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Vol. 4 No. 21

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All of Mint’s coverage before, during and after the budget. Distilled into one download.

THE BUDGET 2010 EBOOK.

CHAPTER

1

The Big Picture CHAPTER

2

Taking It Personally

CHAPTER

3

Equal and Opposite CHAPTER

4

Sector Inspector CHAPTER

5

Run Up

UP IN THE AIR

L2 COLUMNS

SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM

Up in the air From fiscal correction to populism, the finance minister shows his heart is in the right place but missteps in implementation could mean trouble— for the government and the economy

B Y A NIL P ADMANABHAN ···························· inance minister Pranab Mukherjee’s second effort in less than nine months is a honest attempt at consolidation and correcting the fiscal abuse of the past, but it may yet fall under the burden of scepticism emerging from the underlying risks and what’s been left unsaid in Budget 2010.

In the trade-off between infla-

F

tion and growth the minister, risking personal political damage, has opted for the latter and at the same time, to ensure the desired fiscal discipline, targeted subsidies in a manner that could, in the short-term imply an adjustment cost for consumers.

Together with an across-theboard increase in indirect taxes, which signalled the roll back of the fiscal stimulus, and bringing new services in the tax net, the Budget creates the basis for inflationary pressures.

Given the politics, especially with the opposition parties staging a walkout, the first in the history of Parliament during the presentation of a Budget, it is understandable that the minister stayed away from stating the bare-facts about the adjustment (consumers will end up having to pay more for a variety of offerings, although Mukherjee has tried to lessen the impact of the blow). The downside is that because he hasn’t done this, interpretations are open to exaggeration. This could mean trouble when the message sinks in.

This is evident in the reaction of the markets—buoyant at first, muted later.

Politically, this can make the Congress-led United Progressive Alliance (UPA) unpopular and give the Opposition a rallying point besides stirring disquiet among allies. It could also make individuals and companies hold off investments and defer consumption—threatening growth and the core of the government’s strategy.

A reforms legacy Still, the UPA has to be complemented for seizing the political space provided by the 13th Finance Commission (TFC) to press ahead with some honest and much needed (and politically difficult) fiscal reform even as it continues the stock market friendly disinvestment programme. If it does not lose its nerve and effect a retreat, the UPA may well find itself in a position to add to its already enviable legacy as the political coalition that helped put in place the building blocks for a modern economy. Mukherjee has, with this budget, already joined the pantheon of politicians such as P.V. Narasimha Rao, Manmohan Singh, P. Chidambaram and Yashwant Sinha, who pushed difficult but very critical economic reforms.

Budget 2010also marks a departure from finance bills of the UPA’s first tenure (2004-09) when the government failed to take advantage of a booming economy to undertake structural measures to cutback expenditure. This is important because the action taken report (ATR) on the recommendations of the TFC submitted to Parliament on Thursday seemed to suggest that the government had deferred any response to the proposals on expenditure reform.

It emerges that, relying on the recommendations of the TFC, a constitutional body, the government has actually moved ahead with a reordering of expenditure and committed itself to a transparent and binding medium term fiscal reforms programme.

Not only is the UPA going to reduce its borrowing by about Rs1 trillion from 2009-10, it has

decided to embark on a new strategy: the government will cap its stock of internal debt at 68% of gross domestic product and derive the fiscal deficit, gross borrowings, as a residual, instead of deriving the fiscal deficit from spending excesses as it used to do previously; since the government also plans to eliminate the revenue deficit, the gap between the government’s income through taxes and other revenues and its spending, this means that it will progressively reduce its borrowings. Not only will this guarantee a non-inflationary financing of development programmes, it will also ensure that such financing does not crowd out private investment and create an upward pressure on interest rates.

It is apparent that a lot of thought has gone into this Budget.

It is not, despite the Rs26,000 crore giveaways in direct tax concessions and the sustained spending on social sector programmes, by any measure a populist budget. A tax concession of

dubious legacy; matters were worsened because some of his predecessors resorted to creative accounting to mask the fiscal impact of subsidising consumption, especially when there was a runaway rise in international fuel prices. Any effort to undo this would inevitably imply adjusting prices. Unfortunately, since this has coincided with the roll back of the fiscal stimuli that the UPA had injected over the last two years, it is likely to lend a price shock to the system—indeed, if not contained, it could spiral out of control.

Inflation, as measured by the wholesale price index was already high at 8.5% in January; more worrying is the fact that food infla tio n continu es to remain in the high double digits.

Some of the inflationary effects of the Budget have already resulted in price rises in some offerings; rises in several others could follow. The list of such offerings includes fuel, cars, air tickets, cement, coal, cigarettes, consumer products, and air conditioners.

The challenge The Opposition has, by seizing on the weak link in the Budget, signalled its intent to throw down the gauntlet on inflation. The UPA has no choice but to take up the challenge; it will find the going difficult since some of its allies have very publicly differed with it on politically sensitive reforms. So far, the Congress has demonstrated leadership qualities by refusing to bow to such pressures, even as it has, occasionally, passed on the responsibility to politically weakened allies such as the Nationalist Congress Party led

by Sharad Pawar. It has been helped no doubt by its firm commitment to inclusive growth, something that Mukherjee referred to as “an article of faith”.

The Congress’ spin doctors will have to back Mukherjee and wear down the political criticism to the Budget. To its advantage, the Congress still enjoys credibility with people; but in politics, like in cricket, situations can alter dramatically and often without warning. What would also help is the fact that Mukherjee, as a CVoter survey reported in Mint on 25 February showed enjoys personal credibility. Trouble shooters of the government have already indicated that they are prepared to take on the political opposition. The Congress has 208 seats in the Lok Sabha, needs 273 for a simple majority in the house, and it still has the backing of 276 members of Parliament—even after the withdrawal of outside support from the Samajwadi Party and Bahujan Samaj Party.

The real test for Budget 2010, however, will be the ability of the UPA to ensure strong policy response to prevent inflationary pressures from spiralling out of control. So far, it has been found wanting on that front. But now the stakes, both political and economic, are very high. Any misstep in policy would not only set back the Congress as well as the UPA, it could plunge the country into an economic crisis—that could mean missing out on a once-in-a-lifetime opportunity to break the economic shackles and deliver inclusive growth.

COAST OF THE SEMAN­ TICS, A LARGE LAN­ GUAGE OCEAN. A SMALL RIVER NAMED DUDEN FLOWS BY THEIR PLACE AND SUP­ PLIES IT WITH THE NEC

about Rs60,000 for anyone earning above Rs9 lakh, a key demographic category among the middle class, would in normal circumstances be construed a sop.

Instead, it is, as are the other direct tax changes, designed to ready the tax infrastructure for the introduction of the gamechanging direct tax code (DTC) in April next year. Similarly, the minister has gone in for several measures—such as preferring to retain the service tax rate at 10%—in the area of indirect tax to prepare ground for the introduction of a single goods and services tax (GST).

Mukherjee has also taken an initiative to usher in the much needed institutional reform. Key among these is the move to create the information technology infrastructure that can make a success of efforts such as the implementation of GST and DTC. Another is the implementation of TFC’s recommendation to create a national mission for delivery of judicial and legal reforms.

Equally significant, is the UPA’s decision to press ahead on green initiatives. Accordingly, it has effected a 61% increase in the outlay to the ministry of new and renewable energy, funded new programmes for river cleaning and give a big push to use of nonfossil fuels such as solar energy.

Threat of inflation Since previous governments shied away from action on the vexing issue of expenditure reform, Mukherjee inherited a

HOME PAGE L3

SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM

HASEEB A. NIRANJAN RAJADHYAKSHYA DRABU Chairman & CEO, J&K Bank

A neighbour friendly budget or a game­changing one?

P

ragmatically positive: A Budget for uncertain times For the last two years the macroeco­ nomic conditions, international and national, have been severely adverse. While the overall environment may appear to have improved, the fact is that adversity has been replaced by uncertainty. To put it in market parlance, earlier the downside far outweighed the upside but now the possibility of a upside is becoming stronger.

In such a situation of uncertainty, eco­ nomic policymaking is far more complex than it is in difficult times. The economic policy makers of India be it the Reserve Bank of India or the Ministry of Finance, did well to minimize the impact of the global turmoil through concerted monetary and fiscal meas­ ures. How well they handle uncertainty was to be seen in this Budget. This was a budget in uncertain times.

Looking at the basic structure and the underlying theme, what was been delivered yesterday is a budget for uncertain times.

What this really means is that the budget may not ensure a quick turnaround. Instead

what it is more likely to do is to arrest or reduce the possibility of a further decline; limit the extent of the downside as it were.

This is the single most important achieve­ ment of the Budget 2010.

In budgetary terms, the all round uncer­ tainty was getting manifested in a simple issue: demand for continuance of the fiscal stimulus. There were arguments and implica­ tions for and against this. The master stroke in the Budget is that the fiscal stimulus has been neither withdrawn (or deferred) nor extended; the finance minister has deftly changed the nature of the fiscal stimulus.

What was an enterprise/institutional stimulus has now been converted into a retail stimu­ lus! This will help sustain a broader recovery.

So in some way, by design and not by default, he has avoided the “either/or” conun­ drum of the stimulus exit.

The other big uncertainty which has been reduced considerably is regarding interest rates. Coming in right after the clear mone­ tary policy stance of a hardening interest rate regime, the fiscal policy in general and the level of borrowing in particular, not just in

NIRANJAN NIRANJAN RAJADHYAKSHYA RAJADHYAKSHYA Managing Editor, MINT

Full marks for macroeconomic strategy

T

he fiscal prudence that Pranab Mukher­ jee has promised in the coming fiscal year should create the space needed for economic expansion driven by private sector investment ­­­ just what India needs at this point of the economic cycle.

The government hopes that public spend­ ing will grow at a slower pace than the growth in the nominal gross domestic prod­ uct. This along with an estimated Rs75,000 crore that it plans to collect from the sale of equity in public sector firms as well as the auction of spectrum for third generation should help it keep its net market borrowings to Rs3.45 trillion, a level that the financial markets seem very comfortable with.

Higher market borrowings because of a higher fiscal deficit would have pushed up interest rates and put a spoke in the capital spending plans of companies. Such crowding out did not happen last year because corpo­ rate demand for funds was low and the Reserve Bank of India could conduct open market operations and desequester Market Stabilization Scheme (MSS) bonds to ensure that the Rs4 trillion borrowing programme for 2009­10 did not unsettle the money mar­ kets. This is not possible now: private demand for funds is picking up and the MSS bonds have been used up. The fiscal correc­ tion is thus timely.

To understand why it is important for pri­

MANAS NIRANJAN RAJADHYAKSHYA CHAKRABARTY CONSULTING EDITOR, MINT

A skeptical view of the Union Budget

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s expected, the Union Budget for 2010­11 has focused on fiscal consoli­ dation. The finance minister has been able to stick to the 5.5% fiscal deficit target for the year, a target he had set himself in his medium­term fiscal policy statement last year. Interestingly, though, the fiscal deficit target for 2011­12 in the medium­term fiscal statement was 4% last year­­this year, he has raised that to 4.8%. That has happened in spite of the economy doing much better at present than at the time of the last budget.

Clearly, fiscal consolidation is going to be a slow process.

What is important is whether the deficit

reduction is credible. Although the net borrow­ ing requirement has come in as expected, bond yields went up after the budget. There are several reasons for this. One, the borrow­ ing requirement is large and there is no scope this fiscal year of unwinding securities under the market stabilization scheme nor is there any scope to de­sequester or convert MSS bonds into government debt. That means the effective borrowing from the market goes up.

Two, a reason for the fiscal deficit coming in at 6.7% of GDP is because the base year has been changed. As A Prasanna, senior econo­ mist with ICICI Securities points out, that would mean the fiscal deficit computed with

terms of level but also in terms of size, will go a long way to cool the debt markets.

At one stage where it was certain that 10­year government paper may touch 8.5%, it is now more likely that to be in the range of 7.75 ­ 8%. It is now almost certain that yields will stay at sub 8 levels.

However, notwithstanding the fiscal stance of the budget the pressure on rates is bound to come in from monetary policy action most likely to happen in April.

True, this budget lacks the glamour of big bang reforms. But then that was not even required at this stage. Given the extant and the emerging environment, what was required was a classic 1970s budget: nuts and bolts with an eye for detail and without any grand standing and posturing.

If one is driving a car in fog, it is not likely that the wheels will be changed. What an experienced driver does is to ensure the fog lights (the size of borrowings), the front shield wipers (structure of expenditure), the tail lights (infrastructural spending), and the side indicators (personal tax rate reduction) are in order. That is more likely to get you where you want to be. Maybe a little late, but safely not bruised and battered. And that is exactly what the Finance Minister seems to have done.

A fairly clear road map, even if long on promise and short on delivery, a change in the nature and quality of stimulus, and a less than expected recourse to borrowings, is what has seen the markets rally so strongly.

In the current environment, it is not just the just the level but also the structure of public expenditure that will be a key variable and needs to be analyzed in great detail.

The small but significant touches on the

structure of public expenditure, overweight on infrastructure and agriculture, and plan over non plan, will go a long way to dampen some of the impending crowding out effects on the investment side. If delivered well, these could even crowd in private investment. Besides this, given the focus on agriculture and infra­ structure, it will have a sobering impact on inflation as well.

Other than a heightened global adversity, the real threat to the budget numbers will come from expenditure over runs which, in the true 1970s style, have been understated to show a lower dower deficit number. And, of course, from the rather ambitious divest­ ment program of Rs 40,000 plus the 3G auc­ tion receipts. Give the recent experience of the NTPC and the REC share sales, this does look like a vulnerable number.

To sum up, it is a creatively conservative budget which will not be remembered for long either for the budgetary arithmetic or for any fiscal policy initiatives. If at all, it should be remembered for restoring the bal­ ance between politics and economics in the formulation of the budget. In the last twenty years or so, the Budget had come to become a specialist economic policy document with an overdose of intended policy interventions, stabilization measures, reforms initiatives and structural adjustment schemes.

Contrary to that, this budget has restored the political aspect of the budget and reas­ serted the fact that at the end of the day budget is a document of political economy and not just economics alone. In a democracy, this must been seen as a major gain.

vate sector investment to drive growth at this stage of the economic cycle, it would be useful to step back a bit and take a look at what has happened in these two manic years.

Economic growth over the past two years has been propped up by a rise in private and government consumption spending, thanks to the fiscal stimulus, increase in funds for select schemes such as the National Rural Employment Guarantee Scheme and the sal­ ary increases given to public sector employ­ ees. The brutal import compression in the worst months of the downturn also contrib­ uted to economic growth.

However, the contribution from investment was negative as companies held back invest­ ment plans amid all the uncertainty. Capital spending by the government too has been weak. But there can be no doubts that a fast­ growing economy such as ours needs more investments to create capacity and rebuild our tattered infrastructure. The gov­ ernment will help the investment cycle turn if it keeps its borrowings within the budgeted limits, though the decision to increase the minimum alternate tax is a bit puzzling in these circumstances.

The Union budget is just one part of a policy tango so a lot also depends on what the Reserve Bank of India does in the

months ahead. The central bank is widely expected to increase policy interest rates in April. A useful thumb rule is that a tighter fiscal policy will allow the central bank to conduct a relatively looser monetary policy.

In other words: interest rates would have had to be pushed up more aggressively in case the finance minister had not announced such a deep cut in the fiscal deficit and mar­ ket borrowings.

Global experience clearly shows that coun­ tries that have well­managed public finances can maintain a regime of low interest rates to boost private sector activity. The 13th Finance Commission chaired by economist Vijay Kelkar has quite rightly called for a sharp decrease in the fiscal deficit in the next five years, a rise in capital spending by the government and a cut in the stock of public debt to less hazardous levels.

India needs investment­led growth right now. The sort of fiscal discipline that the finance minister has promised in the coming years should help keep down government borrowings and interest rates, creating incen­ tives for companies to build new capacity.

In that sense, the broad macroeconomic strategy implicit in Budget 2010 is laudable.

2000­01 as the base would be higher and the market is therefore worried that this could mean more borrowings this fiscal year. Third, the bond market expects the government bor­ rowing to be front­loaded, which, after taking the higher redemptions of government bonds this year, works out to around Rs 14000 crore worth of government borrowings every week from 1 April, according to Indranil Pan, chief economist, Kotak Mahindra Bank. And lastly, with the fuel price hike and the rise in excise duties, the danger of inflation becoming more broad­based has also increased—the markets will now look to the Reserve Bank of India’s credit policy in April and the likelihood of fur­ ther monetary tightening.

So far as the Budget estimates are con­ cerned, revenue expenditure is expected to rise by just 5.8%. At first glance, this looks commendable. A closer look, however, casts some doubt on the numbers. For example, subsidies are lower by Rs 14800 crore com­ pared to the revised estimates for the cur­ rent fiscal year. It’s difficult to see how this can happen, unless the government is going to free pricing in oil and fertilizers and the finance minister has given no indication of that. Revenue expenditure on police services, social services has been drastically curtailed.

Revenue expenditure on defence is budgeted to be lower than the revised estimates for the current year. There’s a big question mark over whether these expenditure cuts will be possible.

On the revenue side, while the estimates for tax receipts are likely to be met given the buoyancy in the economy, the Rs 74571 crore taken as “other non­tax revenue” includes the proceeds from disinvestment of around Rs 40000 crore, higher than anticipated.

Whether the government will be able to go in for disinvestment of this amount is debat­ able.

That said, there are several positives in the Budget. The biggest of them is the huge increase in capital expenditure. Adjusting for defence expenditure, total capital expenditure is up 33.6% compared to the revised esti­ mates for the current year. The reduction in income tax on certain categories is also wel­ come, but part of that giveaway will be negated by the hike in fuel pieces and excise duties.

The stock market’s skeptical view of the budget and the importance of global factors are amply brought out by the fact that the Sensex gained around the same 1% as the Hang Seng during the day.

THIS BUDGET SHOULD BE REMEMBERED FOR RESTORING THE BALANCE BETWEEN POLITICS AND ECONOMICS.

A LOT ALSO DEPENDS ON WHAT THE RESERVE BANK OF INDIA DOES IN THE MONTHS AHEAD.

THERE’S A BIG QUESTION MARK OVER WHETHER THESE EXPENDI­ TURE CUTS WILL BE POSSIBLE.

L4 COLUMNS

SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM

TAMAL NIRANJAN BANDYOPADHYAY RAJADHYAKSHYA MINT’S DEPUTY MANAGING EDITOR IN MUMBAI

Let corporations float banks with checks and balances

A

fter a gap of six years, once again India is set to open its closely­guarded banking industry to private players. This marks a clear shift in policy—from consolidation to expan­ sion. In a country where 50% of the population does not have access to banking services, this is natural and, in fact, the Reserve Bank of India (RBI) should have opened its doors earlier. The critical question is: Will Indian corporations be allowed to float banks? Many of them cherish the dream of getting into the highly leveraged business but RBI has reservations as banks deal with public money and one bad apple can spoil the entire system.

The finance minister’s Budget speech does not indicate any change in the existing norms as it says the central bank is considering giving some

additional banking licences to private sector play­ ers and non banking financial companies or NBFCs could also be considered “if they meet the RBI’s eligibility criteria”. Shares of listed NBFCs such as Reliance Capital Ltd and a few others zoomed, anticipating banking licences but under the exist­ ing licensing norms, no corporate entity can hold more than 10% stake in a bank. Will the Tatas, Birlas, Anil Dhirubhai Ambani Group (ADAG) and the Bajajs will be allowed to float banks? All of them have NBFCs under their belt and, given a choice, wish to convert them into banks.

The history and performance of the so­called new generation private banks can guide the reg­ ulator on selection of the new players. Of the first set of nine banks that set shops in 1994­95, three could not survive and got merged with

MONIKA NIRANJAN RAJADHYAKSHYA HALAN CONSULTING EDITOR, MINT

Three goals and a Super Regulator

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ork in progress is how this budget can be described. The three large goals that the finance minister articulated in his last budget are still the key focus of the propos­ als and the continuity of governance is a relief.

First, the finance minister wants growth to quickly revert to the 9% trajectory, before hitting double digits. Two, he wants that growth to be inclusive so that India is not pushed into social unrest due to a lopsided sharing of the gains of the growth. ‘Trickle­down’ is a cynical phrase spun out by incumbents as they tried to keep the fruits of growth and development with them­ selves and does not work. Unless wealth is redis­ tributed, as it is created, to those least able to be

a part of the growth, there is huge unrest ahead.

The key to this transfer is the pipeline that moves resources as they are created from the top of the pyramid to the bottom. But the exist­ ing pipeline is leaky – squandering away the gains and causing tax payer unrest. The third goal looks at fixing the pipeline. The desperate need to get this in order is part of his speech: “Indeed, in the coming years, if there is one fac­ tor that can hold us back in realising our poten­ tial as a modern nation, it is the bottleneck of our public delivery mechanisms.”

The failure of the pipeline to funnel tax­payer money to where it should go is the reason that most tax­payers remain hugely cynical about the

other banks. At least one of them was adventur­ ous and used the bank’s money to play in the stock market. In the second lot, Kotak Mahindra Finance Ltd, an NBFC, was converted into a com­ mercial bank in 2003 and a group of private equity investors, professionals and Rabobank International Holding BV were licensed to float Yes Bank Ltd. There is nothing wrong in allowing a corpora­ tion to float a bank, provided it has an impecca­ ble track record and meets the regulator’s “fit and proper” criterion. A corporation can set up the bank on its own and bring down its stake to fulfil the norm of a diversified holding pattern to ensure corporate governance within a predeter­ mined time frame. Even successful micro finance institutions with a large balance sheet and capi­ tal base can be considered, since the objective is financial inclusion.

The other critical market­moving announce­ ment in the Budget is the relatively lower gov­ ernment borrowing programme for fiscal 2011.

The government will borrow Rs3.45 trillion from the market to bridge an estimated 5.5% fiscal deficit next year. The amount is lower than the Rs3.64 trillion raised in the current fiscal but despite this, bond prices dropped and bond yields rose as the market is not convinced about the numbers. The government may end up bor­ rowing more if it’s not able to raise Rs75,000 crore by divesting its stake in public sector

undertakings and selling 3G licences. The Budget has also not made any provision for subsidies for oil firms. On top of that, the rise in excise duty on automobiles and petrol and diesel will fuel inflation. That’s not good news for the bond market.

Yet another focus of the Budget is financial stability, which Pranab Mukherjee has been harp­ ing on since last year. In fact, in his address to the RBI central board after the last Budget he mentioned that the Act that governs the central bank does not have any reference to financial stability. The RBI governor’s response to this was, “like pornography, financial stability is something that cannot be defined”. Mukherjee has chosen to address this by setting up a Financial Stability and Development Council. This body will monitor macro prudential supervision of the economy and take care of inter­regulatory coordination issues. In other words, the new body will formalize the loosely constructed and informal platform of High­level Coordination Committee on Financial and Capital Markets.

Finally, Mukherjee has promised to set up a Financial Sector Legislative Reforms Commission to rewrite and clean up the financial sector laws and make them contemporary. In my last col­ umn on Monday I raised the issued of conflict among various Acts in the financial sector and the need to revisit them. Thank you finance min­ ister for taking note of that.

budget. The average comment I heard before the budget still hovered around the expectation of higher taxes. This is misplaced because income tax rates have been going down for the last few years and India has a fairly low average income tax rate at various tax slabs. This budget is also a step in the same direction of lower income taxes, with the slabs widening so that the top income tax rate now applies at Rs8 lakh, up from Rs5 lakh in the current year. The deduction is up

by Rs20,000 and now you can invest up to Rs1.2 lakh. This gets us to an average tax rate for a Rs5 lakh a year household at just 7%. A Rs10 lakh household pays an average rate of 16%. Not high by global standards at all.

Rather than worry about the direct taxes, we need to remember that direct taxes account for just about 8% of the total expenditure of the Central government each year. Indirect taxes, which we all pay, account for a huge 48%. With the excise duty cuts getting rolled back, we need to look at paying out more across the board on the goods we buy. An even more silent worry is that 30% of government expenditure comes from the borrowing programme. It hurts us as entre­ preneurs as we find funds priced out of our reach as the government sucks out the huge pools of money that the households put away each year.

We suffer as consumers since the deficit causes

prices to go up – inflation is said to be the cruel­ est tax in the world – it hurts the most vulnera­ ble, the poor and the old. Which brings the dis­ cussion back to the pipeline. Unless it is fixed, not only will we fritter away the growth advan­ tage, but will cause the resentment in the minds of the tax­payers to fester.

End Note.

I can’t end this column without applauding the setting up of a sort of a super­regulator in the form of the Financial Stability and Development Council (FSDC). Its stated aim to “monitor macro prudential supervision of the economy” means in English that it will be the super regulator that has been in public debate for so long. It will monitor the functioning of large financial conglomerates.

This means in English that another instance of a large universal bank coming near the brink will be sought to be avoided. Third, it will iron out wrin­ kles among various regulators. With the spat between the Securities and Exchange Board of India and the Insurance Regulatory and Develop­ ment Authority coming out into the open, this comes at a good time to address contentious turf issues. And last, FSDC will also be responsible for a coordinated look at financial literacy and finan­ cial inclusion. The yet to be tabled Swarup Com­ mittee Report has recommendations in both these areas and maybe will see the light of the day.

THE PERFOR­ MANCE OF NEW GENERATION PRI­ VATE BANKS CAN GUIDE THE REGU­ LATOR ON NEW PLAYERS

WE NEED TO REMEMBER THAT DIRECT TAXES ACCOUNT FOR JUST ABOUT 8% OF THE TOTAL EXPEN­ DITURE

RAMESH PATHANIA/MINT

BOOSTING GROWTH

Towards a better tax structure The Budget’s most significant contribution to tax reform is its reiteration of tenets laid down in the proposed direct tax code and the uniform goods and services tax

B Y S ANJIV S HANKARAN ···························· EW DELHI -- April 2011 is the deadline for far-reaching tax reforms that are expected to feed into the ongoing fiscal consolidation and eventually boost economic growth.

Finance minister Pranab Mukherjee’s budget proposals on both direct and indirect tax were designed to seamlessly flow into the likely architecture of the proposed direct tax code (DTC) and goods and services tax (GST) respectively.

Of the two, DTC is more under the control of the central government, Ashok Chawla, finance secretary, said at a press conference following the budget speech. GST, which aims to create a common market in India, would require state governments to sign on. Currently, the centre and states are engaged in discussions to roll out GST. Mukherjee proposed to partially roll back fiscal stimulus measures by increasing the mean central excise duty by two percentage points to 10%, and enhancing indirect taxes on some petroleum products.

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The increase in indirect taxes aim to rein in fiscal deficit, reduce government borrowings and create space for loans to drive private investment and growth in the economy.

Though the immediate impact of the increase in indirect taxes would be to push up the general price level in the economy, the eventual outcome would be to neutralise inflationary pressure which stems from an unchecked fiscal deficit (the excess of expenditure over revenue which is funded through borrowings).

According to Kaushik Basu, chief economic advisor in the finance ministry, the budget proposals on indirect taxes would add about 0.43% to the inflation rate as measured by the wholesale price index.

“Beyond a point you are feeding into deficit,” Basu said, while explaining the rationale to increase indirect taxes. “Nothing is a free lunch in developing a budget.”

Another senior official in the finance ministry, who did not want to be named, said the increase in mean central excise

(Cenvat rate) to 10% was designed to be in sync with the central government’s design of GST. The central government, unlike the states, wants a single GST rate to cover both merchandise and services. Prior to the budget, services were taxed at 10%, and Mukherjee pointedly remarked he chose to leave the prevailing service tax rate at the same level.

Studies commissioned by the 13th Finance Commission (TFC) indicated the rollout of GST could increase gross domestic product by almost Rs1

trillion by ironing out inefficiencies and lowering costs.

A buoyant economy is expected to create a virtuous cycle by enhancing tax revenues and lowering the fiscal deficit by compressing the extent of expenditure which needs to be met through borrowings.

On the direct tax side, Mukherjee provided benefits on personal income tax and also pushed further along the path to link tax exemptions for companies to investments rather than profits, both of which were suggested by DTC. The DTC builds on the move

in the recent past to simplify tax law, reduce exemptions and introduce moderate rates, all of which have contributed to the recent buoyancy in direct taxes.

Mukherjee’s budget proposal to provide benefits on direct taxes are expected to boost economic growth. “(The) whole idea is a large part will go into savings. Growth depends critically on the savings rate,” Basu said.

According to budget documents, benefits on personal income tax would also boost private consumption and push economic growth forward.

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SATURDAY, FEBRUARY 27, 2010

L5

Parenting

PRIYANKA PARASHAR/MINT

Party pooper? From buying a television to watching a movie in a cinema hall, you need to pay tax on all goods and services you buy, irrespective of your age.

AFP

tax How much

do you really pay?

Besides paying income tax, you also need to pay tax on the goods and services you buy every year. We take three income groups to show how much this works out for you on an average B Y M ONIKA H ALAN monika.h@livemint.com

······························ he income-tax deduction that shows up in the salary slip really hurts. What that money could have done to ease up consumption and investment needs is a frustrating thought.

Especially when the taxpayer sees the government missing from his average daily life in the absence of efficient water, power, security, urban transport and housing facilities.

But have you ever thought about what you really pay as your total tax bill? We are aware only of the direct taxes we pay, which is income tax, but there is another tax bucket called indirect taxes, which is also filled with our money. Customs, excise, valueadded and service taxes make up the heads under which we pay additional tax to the government.

We pay these on the basket of goods and services that we buy every year.

Because the tax is embedded, we don’t always know what it

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Ten conversations with Mint’s Anil Padmanabhan and Monika Halan that cuts through the clutter and tells you what to watch out for in the union budget speech and why

costs us. For example, did you know that each litre of petrol we buy would cost us half if we took the taxes out of the final price?

To compute the total tax hit that we take each year, Money Matters looked at an average household at three levels of income, which correspond to different income-tax rates. Next we looked at their average consumption baskets and put a tax number against it. Then we added the two to reach the final figure. This is our total tax bill to the government.

Since the direct tax incidence differs across gender and age, we took three faces to represent an average household at an annual income of Rs5 lakh, Rs10 lakh and Rs20 lakh—for a woman under 65 years of age, man under 65 and a senior citizen over 65 years of age.

The Delhi-based economics research firm, Indicus Analytics, gave us an average break-up of a consumption basket at these three levels of income. The three items on which people spend most are the same for each cate-

gory: travel to work and within the city, consumer services and rent. But after the top three, the trend begins to vary.

If the Rs5 lakh household spends on basic food and vegetables, the Rs10 lakh and Rs20 lakh households spend on fruits and vegetables and education.

Next we got the tax consultancy, BMR Advisors, to work in the tax rates—both direct and indirect—to give us a consolidated number for tax paid by each household.

ASSUMPTIONS:

1

Expenditure on conveyance indi­ cates cab hire charges and does not entail expenditure towards self­owned vehicles (fuel cost).

2

Expenditure on education indi­ cates tuition fees for school and colleges and does not indicate expenditure on commercial coach­ ing and so on.

The results are not surprising: The people at the lower end of the income pyramid end up getting hurt more from indirect taxes than those who are richer.

Though we get a uniform 7-7.5% incidence of indirect taxes on the three income categories, the effect is much sharper on a household at a lower income base compared with the income-tax incidence.

The average income-tax paid is 7% for a Rs5 lakh household, 18% for a Rs10 lakh household and 24% for a Rs20 lakh household—this is fair on a progressive system of taxation.

However, for the Rs5 lakh earner, the tax bucket more than doubles with the weight of indirect taxes. For the Rs10 lakh household, indirect tax is around 30% of the total tax paid. On the other hand, for the Rs20 lakh earner, indirect taxes are just about 20% of the total taxes.

While there is nothing much we can do about what we pay to the government, it does help to know what we pay.

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Insider

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Click here to download our tax calculator and find out SOURCE: Tax data and analysis by BMR Advisors ; consumption basket data from Indicus Analytics

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Style I, the consumer SPENDING

DummWith a 2% increase in excise duty this Budget, get ready to pay more for refrigerators and ACs; but microwave ovens and cellphones could be cheaper.y

B Y V IJAYA R ATHORE AND R ASUL B AILAY ···························· et ready to shell out more for that bigger refrigerator and the air conditioner you were planning to buy this summer.

The finance minister has announced a 2% increase in excise duty and consumer durables companies making ACs, refrigerators and other appliances are likely to pass on this cost to the consumer.

In fact, the cost of most white goods is likely to go up owing to impending hike in fuel prices and rising raw material costs.

The good news is that microwave ovens and mobile phone accessories may be cheaper if the firms pass on the excise duty benefits to the consumer.

“Special additional duty on mobile phones has been rolled back. This will benefit the mobile companies which import packaged mobile phones,” said Moon B. Shin, managing director, LG Electornics India Pvt Ltd. “Abolishing the 2% excise duty on mobile phone accessories is also encouraging for consumers.”

Expect prices of refrigerators and ACs to go up in the coming week as most appliances and electronics makers including Godrej Appliances, Samsung Electronics India Pvt Ltd and LG Electronics India say that it will be difficult for them to absorb the additional cost in a challenging environment.

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Several companies announced price hikes in January to offset rising cost of inputs such as steel, aluminium, copper and plastic.

“There will be another hike of at least 2% across products,” said George Menezes, chief operating officer, appliances division, Godrej and Boyce Manufacturing Co. Ltd, adding that the industry cannot absorb the increased pressure of duty hike, higher freight and logistics cost due to the increase in fuel prices.

The actual price rise could be nearly 4%, according to leading companies in this space. Samsung is expected to announce its new prices in a couple of days, its spokesperson said.

However, “microwave ovens could be cheaper by anywhere between Rs150 and Rs 500,” according to A. Srinivasa, director, Vivek Ltd that operates a chain of 53 electronic stores in Tamil Nadu and Bangalore.

V. Ramachandran, director, sales and marketing, LG Electronics India, does not see any significant price cuts on microwaves on account of a custom duty cut of 5% on magnetron—a key component used in making microwaves.

Although duties have been reduced on LED lights and water purifiers as well, according to experts in the related industries, consumers will not enjoy any significant benefit from the change.

Lower central excise duty on

replaceable kits for household water filters, other than those based on reverse osmosis technology, to 4% will not bring down the price of final product.

“Also, the reduction in excise duty on LED lights to 4% will not lead to any significant benefit as most of the LED products are imported,” said Anil Chugh, vice-president, Wipro Consumer Care and Lighting.

The Budget is also unlikely to change the way you buy personal and home care products.

Although there has been an increase of 2% in excise duty, these companies are wary of passing on the burden to the consumer.

According to analysts tracking the segment, prices of products from Nestle India Ltd, Godrej Consumer Products Ltd and Dabur Ltd, which have units in excise-free zones, will not be impacted.

Other companies not in these special zones could be impacted but are unlikely to increase prices of soaps, shampoos and toothpastes for fear of losing sales.

For food products, no company is in a position to pass on the increased burden as consumers are already facing the heat of rising food prices.

According to Anand Ramanathan, an analyst with audit and consulting firm KPMG, “The burden of the excise duty hike will be balanced by the rise in purchasing power of consumers both in rural and urban areas.”

in these—besides the Rs70,000 for other tax-saving instruments, such as equity-linked saving schemes (ELSS), National Savings Certificates and Public Provident Fund—to claim a maximum rebate of 20%. Taxpayers were also allowed to invest the entire Rs1 lakh—the limit in Section 88—in infrastructure bonds.

The 2005-06 Budget scrapped Section 88—along with Sections 80L, 80CCC, 80CCD and 80C—and introduced section 80C, which removed individual limits of all the categories of tax-saving instruments.

It instead allowed an investment limit of Rs1 lakh for all eligible tax-saving instruments.

Since infrastrcture bonds provided returns of between 7% and 7.7%, taxpayers gravitated towards ELSS, which as an equity investment vehicle had the potential to deliver better returns.

Friday’s Budget proposals have now revived the tax-deductible infrastructure bonds by creating a fresh limit of Rs20,000 just for them and putting them separately under a new section.

There are two issues to consider before buying these bonds. The fine print says the bonds will be notified by the Central government. Expect this to come in a month or two, industry experts said. Till then,

it is unclear whether private companies would be allowed to issu e su ch bonds or the option to raise money by issuing bonds will only be given to government companies.

“Our company also lends to the infrastructure sector, but we have to wait for the notification to see if we are allowed to issue such bonds,” said Maheshwari.

Secondly, the tenure of the bonds has not been specified.

Typically the tenure of the infrastructure bonds sold when Section 88 was around was three to five years. The Budget has only said the new incarnation would be “long-term,” without putting a number to it.

“They could be for a minimum of five years or maybe as high as 10 years,” said Bagchi.

Also, unlike in the earlier version, where interest earned from these bonds was also taxdeductible to a certain extent, the new avatar will not offer any such benefit as Section 80L has long been abolished.

Interest from the bonds are likely to be taxed at the appropriate income tax rates. It would be interesting to see the inter est ra tes of these new infrastructure bonds and how competitive they would be.

Budget allows a deduction of Rs20,000 on infrastructure bonds over and above the Rs1 lakh deduction available under section 80C.

TAX DEDUCTION

I, the investor DummyMore tax benefits for you.

Apart from the Rs1 lakh tax deduction that you get under section 80C, you can get another deduction of Rs20,000 if you invest in infrastructure bonds under section 80CCF.

B Y K AYEZAD E . A DAJANIA ···························· nfrastructure bonds are back, with the Budget giving you one more opportunity to save on income tax. You will now be able to invest in these bonds and claim a deduction of up to Rs20,000, besides the existing tax breaks under section 80C. The new deduction comes under section 80CCF. “Retail investors will have one more avenue to participate in the infrastructure projects,” said Anup Bagchi, executive director, ICICI Securities.

If your income is, say, Rs8 lakh and you maximize your investments under section 80C and section 80CCF at Rs1.20 lakh, you will save Rs4,120 in tax.

Money raised from the sale of the bonds will go towards bolstering India’s tottering infrastrcuture.

“The concept of issuing infrastructure bonds is good,” said Suneet Maheshwari, chief executive, L&T Infrastructure Finance Co. Ltd. “The Budget has incentivized it by giving it a tax impetus and the money would be available to infrastructure-lending companies at a lower cost.”

Buying infrastructure bonds to claim income tax deduction is not new. Till 2005, when Section 88 of the Income-Tax Act 1961 was in force, you could invest a maximum of Rs30,000

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Business Lounge

TAX SLABS

Income tax slabs to increase Finance minister gives taxpayers a pleasant surprise by expanding the tax slabs. This would leave more disposable income in the hands of people and would, therefore, increase demand

B Y D EEPTI B HASKARAN ···························· ontrary to expectations, the Budget gave taxpayers a pleasant surprise by broadening the tax slabs.

People were not expecting many changes in the tax proposals until the proposed direct tax code replaced the current taxation regime.

Keeping the minimum exemption limit intact, the Budget proposal has increased the tax slabs by extending the maximum tax rate of 30% for individuals earning more than Rs8 lakh a year against the earlier Rs5 lakh limit. The tax slabs will apply in the fiscal year beginning 1 April.

“This will result in a larger disposable income in the hands of the taxpayer, which in turn would increase demand. This has been a calibrated move to boost growth,” said Jay Shankar, chief economist, Religare Capital Markets Ltd. “The Budget does pave the way for a partial rollback of stimulus, but at the same time creates a balance by increasing disposable incomes.”

For an individual earning Rs5 lakh a year and availing a deduction of Rs1.2 lakh by making the required investments, the new tax slab would translate into savings of Rs12,600 as he would come under the 10% tax bracket and not the 20% slab.

For individuals earning Rs10 lakh or more, the benefit would remain at Rs57,680.

“Even though the Budget has not increased the basic exemption limit, expanding the tax slabs will mean savings for taxpayers,” said G. Ramaswamy, vice-president, Institute of Chartered Accountants of India, the regulator of auditors.

In addition to increasing the tax slab, the Budget has proposed replacing the income-tax return (ITR) forms with Saral-II forms to make the process of filing tax returns simpler. This form is meant for individual salaried taxpayers.

“ITR is meant for the business class or for individuals who have income from various sources,” said Ramaswamy. “For a sala-

C

ried class (individual), his income and savings gets reflected in its Form 16. He can simply use his Form 16 and file his returns instead of filing ITR forms, which run into several pages and require a lot of data.”

Finance minister Pranab Mukherjee said the tax department was ready to notify the two-page Saral-II form for individual salaried taxpayers for the coming assessment year.

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Play Quotes from live chat today I think it’s time we stopped expecting ”benefits for the sal­ aried class” from the budget ­ SUKUMAR RANGANATHAN

I also wish that FM increase the limit of section 80(C). It is seen that most of people have been exhausted their limit of 80(C) with EPF and insurance premium only. ­ MEHUL

Good news on direct tax code ­ NAVEEN

Competitive bidding for coal blocks is MUCH MUCH better than Ad­hoc coal linkages ­ SSK

@Ivan relief continues for those with loans upto Rs 10 lakh. ­ MONIKA HALAN

@Geetika i would wait to took at the math before saying this ­ SUKUMAR RANGANATHAN

impact of indirect duty changes will either increase petrol subsidy burden on oil companies or push up domes­ tic oil prices. If it is the former it will burden the fiscal, if it is the latter, it will push up inflation ­ ANIL PADMANABHAN

That means more of social welfare and inclusive growth to justify more state regulation? when do we see a real signal of growth via innovation and entrepreneurships? ­ SANJAY K

Pranb promises clarity on fdi policy; hope issues related to grandfathering and the banking sector are sorted out ­ SUKUMAR RANGANATHAN

@ssk step by step, setting up coal regulatory authority was a much needed first step to clean up the existing mess ­ ANIL PADMANABHAN

Clean tech/ energy development fund & hydro projects ­ budget gets a shade of green ­ SACHIN

Infra needs to be revamped but that would essentially mean taking money from other initatives and pulling all for infra only..moreover infra projects rarely kicks off within time..hence this would result in underutilization of budget ­ ASHISH

Property rights for slum dwellers scheme ­ 1274 crore as compared to 150 crore in previous years ­ states to create a slum free India. So they are listening to De Soto ­ ANIL PADMANABHAN

Pranab Babu ... is stating all alloca­ tion.... wait for his income generation measure..... from where all this money will come ... Increasing Taxes... ??

More burden on AAM Admi ­ KAPIL

Reigning inflation is urgent need as daily expenses are getting burdensome ­ SAUMYA

whats the news on the home loan front? Any scope of relief for existing customers? ­ IVAN

this one seems to be really an aam admi budget, a substantial impor­ tance and funds for social security for the unorganized sector workers!

Kudos Pranab Babu! ­ GEETIKA

Market borrowings 3.45 trillion creating space for meeting private demand. Bond prices may rise and push yield down as a fall out. ­ TAMAL BANDYOPADHYAY

Additional Rs 20,000 deduction allowed on investment in notified infra bonds. Total deduction now is Rs 1.2 lakh ­ MONIKA HALAN

relief that excise rise was only 2% evident ­­ markets would have fallen had it been more ­ SUKUMAR RANGANATHAN

This budget is going to create too much probelms for aam aadmi because of inflation and price rise ­ SREEKANTH

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SATURDAY, FEBRUARY 27, 2010

Play Cheers by some, not all MARKET MOOD

The Sensex was up 1.08% from the previous close at 16,429.55, down from an intra­day high of 16,669.25; BSE Auto index gained the most

B Y R AVI K RISHNAN ························· lower fiscal deficit, an excise tax hike which had already been accounted for and a personal income tax bonanza led to a relief rally as Indian equities soared 2.5% when the finance minister presented the Union budget. It was shortlived however as investors pared some of the gains fearing inflationary consequences and questioned the assumptions on government spending increases in the next financial year.

The budget did little to change the medium-term outlook, said investors who remained positive on the India’s growth story.

At the close of trading on Friday, India’s benchmark index, the Sensex, was 1.08% up from the previous close at 16,429.55, down from an intraday high of 16,669.25, marking finance minister Pranab Mukherjee’s announcement that next year’s fiscal deficit would be capped at 5.5% and at 4.1% in the next two years.

The 50-stock Nifty index closed 1.29% up at 4,922.3.

The Budget clarified the fiscal road map, bringing a measure of predictability, which bouyed the markets, said Nandip Vaidya, president of equities at India Infoline Ltd, the country’s largest listed brokerage.

“The expectations were not very high,” Vaidya said. “The uncertainty is over and the intent is clear and positive.”

“What the market liked most was the fiscal consolidation programme,” said Alroy Lobo, chief strategist and global head of equity assets at Kotak Mahindra Asset Management Co. Ltd, which manages Rs36,781 crore. “The deficit numbers were good and there was a fair degree of short covering.”

The debt markets were encouraged by the lower borrowing target of Rs3.45 trillion for the year, down from the current year’s record Rs4.5 trillion.

“The budget is positive for the bond markets,” said G.A. Tadas, managing director of IDBI Gilts Ltd. “Although yields rose today because of the petroleum price increases, the borrowing is lower than expected and we should see a

A

rally on Tuesday.”

The benchmark 10-year government bond closed up 8.5 basis points to 7.885%.

G. Chokkalingam, head of equities at Barclays Wealth India, said the budget left investors free to concentrate on the good macro economic fundamentals such as the projected 7.2% growth figure for this financial year, proposed tax reforms that will kick in next year and the thrust on infrastructure, education and health.

“The era of uncertainty is over,” said Chokkalingam.

“Barring issues such as a poor monsoon or global incidents, the budget has laid a foundation of solid wealth creation.”

With profit being booked later in the day, clearly not all investors agreed.

VIPUL NIRANJAN RAJADHYAKSHYA VERMA CEO, MONEYVISTAS.COM

Reform oriented and balanced budget

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ast year I described the budget by starting my column “Finally it’s over”. This year I would like to start with: Finally it has arrived. For the last several years, it had become rather a trend to see markets falling sharply fol­ lowing the budget. So this year came as a pleas­ ant contrast.

While the credit goes to the finance minister for presenting a reform­oriented and balanced budget, some part of the post­budget rally can also be attributed to the fear psychosis of inves­ tors. Investors to a large extent were unduly concerned about budgetary proposals and their likely impact on the stock markets. Since the Indian economy is in a high growth trajectory, the economic environment has to be supportive

in order to achieve the desired results. However, uncertainties attached to the limited options available with the government led to nervous­ ness among investors.

This growth­oriented budget has put to rest several doubts as it’s forward looking and addresses a lot of issues that were haunting investors for some time now like the status of the economic stimulus, the duty structure, gov­ ernment borrowings and the fiscal deficit.

Special mention needs to be made of direct and indirect tax proposals, which on the one hand have left a good amount of money in the hands of tax payers, while on the other hand, a confidence­boosting slow rollback of stimulus measures has also begun. The borrowing target

“There was a lot of relief and the the assumptions made on the revenue side are fairly conservative,” said Anoop Bhaskar, head of equities at UTI Asset Management Co Ltd, which manages Rs74,510 crore. “But investors are concerned about the assumption on the expenditure side.”

The expenditure hike of 8% is one of the lowest in recent years thanks to the modest allocations for subsidies and defence. For instance, the overall subsidy bill projected for next year is 11% lower, while the sum allocated for the Mahatma Gandhi National Rural Employment Guarantee Scheme is only Rs1,000 crore higher than the present fiscal.

The government expects asset sales and high-speed mo-

of the government and lower fiscal deficit tar­ gets were also positive surprises for the mar­ kets.

Though the hike in Minimum Alternative Tax was unexpected, the cut in the cess on corpo­ rate tax was a welcome move. The rationaliza­ tion of excise and custom duties was along expected lines.

The immediate difference is that from now on the Indian markets will not be one of the front runners among the losers as domestic strength will counter the volatile and uncertain global economic scenario. This in itself is a big boost to the market as it will prepare the ground for the return of investors to the market.

Subsequently, the current pace of economic growth will help boost sentiment on bourses further. Indian investors actually needed a turn­ ing point for the market, which this budget has justifiably delivered. Economic fundamentals will be back in the reckoning ­­ that’s one of the immediate impacts of the budget for the mar­ ket.

On a broader horizon, valuations post tax adjustments will become slightly more attrac­ tive, which will also go down well with the mar­ kets as the budgetary proposals have a positive impact on companies.

Though it is fair to assume that the impact of the budget will dominate the market for a very

bile spectrum auctions to be substantial sources of revenue next year.

“There is a fair bit of reliance on the 3G auction and disinvestment figures and if there’s any slippage on that front, it will be negative,” said Lobo of Kotak. “The sale of mobile spectrum, which will fetch the government Rs35,000, crore has been delayed for several months now.”

While the budget is seen as positive, investors said they would look at global factors such as high debt in the Euro zone and banking regulations across the world in the medium term, besides valuations.

“One has to go through the fine print, but the signal is of moving to better fiscal health,” said Vetri Subramanian, head

short period of time and the focus will shift back to global economic issues, with projections and assumptions in front of us, there would be more clarity about the economy.

There will be an uptick in inflation due to the rise in petroleum prices, which as per the eco­ nomics secretary will be less than 0.5%. Howev­ er, the spiralling effect of this would surely hit sentiment in coming weeks and sooner rather than later the fear of fiscal tightening would pop up again to haunt investors.

Following the post­budget rally, technical analysis suggests that the worst is over for now and the market has a very limited downside going forward. As far as the trend on bourses is concerned, it is now pointing upward with a Nifty target of 5,148 in sight. What happened in the last two hours of trading on Friday does not mean peaking out of the trend as leading indica­ tors are in cross­over mode and clearly showing a break­out on the positive side.

The fact that the rally came on huge volumes, also reinforces the view that there is scope for more gains on bourses and next week should be good. On a broader horizon, short­term technical indicators suggest that the Nifty and the Sensex could move up 4­5% in coming weeks, before they see any significant downside.

of equities at Religare Asset management Company Pvt Ltd, which manages Rs13, 283 crore. “But valuations are still high and have not dropped to attractive levels. We remain cautious on Indian equities.”

At the sectoral level, auto stocks soared the most with the BSE Auto Index up 4.74% as the 2% excise tax hike was on expected lines. Banking scrips also gained a collective 2.58% after the budget announced that the RBI was considering additional licenses for the private sector. The top gainer among the 50 Nifty stocks was Reliance Capital Ltd -- a banking licence candidate -- up 7.83% at Rs784.7. It was followed by Tata Motors Ltd, which gained 7.21% to close at Rs715.55.

SHORT­TERM TECH­ NICAL INDICATORS SUGGEST THAT THE NIFTY AND THE SENSEX COULD MOVE UP 4­5% IN COMING WEEKS.

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Play

BUDGET MOVES

Street smart The Sensex reacted instantly as the finance minister read out the Budget. A lower fiscal deficit and smaller borrowing programme sent the markets soaring, but ended the day at 16,429.55

YAMINI NIRANJAN RAJADHYAKSHYA AIYAR Centre for Policy Research

Governance reforms, not hikes, were needed

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ndia’s social sector, including education, health and rural infrastructure, received pride of place in Pranab Da’s budget speech. After all, as he noted, harnessing economic growth to consolidate recent gains in making development more inclusive is one of the greatest challenges we face today. And so, spending on the social sector has increased. With budget 2010, the social sector now accounts for Rs. 137,674 crore, or 37% of the total plan outlay for 2010-11.

But will these increases result in meeting the challenge of inclusive development? No doubt, inclusion requires increased allocations. But this is only half the battle. The real challenge for India is to ensure that the increases in allocation result in effective spending and, therefore, improved outcomes. This requires effective governance and this

is where budget 2010 falls short The issue of ineffective expenditure and poor governance is well acknowledged. In fact, at the start of his budget speech, Pranab Da articulated weaknesses in government systems, structures and institutions as the third key challenge for India.

Yet, his budget does very little to address this challenge.

The crux of the problem with governance of India’s social sector is an incentive structure that significantly compromises accountability for performance. Take the issue of expenditure. Year after year, large amounts of money remain unspent, as reported by the government itself. And yet, year after year, the annual budget makes increased allocations with little consideration for expenditure performance–where then are the incentives? This is

exacerbated by the fact that information on expenditures, in real time, is rarely available. Moreover, there is very little information and effort made to monitor outcomes.

The problem of poor spending is inextricably linked with weaknesses in the nature and form of the implementation structures. In the current system, where centrally sponsored schemes dominate social sector spending, funds arrive at the local level tied to specific guidelines allowing little flexibility to accommodate local needs and priorities. Consequently, expenditure rarely reflects real needs on the ground.

Another critical weakness is the incentive structure at the local level. Teachers and doctors for instance are hired, paid, monitored and therefore accountable only to state governments. It is of course, unrealistic to expect that the state government, which is far removed from the schools and public health care centres, could be effective monitors. This is why absenteeism is so high – 25% among teachers and 40% among doctors.

Worse, as salaried government employees, they are paid regardless of performance. What then are the service providers’ incentives? Think about it -- if you are paid a salary, not monitored by supervisors, cannot be fired or have your pay reduced under any circumstances, would you bother showing up for work?

Under these circumstances, if the budget was to really ensure real inclusion it would have seriously

considered raising allocations with real administrative reforms. This would have included making provisions for block grants to Panchayats, and increasing their powers to monitor and hold local service providers accountable. The 13th Finance Commission has made some far reaching recommendations aimed at strengthening local bodies. Budget 2009 could have leveraged this to strengthen local governments’ role in implementing social sector programmes. Not doing so is a real opportunity lost.

Local governance apart, budget 2010 could have introduced other reforms such as linking pay to performance and creating more effective systems for monitoring outcomes.

In sum, the budget is much as expected. Some increases in allocation but increases that are unlikely to have any real consequences in the absences of real governance reforms. In his maiden speech on becoming Prime Minister, Manmohan Singh promised that the UPA would be a government with a real reform agenda. “No development agenda”, he said, “can be met if we do not reform the instrument in our hands”. Sadly, one term later, the instrument remains much the same.

Yamini Aiyar is a senior research fellow and director of the Accountability Initiative of the Centre for Policy Research.

Respond to this column at feedback@livemint.com

THE CHALLENGE IS TO ENSURE HIKES IN ALLOCATION RESULT IN EFFECTIVE SPENDING

Watch Yamini Ayer analyze the budget here

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SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM

ourview Well-designed Budget Fine on paper, the hard part is implementing it under political constraints

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t is hard to fault finance minister Pranab Mukherjee for what he has tried to do in the new Union Budget he presented on Friday. It is a fine blend of pragmatism and vision.

The pragmatism comes from the recognition that the Indian government cannot continue to live beyond its means. Public finances had to be set right now that the Indian economy has recovered from the mild downturn.

The stated goal of bringing down the fiscal deficit from 6.7% of the gross domestic product (GDP) in FY10 to 5.5% in FY11 is as welcome as it is ambitious; but we cannot help mention that the budgeted revenue deficit is still 4% of GDP. In other words, the government will borrow up to 4% of GDP in the new fiscal year to help meet its expenses on stuff such as salaries, interest payments and subsidies, at a time when companies need funds to increase capacity and the government should be borrowing to build new roads and ports. The revenue and primary deficits will have to be watched as closely as the fiscal deficit is.

But the welcome first step to fiscal consolidation seems to have been taken. India

does need to get to a fiscal deficit of 3% of GDP and a zero revenue deficit by 2015.

It is no surprise that the stock market perked up only after the fiscal numbers were announced.

The finance minister is now gunning for a deep cut in the fiscal deficit—1.2 percentage points. Will it prove to be a stretch target? The Indian government has been able to make a larger fiscal correction only twice in recent history: 1991-92 and 2003-04. The ability of the current government to pull offthe trick will depend on two factors: how realistic its budgetary assumptions are and how well it can keep spending under control.

Here’s a look at some of the numbers in the Budget

The FM has assumed a wonderful combination of tax buoyancy and spending discipline

papers. The finance ministry has implicitly assumed that the Indian economy will grow at 12.5% at current prices in FY11. Tax revenues are expected to grow faster than the economy (18%) and total expenditure is expected to grow slower than the economy (8%). This means that the finance minister has assumed a wonderful combination of strong tax buoyancy and spending discipline.

And what’s even more interesting is that the stronger tax collections are to come from excise and customs duties rather than income tax, where effective rates have been reduced. On the spending side, Mukherjee hopes to keep a tight leash on revenue expenditure even as he budgeted for an increase in capital expenditure.

What this means is that the government is planning for a fiscal correction led by a spending discipline rather than a cut in capital expenditure or soaring taxes. That makes this fiscal correction plan quite different from many ofi ts predecessors—and seems a bit unrealistic, given the political economy constraints in India. We should also take note of the

JAYACHANDRAN/MINT

huge 32% rise expected from non-tax revenues, including disinvestment and auction of third-generation, or 3G, telecom spectrum.

The vision in the Budget comes from some of the reformist hints dropped in the finance minister’s speech. He has committed himself to the introduction of the goods and services tax and a new direct tax regime in April 2011. That means India will finally have a low and stable system of taxes—a huge plus.

Mukherjee has suggested that the money collected from disinvestment would be used for capital spending of social sector schemes so as to create assets. The decisions to give out new bank licences and to expand the bank branch network are some of the moves to deepen the financial sector and also promote financial inclusion. The promise that oil marketing companies would be paid cash rather

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S NARAYAN fifl  fl  

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inance minister Pranab Mukherjee started offwith a strong political philosophy statement that the role of this government was to create an enabling environment for growth and development and to strengthen investments in the social sector. For the first time, perhaps, this government openly acknowledged the importance of market- and private sector-led growth, and that public expenditure could not be expected to be the origin of gross domestic product (GDP) growth. He followed it up by allocating 37% of all Plan expenditure for the social sectors (perhaps a record), and outlined the concept of a welfare state by talking about the food security Act, the new schemes for the unorganized sector, reliefi n income tax for the lower slabs, and other concessions.

In parallel, in keeping with the strong pro-market, pro-liberal statement, he announced greater disinvestment in public sector undertakings, opening up off oreign direct investment (FDI) in retail, more private sector banking licences, and a complete overhaul of financial sector regulations. Simultaneously, petroleum product prices have been increased to bring them closer to the market, fertilizer subsidies have been rationalized, there are promises of enlarging FDI, and there is an impression that the government is now open to big private sector initiatives.

This new philosophy comes as a bit of

There is no mention of pending reform Bills; even the word ‘reform’ is perhaps hidden away somewhere a surprise, for the general impression is that the Congress party continues to be socialist in outlook. A criticism here could be that Mukherjee needs to provide public funds for the pro-poor programmes, and that has left him with little for other asset formation initiatives, and hence he is forced to rely on publicprivate-partnership (PPP) models to give the country the required growth stimulus.

On the fiscal deficit, the Budget has delivered as promised, with the expectation of a fiscal deficit at 5.5% of GDP next year, down from 6.8% this year, and a road map of reductions for the next two years. More importantly, Mukherjee has subsumed below-the-line items such as oil bonds and food and fertilizer sub-

than bonds to cover under recoveries is also a step in the right direction— both for the cash flows of the oil companies and as a step towards greater budgetary transparency.

There are undoubtedly and inevitably many budgetary moves that are either puzzling or which hurt select groups. That is part of the game. Some of the tinkering brings back memories of budget making in the 1980s.

However, the overall tenor and promise of the Budget is worthy of praise, given economic and political realities in the country.

The plan has been revealed. Now comes the next step: implementation. It may not be as simple as it seems.

Does Budget 2010 meet your expectations, and are Pranab Mukherjee’s targets realistic?

Tell us at views@livemint.com

sidy numbers—previously taken offthe balance sheet—into the budgetary deficit, which indicates greater transparency and, indeed, a greater resolve to get finances in order. The government is also providing enough funds to recapitalize public sector banks, and there are no loan giveaways that would affect their balance sheets.

On tariffs, there is no new taxation, and there is only adjustment in the rates of taxes already being levied. The reduction in personal income-tax rates would be very welcome for the middle class, and there is no increase in service tax rates. Excise duty hikes are modest, and there are customs concessions for specific sectors in keeping with the budgetary practice of choosing winners for tariffbenefits.

Altogether, this is a very mature budget, balancing requirements of growth with social sector spending, ensuring that inflationary pressures are not exacerbated. This is, indeed, the very kind of balanced mature document one would have expected from a seasoned person such as Mukherjee.

And yet, there is a feeling of opportunity missed, of things not done, and of shadows lurking. First, the increase in Plan allocation is very modest—just 15%—and given inflationary pressures, real increases (subtracting for the rate of inflation) would be even lower. Agriculture, for all the fanfare in the Budget, gets only around Rs400 crore more—surely a very modest number for such an ambitious programme.

Increases in allocation for the national highways programme and even the National Rural Employment Guarantee Scheme are fairly small. The numbers indicated for revenue expenditure do not inspire confidence, and it is quite possible that these may have to be revised substantially upwards

later—and this would affect the fiscal deficit.

Second, there is little delivery on promises. The launch of the goods and services tax moves to 2011, and so does the direct tax code. The road map for fiscal consolidation would be placed before Parliament only in six months’ time. There is talk of committees for the financial sector, regulators for coal, and a host of other bureaucracy to be grown.

There is no mention of the reform Bills pending in Parliament, and even the word “reform”, perhaps, is hidden away somewhere, difficult to find. Allocations continue to be used as a surrogate for action, and even the concern in the speech about poor public delivery systems has not led to any actionable programmes. Mukherjee said that more than 300 of the recommendations of the Administrative Reforms Commission have been implemented, but the citizen is hard put to locate improvements in administration.

On two important issues, inflation and employment, there is very little. He shares the concern with all of us that inflationary pressures are high—we thought he was the person to do something about it. The petroleum price increases will add to these pressures, as will the increase in excise.

Finally, there is reliefi n direct taxes and an increase in indirect taxes, quite the reverse of what India has been trying to do these last 10 years. Indirect taxes are retrograde, affecting the poor and rich alike—a mature economy should have a larger share of direct taxes.

S. Narayan, a senior research fellow at the Institute of South Asian Studies, Singapore, is a former finance secretary.

We welcome your comments at policytrack@livemint.com

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PROPOSAL Excise duty on auto components and tyres increased from 8% to 10%. Interest subvention of 2% on pre-shipment credit for small and medium exporters extended to 31 March 2011.

IMPACT No significant impact on the industry. Increase in excise duty on tyres will be passed on fully to original equipment manufacturers (OEMs) and replacement segments. A rise in excise duty for the auto component sector may be passed on to automobile manufacturers. However, if absorbed, it will be offset by increase in demand. The interest subvention of 2% will have a marginally positive impact for small and medium exporters engaged in exports of auto components.

PROPOSALS Excise duty up from 8% to 10%; excise duty on big cars, sport utility vehicles and multi-utility vehicles raised from 20% to 22%; additional duty component retained at Rs15,000 for cars of 1,500-1,999cc engine capacity and Rs20,000 for passenger vehicles with engine capacity above 2,000cc; excise duty of Re1 per litre on fuel; customs duty 5% higher; allocation for road development up 13%; weighted deduction on in-house R&D spending raised from 150% to 200%; 4% excise duty on electric vehicles; critical parts and assemblies of such vehicles exempted from basic customs duty, special additional duty; countervailing duty of 4% imposed.

IMPACT Higher excise duty rates is likely to be passed on to consumers and is partially negative. But this is likely to be compensated by exemptions on personal income-tax rates. The government’s thrust on rural and infrastructural development remains a key positive. The increased weighted deduction rate for in-house R&D will encourage higher R&D allocations.

PROPOSALS RBI to consider giving banking licences to private sector companies /non banking finance companies. Government to recapitalise select public sector banks by Rs16,500 crore; additional capital to regional rural banks. Increase in interest subvention from 1% to 2% for farmers who pay as per repayment schedule, extension of debt waiver and debt waiver for farmers extended to 30 June.

PROPOSAL Increased allocation for power and infrastructure sector; excise duty cut from 8% to 4% on compact fluorescent lamps (CFL) and LED lamps; 5% concessional import duty on inputs for photovoltaic, solar panels; excise duty waived on photovoltaic, solar panels, and on inputs required in rotor blades.

IMPACT Positive Competition is likely to further intensify. Recapitalising public sector banks is likely to help around one third of these banks. The additional interest rate subvention schemes to encourage prompt repayment by farmers should improve credit culture. But b, the government’s borrowing programme for FY11 remains sizeable and if the credit offtake is more than 15% - 16%, bond yields may rise and thereby impact treasury profits.

IMPACT Increased allocation and long-term funding availability for power and infrastructure projects will induce more investment and thereby benefit equipment manufacturers. Focus on energy efficiency and excise duty reduction for CFL will result in improved demand prospects for players in the lighting segment. Concessional import duty and waiver of excise duty on photovoltaic and solar panels as well as lower excise duty on inputs for rotor blades will benefit photovoltaic cell and wind turbine generator manufacturers, respectively.

PROPOSAL 2% excise duty hike.

IMPACT Increase in outlay on roads, subventions on housing and focus on infrastructure development should boost demand for cement. Increased rural income under National Rural Employment Guarantee Scheme will also boost rural housing demand and, in turn, demand for cement. However, increase in excise duty and imposition of Rs50 per tonne cess on imported and domestic coal will increase costs, which will difficult to pass on to consumers given the current oversupply situation.

PROPOSAL Higher allocation for roads, railways, housing, urban infrastructure sectors; India Infrastructure Finance Co. Ltd (IIFCL) to continue take-out financing; minimum alternate tax (MAT) increased from 15% to 18% of book profits.

IMPACT The increased outlay and continued take-out financing and refinancing plans of IIFCL, and availability of funds through long-term infrastructure bonds, will aid in faster execution of infrastructure projects.

MAT increase will have negative impact on players with operational build-operate-transfer projects.

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Travel PROPOSAL Increase in weighted reduction from 150% to 200% on expen­ diture incurred on in­house research and development (R&D) activities, and from 125% to 175% on activities outsourced to specific institutions. Partial rollback in excise duty from 8% to 10% (to impact raw material costs).

IMPACT The increase in weighted reduction on R&D activities is a posi­ tive and will continue to support higher investments by research­led pharmaceutical companies. It’s a positive for con­ tract research organisations as well. The increase in excise duty for raw material will impact the cost structure. Also, an increase in petrochemical prices may impact some of the basic raw material (intermediate) costs, impacting margin. The increase in MAT rate, however, is going to increase tax outgo for few companies that are currently paying lower taxes.

PROPOSALS Increase in allocation to power sector at Rs5,130 crore (increase of 152%); increase in available long­tem funding through refinanc­ ing from India Infrastructure Finance Co. Ltd; increase in alloca­ tion to renewable energy sector at Rs1,000 crore (increase of 61%); formation of coal regulatory authority and national clean energy fund; clean energy cess of Rs50 per tonne on both domestic and imported coal; increase in minimum alter­ nate tax (MAT) rates from 15% to 18%.

IMPACT Increased allocation to power sector will be positive for central public sector undertakings. Increase in allocation and excise duty benefits are clear positives for firms in renewable energy segment. Coal regulatory authority will bring regulatory clarity and introduction of competitive bidding mechanism for allotment of coal blocks will further enable increased participation from private firms. The increase in MAT and cess on coal are a negative as they will negatively impact profitability of merchant power plants, where costs are not a pass through.

PROPOSAL Nutrient based subsidy (NBS) regime with effect from 1 April . Budgetary provision for subsidy is Rs.52,980 crore (revised estimates for 2009­10) and Rs49,981 crore (budgetary estimates for 2010­11).

PROPOSALS Increase in allocation for rural development, agricultural­ centric and employment generation schemes; reduction in personal income tax; increase in central excise duty from 8% to 10%; increase in duties on all tobacco products.

IMPACT The impact of NBS , announced earlier, will be a function of the subsidy provided in the Budget and the level of increase in minimum retail price to be achieved by industry players. Efficient DAP(diammo­ nium phosphates) and complex fertilizer companies should benefit. The budgetary provision for the cur­ rent fiscal may marginally fall short of requirements due to the surge in component prices in recent months. Provision for 2010­11 also appears to be on the lower side. Firms may not be able to pass on the rise in costs to farmers in view of the commitment given to the government for kharif 2010.

IMPACT Increased allocation for rural development and employ­ ment generation is a positive for the sector, since it is expected to increase consumer spending. Reduction in personal income tax will benefit the sector by increasing disposable incomes. The increase in central excise duty, if passed on to consumers, may lead to some demand con­ traction; increase in duties for tobacco products will adversely affect the segment.

PROPOSALS Benefits of 100% investment­linked tax deduction on capital expenditure (excluding land, goodwill and financial instrument) for building and operating a new hotel (commis­ sioned after 1 April) of two­star category and above, extended from select locations to across the country.

IMPACT Bringing the hotel industry within the pre­ view of investment­linked tax deductions could promote balanced (across categories) incremental investments in fresh inventory, reducing the supply–demand gap in the country. Benefits of increased government thrust on infrastructure/roads to trickle down to the tourism industry over the medium to long term. The increase in MAT rates will, how­ ever, have an adverse impact.

PROPOSAL Rs1,270 crore allocated under Rajiv Awas Yojana; allocation for housing and urban poverty alleviation raised to Rs1,000 crore; 1% interest subvention on housing loan up to Rs10 lakh extended to 31 March 2011; allocation under Indira Awas Yojana increased.

IMPACT Allocation under Rajiv Awas Yojana will aid slum redevelopment programmes. Moreover, extension of the scheme of 1% interest subvention on housing loan up to Rs10 lakh (where the cost of the house does not exceed Rs20 lakh) will continue to provide a boost to affordable housing. On the rural front, increase in alloca­ tion under the Indira Awas Yojana to Rs10,000 crore will help reduce the prevailing shortage in rural housing. However, these allocations will not sig­ nificantly impact the organised housing sector.

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Travel PROPOSAL Minimum alternate tax (MAT) rate has been increased from 15% to 18% while surcharge has been reduced from 10% to 7.5% for Indian companies.

IMPACT The impact of the Union Budget 2010­11 on the IT sec­ tor is negative. The increase in MAT rate will offset any benefits resulting from the decrease in sur­ charge and will affect the players’ cash flows. The impact of MAT will be higher for tier­II players compared to tier­I players.

PROPOSAL Increase in excise duty from 8% to 10%; Levy of cess on coal (Rs50 per tonne).

IMPACT Increase in excise duty will result in an increase of around Rs2,000 ­ Rs2,500 per tonne in aluminium, zinc and lead prices, and Rs7,000 – Rs8,000 per tonne in copper prices. The cess levied on coal will increase the cost of production of aluminium. However, the increased cost of production and price increase on account of rise in excise duty will be passed on to buy­ ers due to favourable expectation of demand growth. Hence, the overall impact on the non ferrous metals sector is neutral.

PROPOSAL Exemption from additional duty of customs (special CVD) of 4% on waste paper and paper scrap IMPACT Impact on the domestic paper industry is neutral.

While the exemption of additional duty of customs of 4% on waste paper and paper scrap will reduce raw material costs for paper manufacturers, players will be unable to retain this benefit and are expec­ ted to pass it on.

PROPOSAL Customs duty on setting up of “digital head­end” reduced to 5%, waiver of 5% SAD proposed. Customs duty on imported digital masters of films, and music and gaming software rationalised to include only cost of medium.

IMPACT The impact of the Union Budget 2010­11 on the media sector is positive. The input cost for mul­ ti­service operators will decrease as a result of the cut in customs duty for digital head­ends. The rationalisa­ tion of customs duty on imported digital masters of films will enable proliferation of digital content in the country.

PROPOSAL Basic customs duty of 5% restored on crude petroleum, 7.50% on petrol and diesel and 10% on other refined products. Central excise duty on petrol and diesel hiked by Rs1 per litre each.

IMPACT The revised duty structure will marginally increase the import duty differential for refineries, leading to a marginally higher refining margin, which is a positive for standalone refineries, including greenfield projects currently being set up.

Higher import duty and excise duty is negative for oil marketing companies as gross under­recoveries will increase. But the post­budget hike in fuel prices will largely negate the impact. Increase of MAT is marginally negative for some large oil and gas companies and new refinery projects. Five per­ cent import duty on crude oil is positive for upstream companies, as they will be benefited in an import parity based pricing regime.

PROPOSAL No announcements made.

IMPACT The overall impact on the domestic petrochemical industry is neutral with no changes announced in the excise or customs duties of petrochemicals.

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Travel PROPOSALS Budget allocation for road projects increased by 13.5% to Rs19,894 crore in 2010­11, incremental disbursement of Rs25,000 crore over the next three years by India Infrastructure Finance Com­ pany Ltd ( IIFCL) under its takeout financing scheme and import duty exemption for specified machinery used in construction.

IMPACT The increased outlay will favourably affect companies involved in road construction. The takeout financing through IIFCL would facilitate the availability of long term capi­ tal. The increase in MAT rate from 15% to 18% will have an adverse impact. Excise duty hikes in cement, petrol/diesel will also push up costs for the sector. Import duty exemption for specific equipment will provide some respite.

PROPOSAL There are no specific proposals in Union Budget 2010­11 for the sugar industry.

IMPACT No impact on the industry.

PROPOSALS Introduction of competitive bidding for allocation of coal block and a regulator for the domestic coal sec­ tor, a cess of Rs50 per tonne on coal, a 2% increase in excise duty, focus on infrastructure, housing and urban development IMPACT The setting up of a coal regulatory authority and the introduction of a competitive bidding process for alloc­ ating coal blocks will help in the development of the sector, which, in turn, will benefit the steel industry, for which coal is a key input. However, the Rs50 per tonne cess on coal and the 2% excise duty hike will adversely affect the profitability of steel companies. The proposals for sectors such as infrastructure, housing and urban develop­ ment are also likely to boost steel demand.

PROPOSALS MAT increased from 15% to 18%. Exemption from basic, countervailing duty (CVD), and special additional duty (SAD) to include battery chargers, headphones; Exemption of SAD extended to mobile phones not imported in pre­packaged form.

IMPACT The impact on the telecom services sector is negative. The increase in MAT will negatively impact the profitability of tel­ ecom services providers. The duty exemptions will result in further reduction in mobile handset prices. However, the impact will be marginal as mobile handsets and accessories are already very affordable.

PROPOSALS The exemption from basic, countervailing duty (CVD), and special additional duty (SAD) on components and accessories of mobile handsets has been extended to include battery chargers and headphones. The government has also extended the exemption of SAD to mobile phones that have not been imported in pre­packaged form. MAT increased from 15% to 18%.

IMPACT The increase in MAT will negatively impact the profit­ ability of telecom services providers. The duty exemp­ tions will result in further reduction in mobile handset prices. However, the impact will be marginal as mobile handsets and accessories are already very affordable.

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If I were FM Industry leaders across sectors spoke to Mint about what they wanted out of the budget, answering three basic questions:

1. If you were finance minister what would you address as an immediate priority this budget?

2. In a five year time frame, what would you implement now that would show results in 5 years?

3. Coming to your own sector, what is the one thing you would like addressed this budget?

Right click to pause/stop

VINAYAK CHATTERJEE

AJIT GULABCHAND

HITESH OBEROI

JOSEPH MASSEY MD & CEO, MCX-SX

CMD, DLF Pramerica

SANJAY UBALE

SANJEEV BIKCHANDANI

SANJAY AGARWAL

S. VISHWANATHAN

V. BALAKRISHNAN

Feedback Ventures

COO Naukri.com

MD/CEO, Tata Realty

RAVI SUD

CFO, Hero Honda

CMD, HCC

CEO/Founder, Naukri

Dty. MD Toyota Kirloskar

GAUTAM THAPAR

SHIVINDER MOHAN SINGH MD Fortis

CEO & MD, Yes Bank

KAPIL MEHTA

SHACHINDRA NATH

RUSSEL PARERA

Chair/CEO, Avantha

CEO, Spicejet

Sr VP & CFO, Infosys

COO, Religare

VINOD JUNEJA

RANA KAPOOR

CEO, KPMG

RANU VOHRA

MD Binani Cements

MD & CEO, Avendus Capita

H.M. BANGUR

SUMANT SINHA

MD, Shree Cement

COO Suzlon

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Books

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SATURDAY, FEBRUARY 27, 2010 ° WWW.LIVEMINT.COM

PLAY THE BUDGET

Which FM are you?

What kind of budget would YOU make if you were Finance Minister?

Would you be pro­reform, pro­labour, or simply populist? See the different outcomes of the game and then try playing it for yourself to see which category you fall under. (PLAY GAME)

Click here to view slideshow

3. PRO GROWTH:

PRO REFORM:

A pro growth budget seeks to maintain the Indian growth story. You want to use your budget to keep incomes grow­ ing, and growth rates at a high rate. This might have implication in terms of overall policy reforms and fiscal defi­ cits. But with global econo­ mies still sluggish, it is a pru­ dent move. Yashwant Sinha’s budget of 1999 might seem familiar.

You have chosen a budget that ignores political pressures and seeks to being prudence to the way the government spends money. You have made steps to increase income, control expenditure, undo decades of faulty pol­ icy and allocate money to the sectors that matter.

This could be a land­ mark budget. Like Chidambaram’s budget of 1997, or Manmohan Singh’s budget of 1991.

4. PRO INDUSTRY: Your decisions will make the industry lobbies happy. This can bring in more invest­ ments, create more jobs and help to fuel growth. In may not make complete political sense, with some of the work­ ing class and poorer sections sceptical of your decisions. But like Yashwant Sinha in 1999 or Chidambaram in 1997, busi­ nesses will be very pleased.

2. PRO LABOUR: The people of the country is what matter most to you.

Your budget will make their lives better, even if it means taking a hit on the deficit and reforms sides. There is a little bit of a Robin Hood at play here in the way you channel income from one side and use it to help the poor and the working class. You look to repeat Chidambaram’s budget of 2004.

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SATURDAY, FEBRUARY 27, 2010

Culture

Farming is dead; long live subsidies B Y S IDDHARTH S INGH ···························· aridkot (Punjab): Avtar Singh is a child of Independence.

When, as a six-month-old toddler he came to India in early 1948, his family was almost penniless. By dint of hard work, the way most Punjabis of the era built their fortunes, the Singhs managed to acquire 23 acres of land. That was in 1965 when the going was good. Today, that landholding has fragmented as it has passed down generations.

F

Mint's reporters traveled across the country to find out more about the implementation of various government schemes in the run up to the budget. Click here to read the whole series.

Singh himself owns 8 acres of land. His brothers and their children own the rest. Singh’s farm is irrigated, a big benefit in a country where most agriculture is rain-fed, but he is caught in a vicious cycle of rising costs and near-stagnant farm income. His is a story of millions off armers in Punjab, Haryana and other areas touched by India’s Green Revolution—the 1970s movement that stressed on irrigation and the use off ertilizers to increase farm produce.

“I don’t understand what went wrong. Today, I get almost 20 times higher yield than when I began farming in 1965. Yet, I barely manage to save anything at all,” the former headman of Kameana village in Punjab’s Faridkot district says.

Also See Mint’s complete coverage of Budget 2010 A look at the costs incurred by him and the monetary returns from farming shows why. On average, Singh ends up spending Rs7,700 per acre on inputs such as fertilizers, pesticides and labour while cultivating rice of the non-basmati variety. His yield per acre is around 27-28 quintals (1 quintal equals 100kg). In nominal terms, his returns look impressive: With the prevailing minimum support price for rice of Rs1,050 per

quintal, his gross revenue adds up to Rs28,350. If his input costs are accounted for, his return is a tidy Rs20,650 per acre. Does he, and most farmers like him, protest too much?

Life is more complicated than that. Singh has a huge loan to repay. He purchased a tractor some years ago. He also has to borrow money for operational costs (or working capital in industry lingo) every season from the local grain commission agent. This usually happens at the start of every sowing season.

The interest alone eats up much of his returns. In Punjab, the interest rate on loans from moneylenders is in the range of 24% to 30%. Public sector bank are rather reluctant to lend money for these purposes. Even if they are willing, their paperwork and formal requirements often defeat farmers.

As a result, Singh tries to farm his land more intensively. His use of urea (a popular fertilizer) per acre has almost doubled: from roughly one-and-a-half bags per acre 15 years ago to close to four bags now (one bag equals 50kg). His use of DAP (diammonium phosphate, another fertilizer, but a more expensive one) has remained almost constant at one bag per acre. He rarely uses potassic fertilizers. The result is a greatly skewed NPK (so called after the chemical symbols for nitrogen, phosphorous, and potassium) ratio. The ideal NPK ratio is 4:2:1. In Singh’s case, it is close to 4:1:0. The average in Punjab, was close to 3.71:1:0 in 2006-07.

Singh is an experienced farmer and should know the harmful effects of excessive use of chemical fertilizers, but his behaviour indicates otherwise.

“It works. If I use more urea, the yield improves. If I won’t do so, it will fall drastically,” he argues.

And he is reluctant to use biofertilizers or, even better, leave part of his holdings fallow to allow them time to recover. “I cannot afford that. Any fall in yield or leaving a part of my field fallow will sink me.”

That’s the case all over Punjab, India’s granary.

After almost 40 years of relentless use, Punjab’s soil is addicted to chemical fertilizers. If their use is curtailed, foodgrain output will fall drastically. The consequences for the country’s food security and Punjab’s prosperity cannot be underestimated.

A chain ofi rrationality There is an entire chain, from Singh upward to the state government to the Centre that draws benefits from the current state of affairs. Most subsidies—food, fertilizer and oil—can be explained by perverse incentives at each link in this chain.

In Singh’s case, for example, one bag of urea costs him Rs246 and one of DAP, Rs470. The subsidy per bag on urea is at least Rs530 and that on DAP, Rs1,030.

This price differential is one big factor in the nutrient imbalance in Punjab.

There is broad agreement about this. In Chandigarh, the state capital, Punjab’s finance minister Manpreet Badal agrees that “”price differentials are leading to a skewed nutrient ratio”.

The Union government, as part of a larger objective to reduce the bill for fertilizer subs idy , w hi ch i s e s t i m a t e d a t Rs49,980 crore this year, is considering a nutrient-based subsidy scheme for fertilizers, even a direct cash transfer of the fertilizer subsidy to farmers.

Neither may work, says Badal.

“Logistics would be my worry.

Who is going to evaluate what every farmer uses and how much fertilizer is required in every

field,” he adds.

“I am worried how could you physically transfer the subsidy to a farmer. In a country where land records are poor, doing this will be difficult.”

There are other options, such as transferring money directly to farmers through their bank accounts. But there are complications. Many farmers lease land and farm it. Ifl and records are as incomplete as Badal says, it will be a challenge to identify farmers who pay for fertilizers and use them.

Physical, door-to-door handing out of money by state government officials (either those of the revenue department or the development bureaucracy) could turn out to be self-defeating in the face of corruption and inefficiency.

The issue is not that off armers alone. There is a symbiotic relationship between the Union and state (Punjab and Haryana) governments when it comes to food purchases. At this level, farmers are only incidental to the story.

These state governments levy taxes on the grains purchased by the Food Corporation of India.

At one point of time, some years ago, these taxes and levies on the Union government’s purchase of foodgrains amounted to nearly 12.5% of the total value of purchases in Punjab. These were a source of perennial friction between the state government a n d t h e C e n t r e . Th e y a l s o funded expenditure by the state government. The higher the amount of grain bought, the greater was the amount garnered by the state governments.

So, from the perspective of the states, it makes sense to push for constant increases in output, even if their ecological and other costs increase with every passing year.

At the Central level, a wholly different set of concerns takes over. Keeping inflation in check requires that the Union government have a ready reserve of foodgrains to douse the fire when prices rise. It is easy to do so if grains can be purchased easily from surplus states. The political costs of not doing so can be high: inflation is politically expensive. It also makes great sense to keep powerful farm lobbies, represented by regional parties in Punjab and Haryana happy: They get to keep their constituents happy, while the Union government has enough ammunition to fight inflation. There are few incentives to change the existing system.

The costs, of course, are staggering. Food and fertilizers subsidies alone accounted for Rs1.02 trillion. As for the ecological costs, they simply cannot be calculated.

“Our land had 24 elements/ micronutrients when intensive cultivation (had) begun in 1962-63. There was shortage of only one or two such elements.

Today, excessive subsidization of chemical fertilizers has ensured that very few farmers use natural fertilizers. The result is that in many parts of Punjab, soil is deficient in as many as 16 micronutrients. You can see the ecological costs for yourself,” says Sucha Singh Gill, an agricultural economist and former professor of economics at Punjabi University in Patiala.

Badal, too, is aware of the problem and argues for realistic policy choices. “ Ultimately you have to decide the cost off ood,” he says and adds that “we have to look towards eastern India for food. Punjab and Haryana will not be able to meet the food requirements of the country.”