Hoping for a repeat

Lower fiscal deficit next year hinges on buoyant markets to boost tax receipts as in this year. Will oil and food prices cooperate?

Union Budget 2011-12 had the trappings of a government under siege: crumbs for the section (urban elite) agitated over the various scams and focus on those (urban and rural poor) amenable to be wooed. Sparing cigarettes, automobiles and liquor from additional excise burden is seeped with ambiguity. Was this an oversight or the realisation that any increase would prove counterproductive by puncturing the buoyancy in taxes from these sectors? At the same time, the budget has expanded the service tax list to include restaurants serving liquor and raised it on domestic and international air travel. The flip side of lowering the age to qualify for the senior citizen tag to 60 years is the ramp-up of dividend distribution tax for corporate subscribers of debt mutual funds to 30%, thereby closing an avenue that could provide higher post-tax returns than bank FDs. Similarly, increasing the personal tax exemption limit to Rs 5 lakh for those above 80 years has been balanced by bringing AC hospitals with over 25 beds and pathology labs under the service tax net. The budget has gone all out to court the rural population, which is not bad. Due to the thrust on inclusive growth, the market is now hooked on to the rural story. The effort is to improve lending to farmers and reward those who pay their loans early. Housing finance companies, which will get 1% subsidy for low-cost loans, will be cushioned for mortgage risks. Could this be on fears of an impending sub-prime mortgage crisis? NREGS wages will be linked to the Consumer Price Index. Did not the prime minister days ahead of the budget reject the appeal for minimum wages by Congress president Sonia Gandhi, who also managed to fast-track another of her pet project, food security? The prime minister could perhaps attribute this on the compulsions of being a CEO of a promoter-run company just as he blamed the 2G telecom licensing scam on the compulsions of coalition politics!

Funding warehousing is long-term solutions for availability of food and does not address the current demand-supply imbalance, which could increase in the near term with the blanket of food security: 25 kg of food grains at Rs 3 per kg for every family below poverty line. A taskforce has been formed to determine how to hand cash to the poor to buy kerosene and LPG. This indicates the government may take the fuel subsidy on its balance sheet instead of passing it on to OMCs. The obsession with infrastructure continues: more tax-savings bonds to mop up Rs 30000 crore. The problem here is not of funds but speedy decision-making in awarding contracts. The budget’s solution to overcome this obstacle is public-private partnership. Before becoming too optimistic, it is necessary to audit existing ventures. Banks have got lots of attention: the government wants the Reserve Bank of India to give more licences even as PSU banks are being subjected to a massive infusion aggregating to over Rs 30000 crore. There was public disagreement on new licences between the central bank and the Centre after the presentation of the last budget. The RBI came out with a discussion paper in August 2010, nonetheless. What has been its conclusions based on the feedback?

The knee-jerk market rally in response to, among other things, reduction of corporate surcharge to 5% from 7.5%, and permitting foreign arms of Indian companies to send back money in the form of dividend taxed at 15% rather than income, taxed at 33.33%, petered out even before the market closed for trading, realising that this is not a budget of a confident emerging economy. Increasing the limit on investment by foreign institutional investors (FIIs) in corporate infrastructure bonds is perhaps to stem their flight by luring them with high yields rather than growth in equity returns. There is a hint that FDI in insurance may be relaxed but silence on FDI in retail except for a bland promise to ease procedures for all foreign investors. The budget apparently is relying on consumption to fuel growth than taking care of supply-side worries. The government seems to feel it can do a better job of erasing concerns of foreign individual investors, who would be allowed to invest in equity through mutual funds, about high interest rates and corruption than convincing FIIs. If the reduction in fiscal deficit this year is on the back of 3G auctions, a one-time income, besides higher tax collection arising from a bullish market in 2010, the lower targets for the next two years could be on the assumption that penalty collection from out-of-turn 2G licensees, Rs 50000 crore from PSU divestment and the widened service tax net would supplement the current buoyant tax revenue to meet most of the expenditure. This hinges on the bounce-back of the equity market, which would be sustained if the government keeps its market borrowings under check and tackles inflation. It now remains to be seen if oil and food prices are willing to go along.