of corrective action. 5. The balance of payments situation is most difficult. The current account deficit, which was about 1-2 percent of GDP for several years, is estimated to be more than 3.6 percent of GDP in 2011-12. This, too, is worse than it was in 1991. In 2003-04 our current account was actually in surplus at 2.3 percent of GDP, but has since been deteriorating. These persistent deficits, which were (and continue to be) inevitably financed by borrowings from abroad, have led to a continuous increase in external debt, including foreign currency convertible bonds, external commercial borrowings, and non-resident Indian deposits These strains were stretched to a breaking point on account of the European crisis since last year. The balance of payments has lurched from one liquidity crisis to another since 2008-09, after the Lehman crisis broke. 6. The price situation, which is of immediate concern to the vast mass of our people, poses a serious problem as inflation had reached a double-digit level in September 2011. The major worrisome feature of the inflation in 2011-12 was that it was concentrated in essential commodities. The prices of these commodities rose inspite of the two good monsoons in a row and hence the two successive bumper harvests. Inflation hurts everybody, more so the poorer segments of our population whose incomes are not indexed.

7. There is no time to lose. Neither the government nor the economy can live beyond its means year after year. The room for manoeuvre, to live on borrowed money or time, does not exist any more. Any further postponement of macroeconomic adjustment, long overdue, would mean that the balance of payments situation, now worsening, would become unmanageable and inflation, already high, would exceed the limits of tolerance. For improving the management of the economy, the starting point, and indeed the centre-piece of our strategy, should be a credible fiscal adjustment and macro-economic stabilisation during the current financial year, to be followed by continued fiscal consolidation thereafter. This process would, inevitably, need at least three years, if not longer, to complete. But there can be no adjustment without pain. The people must be prepared to make necessary sacrifices to preserve our economic independence and restore the health of our economy.

8. In the macro-management of the economy, over the medium-term, it should be our objective to progressively reduce the fiscal deficit of the central government, to move towards a significant reduction of the revenue deficit, and to reduce the current account deficit in the balance of payments. It is only such prudent management that would enable us to curb the exponential growth in internal and external debt and limit the burden on debt servicing, for the government and the country, to manageable levels. Indeed, we must make a conscious effort to reduce the internal debt of the government and the external debt of the nation, so that we rely more and more on our own resources to finance the process of development.

During the period of transition, it shall be our endeavour to minimise the burden of adjustment on the poor. We are committed to adjustment with a human face. Hence we will launch an affordable Food Security Bill, of which Soniaji is our biggest backer. It will also be our endeavour that the adjustment process does not adversely affect the underlying growth impulses in our economy. We do not have time to postpone adjustment and stabilisation. We must act fast and act boldly. If we do not introduce the needed correctives, the existing situation can only retard growth, induce recession and fuel inflation, which would hurt the economy further and impose a far greater burden on the poor. 9. Macro-economic stabilisation and fiscal adjustment alone cannot suffice. They must be supported by essential reforms in economic policy and economic management, as an integral part of the adjustment process, reforms which would help to eliminate waste and inefficiency and impart a new element of dynamism to growth processes in our economy. I am confident that, after a successful implementation of stabilisation measures and the essential structural and policy reforms, our economy would return to a path of a high sustained growth with reasonable price stability and greater social equity.

10. Thanks to the efforts of Pandit Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi, and the inclusive vision of UPA Chairperson Soniaji, we have developed a well diversified industrial structure. This constitutes a great asset as we begin to implement more structural reforms. Now, I present my specific proposals for taxation and expenditure reforms in this budget. Editors note: Dear Readers, at this point, we have stopped plagiarising the Manmohan Singh speech of 1991 since it gets into too many specifics of that period. For those who would like to read the full speech both for its historic value and its potential for use as a reference point and plagiarisation, here is the link to the original. Net-net, after reading Manmohan Singhs speech of 1991, this is our takeout. Barring the fact that Indias economy is now much larger and its foreign exchange reserves more respectable, the fundamental economic problems presided over by the UPA regime have only worsened since it was re-elected in 2009 with an improved mandate. Budget 2012-13 is thus the right vehicle to start setting things right. It can take all its key points from Budget 1991-92.

this Budget 2012?

FP Editors, Mar 14, 2012

Who must the government tax

he prime task before Pranab Mukherjee this year is to reboot the investment cycle by rebuilding business confidence.

invest, or hitherto untaxed or undertaxed sectors like agriculture and services? A Firstpost panel of economists examines the finance ministers options. See more Budget 2012 videos and expert views on Firstpost: Ajay Shah, Rupa Rege Nitsure, Indranil Pan, Ashima Goyal, Jim Walker, DK Joshi, Ajit Ranade, Art Woo. See more Budget 2012 issue based videos on Firstpost: Subsidies, Fiscal Deficit, Inflation.

This can partly be achieved by orchestrating a move towards fiscal rectitude so that private investment is not crowded out by government overborrowing. But, how can he raise revenues without additional taxation? And if he must tax, where must he go looking for additional revenue? From corporates, who are anyway reluctant to

Budget Primers

Budget 2012 primer:

Tackling the fiscal deficit

Deficit numbers for 2011-12, while higher in absolute terms may not be alarming. This is called inflating away the fiscal deficit.
Arjun Parthasarathy, Mar 13, 2012

(This story is the fourth in a multiple-part series explaining the governments sources of revenues, expenditure and fiscal deficits. For earlier stories, click here and here and here)

he end result of expenditures being greater than revenues is the fiscal deficit.

ment borrowings will be positive for bond yields as the other half will be taken up by insurance companies, provident funds and trusts, primary dealers, mutual funds and the Reserve Bank of India (if required). The RBI is expected to cut interest rates in the new financial year starting 1 April. If rates are cut, bullish sentiment will drive up demand for government bonds and yields can fall from current levels of around 8.25 percent on the tenyear benchmark government bond. Gross borrowings: Gross borrowings significantly above Rs 5,50,000 crore will be negative for the markets as investors will worry about demand for the extra government bonds, and bond yields will move higher, pushing interest rates higher in the economy. Financing the fiscal deficit The fiscal deficit for 2011-12 was projected at Rs 4,13,000 crore, which was to be financed by market borrowings via the issue of dated securities estimated at Rs 3,43,000 crore (83 percent of deficit) and the issue of treasury bills estimated at Rs 15,000 crore (3.5 percent of the deficit). The issue of securities against the NSSF (National Small Savings Fund) was estimated at Rs 24,000 crore (5.9 percent of the deficit). The external debt of Rs 14,500 crore (3.5 percent of the deficit) and drawdown of cash balances of Rs 20,000 crore (4.8 percent of deficit) were the other two sources of financing. Implications of overshooting estimates The government has overshot its fiscal deficit projection of 4.6 percent of GDP for the current financial year by at least one percentage point, leading to higher-than-budgeted market borrowings. The government borrowed an extra Rs 92,800 crore by issuing dated securities and a further Rs 1,00,000 crore by issuing treasury bills to finance its fiscal deficit. In other words, a result of the higher fiscal deficit, the issuance of dated securities jumped

The fiscal deficit is financed predominantly by market borrowings (around 85 percent). Market borrowings refers to the issue of marketable government securities, including dated government bonds and treasury bills, to raise money for funding the fiscal deficit. Bond, equity and currency markets will takes their cue from the total market borrowings of the government, as the quantum of borrowing directly affects interest rates in the economy. Watch out for these figures Headline budget numbers will drive markets on budget day. The following are the primary headline numbers to note as the budget is being read out. Positive numbers will drive up markets and vice versa. Fiscal deficit: The headline fiscal deficit should be below the expected revised 2011-12 deficit of 5.6 percent of GDP. There have been sound bytes from the finance ministry that the deficit for 2012-13 will be around 5.1 percent of GDP. Markets will take a deficit of close to 5 percent of GDP reasonable well, though any number close to 5.5 percent of GDP will be taken negatively. Government borrowings: The gross borrowing for 2012-13 is estimated at Rs 5,50,000 crore, and net of bond redemptions of around Rs 90,000 crores, borrowings will be Rs 4,60,000 crore. The key factor to the borrowing will be bank deposit growth. The deposit base is around Rs 58 lakh crore. A 16 percent growth in deposits will translate into a net demand of Rs 2,20,000 crors for government bonds assuming a statutory liquidity ratio of 24 percent. Banks taking up more than half of the govern-

22 percent, while treasury bill issuance soared six-fold over budgeted estimates. The RBI was forced to step in to address rising government borrowings by infusing liquidity into the system through the purchase of government bonds. The central bank has bought Rs 1,25,000 crore of government bonds through OMOs (open market operations) in the current financial year ending March. That helped absorb the higher borrowings of the government, but a central bank stepping in to finance the fiscal deficit is inflationary in nature. Indeed, the RBI has been consistently warning the government about its fiscal deficit, since it hampers the central banks monetary policy operations. The central bank is forced to keep monetary policy tight on the back of inflationary effects of a higher fiscal deficit and this tight policy is leading to a growth slowdown as firms cut investment spending on the back of high interest rates. Higher government borrowings also crowds out the private sector, which is seen as more productive, from the loan market. Banks use most of their resources to buy government bonds leaving less money to lend to the private sector. That hikes the borrowing cost for the private sector. Banks have bought Rs 1,67,000 crore of

government bonds between April 2011 and February 2012, which is around 35 percent of their total deposits raised in the period. Beware of nominal GDP Nominal GDP growth, as opposed to real GDP growth, factors in inflation. All the deficit estimates are based on nominal GDP growth. Higher inflation helps boost nominal GDP growth leading to lower deficit estimates even if the absolute quantum of deficits is higher than the previous year. The government has projected a GDP growth of Rs 89.80 lakh crore for the current financial year, 14 percent higher than a year ago. Real GDP growth was pegged at 8.6 percent and inflation (or the GDP deflator) was estimated at 5.4 percent for 2010-11. Given the higher inflaiton, nominal GDP could actually be higher than estimates even if real GDP is forecast at around 7 percent (revised from 9 percent). Hence, deficit numbers for 2011-12, while higher in absolute terms may not be alarming. This is called inflating away the fiscal deficit. Arjun Parthasarathy is the editor of www.investorsareidiots.com, a web site for investors.

Expert View:

Budget 2012 must rein in

populist spending

Manika Premsingh talked to Surjit Bhalla of Oxus Investments on behalf of Firstpost, and he made it plain that the top priority must be move away from populist measures.
Manika Premsingh, Mar 15, 2012 f there is one thing almost all economists agree on, it is that Pranab Mukherjee must try to rein in populist spending to bring about fiscal consolidation and boost growth. Manika Premsingh talked to Surjit Bhalla of Oxus Investments on behalf of Firstpost, and he made it plain that the top priority must be

move away from populist measures. According to Bhalla, the government has everything to gain from having a responsible budget. However, in the context of the poor showing of the Congress party in the recent elections, one doesnt know if this sentiment is going to be heeded.

Budget 2012 must strike a balance between revenue and expenditure

Making ends meet is the biggest challenge facing the finance minister, come 16 March.

FP Editors, Mar 14, 2012 aking ends meet is the biggest challenge facing the finance minister, come 16 March. Firstpost spoke to several senior economists, and most of them said he needs to work both levers revenue and expenditure. In cutting expenditures, the axe must fall on consumption expenditure and non-merit subsidies like diesel and fertiliser, not on productive expenditure like capital investment. So will Pranab Mukherjee bite the bullet on subsidies and expand his tax net? Heres what the Firstpost panel of economists thinks he should do.

After the UP election debacle of the Congress, the markets are not expecting any dramatic pyrotechnics in the budget, but they do expect the FM to signal a credible path to fiscal consolidation. In cutting expenditures, the axe must fall on consumption expenditure and non-merit subsidies like diesel and fertiliser, not on productive expenditure like capital investment.

its inflation, baby!

Either way -

No matter what the finance minister does in his budget, he will end up stoking some kind of inflation.

he just released February inflation figure, which stands at 6.95 percent, may have been below expectations. But no matter what the finance minister does in his budget, he will end up stoking some kind of inflation. Cutting subsidies means higher prices for fuel and fertiliser; withdrawing the excise/service tax stimulus of 2008 means higher prices of goods and services. A new Food Security Act

FP Editors, Mar 14, 2012 means more food will have to be procured, and this means raising food support prices. So if any effort in reform means raising prices, how will inflation ever subside? A panel of economists that Firstpost spoke to debates prospects for inflation in the context of the finance ministers various options in the forthcoming budget.

Cutting subsidies is key

to fiscal correction:
Surjit Bhalla

Economist Surjit Bhalla of Oxus Investment says that the budget must target subsidies and also reduce the NREGA allocations next year.

he fiscal deficit in 2011-12 is not look- subsidies are a key component where the goving like an encouraging number, with ernment has room for improving the countrys a widening gap between the centres fiscal health this year by scaling back on oil, expenditure and revenue. Deficit will most likely food and fertiliser subsidies. be hugely higher than the 4.6 per cent of gross domestic product (GDP) envisaged at the time Indeed the idea of a cutback in subsidies and of the last budget. But despite signs to the conhence expenditure finds resonance within the trary slowing growth, high expenditure numgovernment as well, which are expected to exbers, dampened sentiment economists believe ceed budgeted sums by at least Rs 1 lakh crore that there is room for fiscal consolidation going this year. C Rangarajan, the Chairman of the forward. Prime Ministers economic advisory council, has said that diesel prices need to be adjusted in a According to Surjit Bhalla of Oxus Investments, phased manner, since it is not possible to subsi-

Manika Premsingh, Mar 13, 2012

dise the sector beyond a point. Bhalla further mentions that in the absence of the Food Security Bill coming up for legislation next year, it is actually likely that there might be some attempts to decrease the food subsidy as it exists by having better targeting mechanisms. It is, however, likely that the provisions for the bill gets made in the budget itself. Nevertheless, there are other areas of potential consolidation as well, with fertiliser subsidy reduction likely to be on the cards too. A new urea policy that aims to increase domestic production will reduce imports, closed fertiliser plants are also already being revived and there is a likelihood of reducing subsidy on imported nonurea fertilisers too.

Besides subsidies, a cutback on social sector schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) is possible. According to Bhalla, a decline in MGNREGS allotment by Rs 10-15,000 crore, which is the unused amount as of the previous allotment, could lower the spending envisaged. Also, increasing the tax net as well as raising indirect tax rates to pre-crisis levels cannot be ruled out, which would cover the gap from the revenue side. While the Finance Minister is famously losing sleep over subsidy bills, with these potentials in place, it looks like he could afford to catch a wink.

tackle fiscal deficit: Crisil

Cut oil subsidies first to

Dharmakirti Joshi, chief economist, Crisil, believes, you have to start with cutting oil subsidies with diesel deregulation taking the prime spot in reforms.
Rajanya Bose, Mar 12, 2012

ts not just the budget deficit numbers that have gone out of control, but even the quality of the deficit is suspect. And in a scenario where growth is slowing, it might be difficult to boost revenue. The automatic solution would be to control expenditure to set the fiscal numbers right. Dharmakirti Joshi, chief economist, Crisil, believes, you have to start with cutting oil subsidies with diesel deregulation taking the prime spot

in reforms. He also explained that tackling issues of land acquisition and the Mining Bill will be the two other major issues the government must handle around budget time. Joshi also feels the government needs to relook at its flagship programme NREGA and use it to boost productivity and not just consumption.

Software icon N R Narayana Murthy is looking forward to the budget turbo-charging the economy and generating more jobs
PTI, Feb 27, 2012

FDI, jobs and education infra

Murthys budget wishlist:

for FDI and for building higher education infrastructure quickly. Regarding higher education sector in India, he said, We have to speed up our responses to the critical areas that we have whether entry of foreign universities in India, whether its the formation of National Science and Engineering Board.

angalore: Ahead of the presentation of the Union budget, software icon N R Narayana Murthy today urged the government to make it easier for businesses to grow and foreign direct investment, among others. On his wish-list for the budget, the Chairman Emeritus of software major Infosys, told reporters here that if the government can do whatever is needed to accelerate the countrys progress in basic and higher education, in the areas of nutrition, health and shelter, that would be good. Asked if he is looking forward to the budget turbo-charging the economy, Murthy said in addition to that, the government needs to make it easier for businesses to grow, for job creation,

All these issues will have to be decided with a sense of alacrity. Because education is one of the most critical infrastructures for the country, he added, stressing the need for taking quick decisions because then you can go to the next steps. The Union Budget will be presented on March 16.

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