When Finance Minister Pranab
Mukherjee got up to present his budget speech for financial year 2012-13 it was
in backdrop of projected growth rate being lower than expectation at 6.9
percent signalling interruption in recovery, inflationary pressure though
subsidizing but still far from comfort levels even after 13 interest rates hike
by RBI, miss in fiscal deficit target by wide margin due to fall in corporate
taxes in wake of slowdown and global concerns due to persisting euro zone
crisis and tepid growth in US impacting exports which coupled with prevailing
high crude oil prices as pushed current account deficit to more than 3 percent of
GDP raising concerns about BoP situation. If that was not enough market has
vindicated these concerns by remaining range bound for better part of last two
years.
Expectation
Different sections of the society were expecting relief from Finance
Minister to soften the impact of economic distress. While working classes were
bearing the brunt of inflationary pressure through erosion of purchasing power
and consequential lowering of their real income, farmers and agriculture
labourers were more impacted due to agrarian distress which is resulting in
viability of agriculture being put in question resulting in debt trap leading
to increasing cases of suicide witnessed in each passing year. Corporate on their
part were expecting relief in taxes due to perceived impact on their profits in
light of slowdown. Small and medium sized businesses were seeking streamlining
of bureaucratic process to facilitate business operations. Finance Minister was
faced with the task to meet these conflicting demands presumably keeping in
mind the UPA government political commitments to inclusive development and
concerns of aam aadmi.
Adopted Approach
In Finance Minister own words he has sought to address the economic
concerns of the country by achieving five key objectives in the ensuing
financial year. The priorities identified are –
• Focus on domestic demand driven growth
recovery;
• Create conditions for rapid revival of
high growth in private investment;
• Address supply bottlenecks in
agriculture, energy and transport sectors, particularly in coal, power,
national highways, railways and civil aviation;
• Intervene decisively to address the
problem of malnutrition especially in the 200 high-burden districts; and
• Expedite coordinated implementation of
decisions being taken to improve delivery systems, governance, and
transparency; and address the problem of black money and corruption in public
life.
The proposals of expenditure and taxation in the Budget are to be viewed in
light of these explicit objectives which Finance Minister has identified to be
pursued on priority basis.
SECTORAL ANALYSIS
Agriculture
In the budget for ensuring
timely access to affordable credit, the target for agricultural credit in
2012-13 has been raised to Rs 5,75,000
crore marking an increase of Rs 1, 00,000 crore. The interest subvention scheme
for providing short term crop loans to farmers at 7 per cent interest per annum
will be continued in 2012-13. An
additional subvention of 3 per cent will be available to prompt paying farmers.
In addition, the same interest subvention on post harvest loans up to six
months against negotiable warehouse receipt will also be available. Policy
making in agriculture for few years has been revolving around enhancement of
credit to farmers. But this fails to take into account the structural problem
in the sector which has been created due to fall in public investment in
agriculture needed for expansion of irrigation and efficient running of
extension services. Even after the total plan outlay for the Department of
Agriculture and Cooperation is being increased by 18 per cent to Rs
20,208 crore in 2012-13, it remains inadequate for previously neglected sectors of
irrigation and extension services. Allocation for Accelerated
Irrigation Benefit Programme (AIBP) in 2012-13 is being stepped up by only 13
per cent to Rs 14,242 crore.
On the other hand, costs would rise because of the cut in
fertilizer subsidies which is projected to fall to Rs 60,974 crore in 2012-13
from Rs 67,199 as per the revised estimates for the 2011-12. This along with imposition
of higher charges for other inputs through general hike in indirect taxes, fall
in subsidy on petroleum products from Rs.68, 481 crore in 2011-12
to Rs.43, 580 crore in 2012-13 will
squeeze the margins accruing to farmers even further. This is particularly
damaging because the problem in agriculture presently is that the viability of
crop production is under challenge, since costs are rising faster than prices
received by farmers. In this context, to squeeze the net returns garnered by
farmers while promising
them more credit doesn’t make much sense. It could only trap them in debt with
consequences that experience has shown can be tragic.
Food Security
The government
is in the process of legislating and implementing a major food security
programme through Food Security Bill, 2011. So it is surprising that as
compared to an expenditure of close to Rs.73,000 crore in 2011-12, the Budget
for 2012-13 provides for just Rs.75,000 crore for covering the subsidy on food.
Government it seems hopes that its new effort at targeting subsidies would help
rein in expenditures and reduce real outlays. A Public Distribution System
Network is being proposed to be created using the Aadhaar platform.
The MGNREGP has been implemented with the intention to put purchasing power especially in hands of agricultural labourer in rural areas. The scheme if implemented with adequate fund allocation is likely to have favourable impact on nutritional levels. However, assistance for the scheme, which fell from Rs.35, 841 crore in 2010-11 to Rs.31, 000 crore in 2011-12, is budgeted to increase to only Rs.33, 000 crore in 2012-13. This is to be understood in wake of facts brought out by Economic Survey 2011-12 that in MGNREGP average number of days of employment per person has been only 47 days as compared to promised 100 days. Some other programs for ensuring nutritional needs of vulnerable sections like Multi-sectoral Nutrition Augmentation Programme to address maternal and child malnutrition in selected 200 high burden districts will be rolled out during 2012-13. In this context, Integrated Child Development Services (ICDS) scheme is being strengthened and re-structured. For 2012-13, an allocation of Rs 15,850 crore has been made as against RS 10,000 crore in 2011-12. This amounts to an increase of over 58 per cent.
National
Programme of Mid Day Meals in Schools has enhanced enrolment, retention,
attendance, and also helped in improving nutrition levels among children. In
2012-13, Budget proposes to allocate Rs 11,937 crore for this scheme as against Rs 10,380 crore in 2011-12. Rajiv
Gandhi Scheme for Empowerment of Adolescent Girls, SABLA, is being implemented
from last year to address the nutritional needs and other educational and skill
development initiatives for self development of adolescent girls in the age
group of 11 to 18 years. For 2012-13, an allocation of Rs 750 crore has been
proposed for the scheme.
Rural Development
and Panchayati Raj
The allocation under Rural Infrastructure Development Fund (RIDF) has been hiked to Rs 20,000 crore in the budget of which Rs 5,000 has been earmarked exclusively for creating warehousing facilities under RIDF. Rural drinking water and sanitation allocation has been hiked from Rs 11,000 crore in 2011-12 to Rs 14,000 crore in 2012-13. Pradhan Mantri Gram Sadak Yojana (PMGSY) has been allocated Rs. 24,000 crore to accelerate connectivity in the rural side. The budget stated the continuance of Backward Regions Grant Fund scheme in twelfth plan with enhanced allocation of Rs 12040 crore in 2012-13, thereby representing an increase of 22 per cent over the budgetary expenditure of 2011-12.
Education
The Right to
Education (RTE) Act is being implemented with effect from April 1, 2010 through
the Sarva Shiksha Abhiyan (SSA). For
2012-13, Budget proposes Rs 25,555
crore for RTE-SSA amounting to an increase of 21.7 per cent over 2011-12. From 2009
onwards the Rashtriya Madhyamik Shiksha Abhiyan (RMSA) is under progress to
enhance access to quality secondary education. In 2012-13, Rs 3,124 crore has been proposed for RMSA which is
nearly 29 per cent higher than the allocation in 2011-12. Even after the
proposed hikes the total public investment in education continues to be far
less than politically commitment of UPA government of expenditure amounting to
6 percent of GDP. To ensure better flow of credit to deserving students for
education loans, FM has declared to set up a Credit Guarantee Fund for this
purpose.
Access to
higher education in India
Health
National Rural
Health Mission (NRHM) is being implemented through ‘Accredited Social Health
Activist’- ‘ASHA’. At the community
level, a more active role is envisaged for ASHA as the convenor of the Village
Health and Sanitation Committee, as also to support the initiative on
malnutrition. Budget also proposes to increase the allocation to NRHM from Rs 18,115
crore in 2011-12 to Rs 20,822 crore in 2012-13. The outlay for health and family welfare has gone up by nearly 22
per cent compared with the current year's revised estimates, but that reflects
a significant shortfall in spending in the current year – of Rs.1,643 crore. In
any case, at a total of only Rs.30,702 crore, spending on health by the Central
government is still embarrassingly low in relation to India's projected GDP –
only 0.3 per cent. It compares poorly with the political commitment of UPA
government to increase total health spending by Centre and States to 3 per cent
of GDP.
Defence
Budget 2012-13
makes a provision of Rs 1, 93,407 crore for Defence Services which include Rs
79,579 crore for capital expenditure. Finance Minister
declared in his speech that the scheme to create the National Population
Register (NPR) is progressing well. It is likely to be completed within the
next two years. The Government is also considering a proposal of issuing
Resident Identity Cards bearing the Aadhaar numbers to all residents who are of
age 18 years and above to help in the e-governance initiatives as well as
defence needs.
Inclusive
development
Allocations are
being made for Scheduled Castes Sub Plan (SCSP) and Tribal Sub Plan (TSP) under
separate minor heads as part of the Plan allocations from 2011-12 onwards. In 2012-13, the allocation for SCSP is Rs
37,113 crore which represents an increase of 18 per cent
over 2011-12. The allocation for TSP in 2012-13 is Rs 21,710 crore representing an increase of 17.6 per cent over 2011-12.
The claims of raising the allocations for SC/ST Sub-Plans conceal the actual
fact that they do not meet the required allocations of 16.5 and 8.2 per cent of
the plan expenditure respectively. The current amounts are only seven and four
per cent respectively.
Industrial
Development and Infrastructure
The strategy to boost investment for infrastructure building revolves around Public Private Partnership (PPP). During the Twelfth Plan period, infrastructure investment will go up to Rs 50 lakh crore. About half of this is expected to come from private sector. Viability Gap Funding (VGF) is an important instrument in attracting private investment into the sector. The budget announces that irrigation (including dams, channels and embankments), terminal markets, common infrastructure in agriculture markets, soil testing laboratories and capital investment in fertiliser sector will also be eligible for VGF under this scheme. To augment financing for power projects it is pronounced in the budget that External Commercial Borrowings (ECB) be allowed to part finance Rupee debt of existing power projects
Ministry of Road Transport and
Highways is implementing National Highway Development Program (NHDP). For
2011-12 the ministry is set to achieve its target of awarding projects covering
a length of 7,300 km under NHDP during 2011-12. Budget proposes to set a target
of covering a length of 8,800 kms under NHDP in 2012-13. For the purpose the
allocation of the Ministry has been enhanced by 14 per cent to Rs 25,360
crore in 2012-13. To encourage public private partnerships in road construction
projects, Budget proposes to allow ECB for capital expenditure on the
maintenance and operations of toll systems for roads and highways so long as
they are a part of the original project.
Aviation Sector
in India
The path of fiscal consolidation involves increasing tax-GDP ratio which is quite low at around 10 percent. Significant tax proposals on direct taxes front involve hiking the minimum individual exemption limit to Rs 2 lakh. Budget also proposes to raise the upper limit of the 20 per cent tax slab from Rs 8 lakh to Rs 10 lakh giving relief to middle class tax payers. Income above the limit of Rs 10 lakh would continue to be taxed at 30 percent. In an important measure to reduce the tax burden compliance of assesses it was proposed to allow individual taxpayers, a deduction of upto Rs 10,000 for interest from savings bank accounts. This would help a large number of small taxpayers with salary incomes upto Rs 5 lakh and interest from savings bank accounts up to Rs 10,000, as they would not be required to file income tax returns.
Tax rates for corporates have been kept unchanged.
But in order that corporates can access low cost funds for infrastructure
sectors, the rate of withholding tax on interest payments on external
commercial borrowings is proposed to be reduced from 20 per cent to 5 per cent
for three years. Investment linked deduction of capital expenditure incurred in
the businesses like Cold chain facility, Fertilisers etc is proposed to be
provided at the enhanced rate of 150 per cent, as against the current rate of
100 per cent. For attracting investment in power sector tax sop by way of extension
of the sunset date by one year for power sector undertakings so that they can
be set up on or before March 31, 2013
for claiming 100 per cent deduction of profits for 10 years. Proposals on
direct taxes are estimated to result in a net revenue loss of Rs 4500 crore for
the year.
In a
relief to Small and Medium enterprises FM announced that the turnover limit for
compulsory tax audit of accounts as well as for presumptive taxation is
proposed to be raised from Rs 60 lakh to Rs
1 crore.
Tax laws are proposed to be made stringent to
deter the generation and use of unaccounted money. To this end, it is proposed that there would
be introduction of compulsory reporting requirement in case of assets held
abroad; Allowing for reopening of assessment upto 16 years in relation to
assets held abroad;Tax deduction at source on transfer of immovable property
(other than agricultural land) above a specified threshold; Taxation of
unexplained money, credits, investments, expenditures etc., at the highest rate of 30 per cent
irrespective of the slab of income etc.
Indirect taxes
In a significant move for the service taxes
keeping in mind the eventual rolling of Goods and Services Act it is proposed
to tax all services except those in the negative list. The important inclusions
in the negative list comprise all services provided by the government or local
authorities, except a few specified services where they compete with private
sector. The service tax rate has also been hiked from 10 per cent to 12 per
cent. This along with other service tax proposals is to yield additional revenue
of Rs 18,660 Crore
According to FM the imperative for fiscal
correction, has forced him to raise the standard excise duty rate from 10 per
cent to 12 per cent, the merit rate from 5 per cent to 6 per cent, and the lower merit rate from 1 per cent to 2 per
cent. However, the lower merit rate for coal, fertilisers, mobile phones and
precious metal jewellery is being retained at 1 per cent. As a result of
these changes, revenues from Central excise duties are projected to rise from
Rs.1, 50,075 crore to Rs.1, 93,729 crore or by close to 30 per cent in a single
year
Fiscal
Consolidation
The budget
proposes much emphasis on fiscal consolidation as FM announced return to the
path of fiscal consolidation through expenditure reforms. The fiscal targets to
be adhered by the government under the Fiscal Responsibility and Budget
Management Act have been announced in the Budget. Two of important features
that are steps in the direction of expenditure reforms have been emphasized in
the budget. First, the concept of Effective Revenue Deficit is being brought in
as a fiscal parameter. Effective Revenue Deficit is the difference between
revenue deficit and grants for creation of capital assets. Focusing on this
will help in reducing the consumptive component of revenue deficit and create
space for increased capital spending. Second, a provision for “Medium-term
Expenditure Framework Statement” is being introduced in the Act. This statement
shall set forth a three-year rolling target for expenditure indicators.As per the
statement the rolling target set are elimination of effective revenue deficit
along with bringing down revenue and fiscal deficit to 2.0 and 3.9 percent of
GDP respectively by 2014-15. FM also announced that it would be government endeavor
to restrict the expenditure on central subsidies to 2 per cent of GDP in
2012-13. Over the next three years, it would be further brought down to 1.75
per cent of GDP.
Disinvestment Policy
The Government
has further evolved its approach to divestment of Central Public Sector
Enterprises (CPSEs). The CPSEs are being given a level playing field vis-a-vis
the private sector with regard to practices like buy-backs and listing at stock
exchange. In 2011-12, as against a target of Rs 40,000 crore, the government was able to raise about Rs 14,000 crore from disinvestment. For 2012-13, FM proposes to raise Rs 30,000 crore through disinvestment.
Financial
Sector and Capital Markets
As per FM, in order to encourage flow of savings in financial instruments and improve the depth of domestic capital market, it is proposed to introduce a new scheme called Rajiv Gandhi Equity Savings Scheme. The scheme would allow for income tax deduction of 50 per cent to new retail investors, who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of 3 years.
It was also declared
that Qualified Foreign Investors (QFIs) would be allowed to access Indian
Corporate Bond market. To achieve simplification of process of issuing IPO, it
is made mandatory for companies to issue IPOs of Rs 10 crore and above in
electronic form through nationwide broker network of stock exchanges. Budget
speech underlined that the government is committed to protect the financial
health of Public Sector Banks and financial institutions. For the year 2012-13,
it is propose to provide Rs 15,888 crore for capitalisation of Public Sector
Banks, Regional Rural Banks and other financial institutions including NABARD.
Budget Estimates
The adjoining table summarizes
the budget estimates. The significant numbers are that Revenue deficit in
Budget 2012-13 is projected to be Rs 350424 crore which is 3.4 percent of
projected GDP. Similarly even after assumed tax buoyancy the fiscal deficit is
likely to be Rs 5,13,590 crore amounting to 5.1 percent of projected GDP.
Summing up
Finance Minister which was under pressure to return to the path of
fiscal consolidation has opted to take the root of hiking the indirect tax
rates. Direct tax concessions benefit the rich while indirect taxes
burden aam admi. They are
subjected to a double whammy as indirect taxes hikes also contribute to the
inflationary spiral directly. Fiscal profligacy must be checked. But how? The
total fiscal deficit now stands at Rs.5,21,980 crore or 5.9 per cent of GDP.
The budget documents show that in the same year, the total tax revenue foregone
(i.e., voluntarily not collected by the government) amounts to Rs.5, 29,432
crore. Internationally, a three per cent fiscal deficit is considered healthy.
This works out to over Rs.2.5 lakh crore, given our current GDP. If legitimate
taxes were collected instead of doling out concessions in form of tax waivers
and this amount spent through public investments for building much needed
infrastructure, the govt. could have generated huge additional employment and
the consequent growth of domestic demand would have put India India
By Saurabh Naruka
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