Budget 2009 Ebook

CHAPTER 1: A Budget for Bharat CHAPTER 2: Following the Budget CHAPTER 3: Breaking it down CHAPTER 4: Needs and Expectations CHAPTER 5: Views

FOREWORD What is it about an annual budget speech that brings most of this country’s industry to a standstill? Why do the stock markets and its purveyors mince and weigh every word that emerges from the Finance Minister’s mouth?

This is because, more than any other document, the budget is the Indian government’s ultimate vision statement. It is the embodiment of the government’s ‘arrangement’ with its subjects: I will tax you only so much but look at all the wonderful things I will do with that money! Well before Pranab Mukherjee presented his first budget speech in over two decades Mint asked people from all walks of life what they wanted this ‘arrangement’ to be. And then when Mukherjee had made his speech we sat down to make sense of it all.

This ebook is a capsule of all the best pre and post budget analyses produced by our integrated newsroom.

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CHAPTER 1: BUDGET FOR BHARAT

Bharat’s Rs10.21 trillion payday B Y A NIL P ADMANABHAN anil.p@livemint.com

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n the end, it was a Budget for Bharat.

Ignoring stock market expectations, finance minister Pranab Mukherjee stressed on the political message of inclusive growth underlying the electoral victory of the Congress-led United Progressive Alliance (UPA) in the 15th general election with an unexpectedly comfortable margin.

The Budget, therefore, promised reforms, laying down a few concrete markers to signal direction and action, and then went on to deliver in actual terms by boosting total government spending by one-third to a record Rs10.21 trillion, directed largely towards social sector programmes, and tax giveaways that will provide extra income in the hands of the working middle class taxpayers—both targeted at creating demand and reviving growth.

This extra spending is over and above the Rs1.86 trillion announced by the government in three fiscal stimulus packages over the last seven months.

India, like many other countries, is trying to spend its way out of trouble—only understandable because the contraction in exports has shaved off a fair chunk of demand, and the decline in private consumption, another bit. As a result, the economy is demand-deficient. The thinking implicit in Mukherjee’s Budget speech is that it makes sense to let growth lead reforms at this point in time, rather than the other way around.

But therein lies the rub and the single biggest macroeconomic risk in the Budget.

The cost of extra spending, especially with tax revenues taking a beating as the economy continues to expand at a slower pace, will result in a larger -than-expected bump up in the government’s gross borrowings, or fiscal deficit. It is projected at 6.8% of gross domestic product—close to levels last seen in 1991. With interest payments projected at almost one-fifth of total government expenditure, the country is dangerously close to a fiscal disaster.

Still, this is a clear macroeconomic gamble that the UPA has taken. It is presaged on the extraordinary circumstances that the country finds itself in following the global meltdown, and is based on some key assumptions and the belief that growth cannot be compromised. And, it is consistent with the UPA’s ideological stance that without growth it can push neither its political agenda for inclusion nor that for reforms.

Government ups spending to spur growth, deficit hits markets

This theory also formed the core of the Economic Survey presented to Parliament last week which posited that the economy would recover from the third quarter, provided there is a normal monsoon—this will become clear only at the end of the month—and the US economy bottoms out by September.

Now, one can fault the finance minister for making these assumptions, but not for not thinking out of the box.

However, there is a tacit admission in the way the monies on social sector programmes will be spent that the existing delivery mechanism is woefully inadequate. Beginning with the National Rural Employment Guarantee Scheme, the government has progressively moved to a system of direct cash transfers—essentially, disintermediating—by ignoring the existing delivery mechanism. The lacuna in the Budget is that there is the promise to change this, but no commitment in practice. The short cut cannot be a solution.

While growth is the central focus of the Budget, Mukherjee has left clear indications that the government is committed to the process of second generation reforms. But, given his political acumen and the fact that the UPA is acutely conscious of its pro-poor stance, he sought to play down the reforms rhetoric in the Budget speech. Also, he has been careful to leave out anything that can be politically controversial. Still, not only has Mukherjee signalled his intent, but has also detailed concrete

measures.

The fault, if any, may have been in the understated delivery of the message.

Mukherjee’s most important reform commitment is, ironically, on his promise to restoring fiscal discipline—something that the stock markets believe he has been remiss about. While Mukherjee has suspended all fiscal rationality for the moment, he has unequivocally indicated that he is committed to the task and, more importantly, that the Budget is not the only place and time to initiate such reform, and that there will be more opportunities later in the year.

“To bring the fiscal deficit under control, we have to initiate institutional reform measures during the current year itself,” he said.

The second initiative is with respect to the reform of the fertilizer subsidy. Mukherjee has essentially ordained a game changer that will once and for all completely free fertilizer prices and do away with the existing complex subsidy apportioning mechanism, which has retarded fresh investments in the business. Now, farmers will be directly reimbursed by the government. While Mukherjee has not explicitly said so, the government’s eventual move to a targeted subsidy regime suggests that in the long term only small and marginal farmers will be retained in the subsidy net.

The third initiative that Mukherjee has proposed, but probably deliberately not fleshed out, is the sensitive issue of petroleum pricing. It has been

clear for a while that something drastic needs to be done so that the subsidy on petroleum products is restricted only to the needy, and the minister seems to suggest that this will happen, but outside the Budget.

The fourth reform effort is the return to divestment, cleverly couched in a “people’s participation” initiative and devoid of specifics. Here again, it is what he has left unsaid that holds the sting. By saying explicitly that the majority stakes of the government in banking and insurance companies would not be given up, Mukherjee may be implying that he has given his ministerial colleagues considerable room to push majority stake sales in other sectors. Whether the government will seize this policy opportunity is an entirely another matter.

Finance secretary Ashok Chawla, at a post-Budget media briefing, said that stateowned Oil India Ltd and NHPC Ltd will hit the capital market with their initial public offerings in August and September.

“Four more companies based on overall framework and design will be identified (for disinvestment) by the department of disinvestment in consultation with ministries,” he added.

And, finally it is in tax reforms that the minister has lent a singular thrust. Under direct taxes, Mukherjee has promised stability by not changing the rate structure. At the same time, he has got rid of all the bad taxes, such as the fringe benefit tax, commodity

transaction tax and the surcharge on personal incometax, all legacies of his predecessors. Alongside, he has promised a draft direct tax code in 45 days that will cement rates, do away with exemptions and prepare the country’s tax administration for a new age economy.

Under indirect taxes, the biggest reform commitment has been the the guarantee that the country will stick to the deadline of 1 April for the introduction of a dual goods and services tax (GST). This will, for the first time, unify the country as one single economic market. At the same time, Mukherjee has provided a major building block for this transition by bringing the Indian Railways under the service tax net. Since the railways is a large entity and touches almost every aspect of the Indian economy, this will make the transition to a GST regime that much easier.

In the final analysis, it is clear that the Union Budget for 2009-10 has, recognizing the unprecedented global crisis, made growth its clear focus. At the same time, it has made a statement of intent and quietly launched initiatives that reaffirm the government’s commitment to second generation reforms. It is, as the finance minister said at the outset of his 100-minute speech, the first policy thrust of a new government that has secured another five years for itself and the politics of which is defined by inclusive growth.

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OUR VIEW

A high­risk gamble The finance minister’s prescriptions are a blast from our statist past

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ndian government budgets are part accounting and part theatre. Pranab Mukherjee has underwhelmed us on both counts in the first Union Budget of the new United Progressive Alliance (UPA) government. It is almost as if he has absent-mindedly put out an election-year budget just months after the general election has actually been won.

First, the accounting part: The mess in public finances has gotten even worse. India could soon be a mere hop, skip and jump away from a huge economic muddle.

Mukherjee has taken a huge fiscal gamble, though in all probability a well-informed one. The Indian economy is in trouble, with both consumer demand and corporate investment sputtering. So, higher government spending is the only pillar holding up the shaky economy right now. India is just one of the many economies around the world where governments have stepped in to support growth or prevent deeper recessions.

But the Indian economy

could be in deep trouble if his gamble does not pay off.

The finance minister has ramped up spending while assuming that growth in tax revenues will be anaemic because of a slowing economy.

The resulting fiscal deficit— estimated at 6.8% of gross domestic product (GDP) in 2009-10—is dangerously high.

Bond traders have already started pushing up interest rates on government bonds because of fears that extra borrowing by the government will crowd out private sector borrowers.

A further fiscal slippage could take India into hazardous territory and invite a downgrade of our debt by global credit rating agencies. That will likely make it difficult for Indian companies to raise money abroad, putting further pressure on the domestic financial system. India could then be sucked into a whirlpool.

The government’s unarticulated assumption seems to be that all the extra money it has showered on the economy will allow growth to bloom and

eventually lead to higher tax revenues. More money in the treasury will eventually allow the finance ministry to cut the fiscal deficit and bring public finances back on track.

But there could be serious trouble ahead in case growth does not recover soon.

However, the finance minister blew up a wonderful chance to use his pulpit to lay out a road map for future reforms that can take India’s growth rate back to 9%. What he did announce—the introduction of a national goods and services tax from 1 April 2010 or the finalization of a new direct tax code—has been on the reforms agenda for long enough not to take anybody by surprise.

The stock markets have been shocked that the new Budget does not have too many reform proposals to lift spirits. It has been our view ever since the UPA was re-elected that brokerages and investment banks were betting too heavily on big-bang reforms.

The optimistic conclusions drawn from the Economic Survey 2008-09 released last week

missed the essential point: the survey is written by economists and budgets are made by politicians.

There are undoubtedly bits and pieces of the Budget that will gladden hearts, especially the removal of the income-tax surcharge and the elimination of mindless levies such as the fringe benefit tax and the commodities transaction tax.

But in terms of concrete proposals on the three challenges identified by Mukherjee in his Budget speech— leading the economy back to a highgrowth orbit, deepening and broadening the agenda for inclusive development and improving governance—this Budget has been an utter failure, unless you equate inclusive development with higher transfer payments to the poor.

True inclusive development entails moving millions out of low-productivity rural jobs to factory jobs where they have access to better tools and the global market.

The process of moving people into modern sectors would mean reforms in critical areas such as labour laws, educa-

tion, controls on job creating activities such as retailing and housing, etc. There is nothing at all in the Budget about these well-known problems. Forget firm proposals, there are not even stray statements that this UPA government wishes to address these problems.

In fact, Budget 2009-10 is in many important facets a throwback to an earlier era.

Mukherjee quoted the Mauryan era sage and political strategist Kautilya in his Budget speech; he did so in 1984 as well, when he had presented his last budget in the pre-reforms era.

The coincidence is perhaps a telling one.

In its dependence on statist solutions, fiscal indiscipline, aimless tinkering and even in the defence of Indira Gandhi’s decision to nationalize banks in July 1969, Budget 2009-10 has brought back memories of a budget from the 1980s.

Will Pranab Mukherjee’s gamble pay off or is India headed for a fiscal crisis? Tell us at views@livemint.com

JAYACHANDRAN/MINT

Panel Discussion: Bharats Rs10.21 trillion payday

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For more budget cov­ erage, log on to budget.livemint.com

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PRANAB MUKHERJEE/FINANCE MINISTER

I could have reduced deficits S

ubsequent to his Budget speech, finance minister Pranab Mukherjee spoke to Sunit Tandon, chief executive officer of Lok Sabha Television. In the televised interview, he spoke about his rationale for various steps announced in his speech and how they are intended to bring the economy back to a high growth trajectory. Edited excerpts:

rate was around that.

Today, the situation is different. But I took that risk. For the three earlier fiscal stimuli that we provided, we had to part with about Rs1.86 trillion in the form of enhanced plan outlay and revenue sacrifice. Therefore, the target was to achieve the high growth trajectory. Keeping that in mind, I have taken this risk.

You have taken this risk at a tremendous You were presenting the Union Budget af­ cost because interest payments are 36% of ter a gap of 25 years. There have been expenditure. In the long term, how will you some substantial changes in the Indian cope with this? economy in this period. I’d like you to con­ I feel it will be possible because if you trast your experiences between then and look at the investment—major infranow. structure, rural infrastructure and urban At that point in time, we had an acute infrastructure programmes, not taking shortage of foreign exchange. In fact, my into account railways and others—it has immediate predecessor, (R.) Venkatara- increased substantially from Rs62,000 man, from whom I took over in 1982, crore to Rs1.24 trillion, almost 98%. had to enter into an extended funding We have to keep in mind, with the facility with IMF (International Monetary growing aspirations of the people, that Fund) to the extent of 5.2 billion SDRs you cannot simply resort to strict mone(special drawing rights). My job was to tary policy. If we make a comparison, I improve our foreign exchange position understand the US fiscal deficit is going and see that we did not fall into a debt to be more than 11%. In the UK, it is trap. In fact, I returned 1.2 billion SDRs. more than 16%. Compared with that, InReturned in the sense I did not withdraw dia is 6.8% and I do feel it would be posthe last tranche of the…instalments due. sible, even when I present the full budgA significant part of your exercise would et next year, to improve the situation. If have been aimed at how we get back to 9% there is a slight improvement in the ingrowth. You would have that road map with ternational scenario, then our exports you. What do you think is this road map will pick up. But if exports and manufacyou have initiated with this Budget? turing sectors go down, then there will That is why I have taken the tremenbe revenue shortage. dous risk to create that fiscal space…of If you want to step up the plan outlay by having higher deficits. I could have gone one year, it is more than 33%—from Rs2.43 the more conservative way of reducing trillion to Rs3.25 trillion. And you have also deficits and satisfying myself with 6% crossed that Rs10 trillion mark in terms of growth or less. Even the high growth rate total expenditure. Total expenditure and to­ syndrome in the 1980s was 5.8%. Even tal receipts also; of course through bor­ before 2003-2004, our average growth rowed receipts. The gap is of some concern because it’s not very clear from your speech how it is being financed.

Additional market borrowing has been done. Those details are there in the Budget papers. I have given the philosophy of the investment. No finance minister can say “I will disinvest this and disinvest that”. The policy I have indicated.

The policy is that it will be done with people’s participation The markets seem to have reacted rather negatively to this Budget. Perhaps you can tell me for what reason?

I am yet to find out the reason, but I am told by experts, that in the last one month, there was a lot of hype. And in the expectation, people forget the reality. Perhaps the market expected too much from the finance minister in one go. At the beginning of my speech, I corrected myself by saying that one Budget speech is not going to address all problems and that is not the only instrument

through which all problems can be solved. You can give a broad vision which has to be followed up.

There is not another fiscal stimulus as per­ haps the industry was expecting?

No... Three we have given. But if you look into what the components of the major stimulus were, which we provided, one was the fiscal concession; another was the public expenditure; the third was the monetary policy with the reduced interest rates. After my talk with the public sector banks, you have seen that almost every bank has announced reduced interest rates.

The Reserve Bank has reduced the repo rate substantially. So, monetary aspects we are taking care of. I have not got back the concessions that we have given on Cenvat—from 14% to 10% and from 10% to 8%. These are continuing.

So, the infrastructure and the other ex­ penditure is going to generate the demand­led growth that you wish to see coming.

I am expecting to have that demandled growth.

What are your expectations of the rate of growth by the end of this financial year giv­ en the kind of provisions you have made in the Budget this time?

I don’t think it will be less than 7%. It may not be in the next financial year but my target is to reach at least 8.6% as fast as possible. Of course, I would like to achieve 9%.

I see some turnaround by the third quarter possibly, but unless there are visible improvements in the global scenario, it will take more time.

Let’s turn to your major initiatives, particu­ larly with view to distributive justice. You have substantially enhanced outlays for various social schemes of the government.

Can you tell us a bit about that?

I have stepped up substantially if you take into account NREGA (National Rural Employment Guarantee Act) and other components of Bharat Nirman.

The enhancement is 79%. For Indira Awaas Yojana, enhancement is 63%.

I am comparing between budget estimates 2008-09 and budget estimates 2009-10. I have enhanced minority-related schemes by almost 74%. I have enhanced to 105% the budget outlay for all women-specific schemes.

People are becoming restless because they want to be engaged. I must keep them engaged. The ambitious programme that we are projecting will cover 50% of the women through self-help groups.

We will try to cover all children up to the age of six through the Integrated Child Development Services. These will require money, and money will come from growth. These are the reasons for the demand-led growth.

You have also made several tax proposals which have been long looked forward to—abolition of fringe benefit tax and the surcharge. You have increased the exemp­ tion levels in income­tax, but not much.

I do not believe if you look at a period of six years, the total enhancement was Rs40,000. Thereafter, during P. Chidambaram’s period of five years, it went up to Rs1.5 lakh.

Now I am building up on a much higher base—from Rs1.5 lakh to Rs1.6 lakh. In case of women, it’s Rs1.8 lakh to Rs1.9 lakh. In case of senior citizens, Rs2.25 lakh to Rs2.4 lakh.

When the base is higher, the percentage will be smaller. But I have not tampered with it because I want to have real reforms in direct taxes.

What direction are you envisaging in the di­

rect tax reforms?

First, I would like to do away with the plethora of exemptions. I would like to make tax laws simple. Rate of taxes will be low. Voluntary compliance will be more. Income-tax return submission would be simple.

What about indirect taxes? You have re­ duced customs duty on LCD panels but there are some that we haven’t quite un­ derstood. You have exempted branded jew­ ellery as a concession to women.

It is because the prices of gold and silver went up. I have charged Rs100 per 10g to Rs200. For jewellery, on the customs side, I have stepped up from Rs250 to Rs500.

For silver, from Rs250 to Rs500 per kg.

So, I thought I would give some concessions on the jewellery.

Of course, when I have enhanced these duties, that is not on jewellery. It is on the import of the raw metal.

The specific component of 24% ad valorem duty for large cars and utility vehicles of 2000cc and above has been reduced by Rs5,000 to Rs15,000. This does not seem to tie in with your other initiatives of pro­ moting biodiesel and so on. Large cars are generally being taxed more heavily. Why has this been brought down?

Because I have enhanced the prices of petrol substantially. But I have given substantial concessions for the use of biodiesel and blending.

Many people have said that the petrol price hike just before the Budget has enabled you to escape criticism on this point.

The Budget has nothing to do with it.

The government is providing a service and it is charging for that service. Here, the role of the government is that of a service provider.

What about the expert group that you are setting up on petroleum pricing?

Do you know what happened? Earlier we left it to the oil marketing companies.

And oil marketing companies, before 2004, used to change prices very frequently, so there was a sense of uncertainty in the oil pricing. Every variation of global prices and they used to adjust it. In 2004, we took it upon ourselves.

And we had to pay a very heavy subsidy because it was not easy for us to enhance the price as and when it goes up. I think in the last five years, we have adjusted the prices only twice or thrice, and that too small and marginal increases.

Even in December and January, we reduced the duties on petrol by Rs4.5 per litre and diesel by Rs2 per litre. We gave them concession of Rs25 per cylinder. As a result of that, the subsidies have increased substantially. Take the case of kerosene. Per litre subsidy is Rs16. In LPG, Rs92 per cylinder is the subsidy.

I want the best method of pricing. Let the experts come out with the recommendation. I want there to be some amount of stability. Total stability is not possible when three-fourth of our coal requirements are coming from outside.

It would be subject to the vagaries of international fluctuations.

How would you rate this budgetary excer­ cise? How satisfied are you with what you have achieved?

I am never satisfied. I am never content with what I do. What it is, is for the people to see. What I can say to sum up is that I have left a huge fiscal deficit, no doubt, but with the objective of having adequate money to inject in the system to help the productive sectors and to lead the demand-led growth.

Click here to watch a Q&A with Pranab Mukherjee

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MANMOHAN SINGH/PRIME MINISTER

Budget is essentially oriented towards rural development RAMESH PATHANIA/MINT

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ndia’s Budget for the fiscal year to March takes forward the stimulus packages initiated in December in the wake of the global downturn, but also looks at bridging the economy’s short-term needs with the government’s medium-term social sector goals, Prime Minister Manmohan Singh said in an interview to Doordarshan. Edited excerpts: To what extent does this Budget fulfil election promises and what will it do for the common man?

The focus of the Budget is to ensure that the short-term requirements of the economy are reconciled with the medium-term goals of our social and economic policies. Right now, the major concern is to minimize the impact of the international recession on the Indian economy. And for that, it is necessary to provide stimulus to our economy. That process began in December last year. This Budget carries that process further.

At the same time, there are medium-term concerns that the growth momentum of the economy must be restored notwithstanding the decline in the international demand for our exports. The road to do that is to strengthen infrastructure investment, both in the public sector and in the private sector, through the PPP (public-private partnership) route.

The Budget does that admirably well. And then, simultaneously, it also seeks to carry forward the process of inclusive growth; its expenditure programmes take care of our major flagship programmes— Bharat Nirman, National Rural Employment Guarantee Act (NREGA), the (Jawaharlal Nehru National) Urban Renewal Mission, the (National) Rural Health Mission. So, I believe the finance minister has done an admirable job.

What will this do for people in ru­ ral areas?

It is essentially a rural development-oriented Budget. A record increase in allocation for national rural employment guarantee fund, increased money for irrigation benefit schemes, the Bharat Nirman programme, which seeks to upgrade and modernize rural infrastructure. These are all programmes which will pri-

Road map: Manmohan Singh says it is important for the government to reaffirm its commitment to introducing a goods and services tax by ’10. marily benefit our rural areas and reduce the gap between Bharat and India.

At the same time, there is new ur­ ban emphasis. The urban develop­ ment scheme has a huge increase of 86%.

The urban mission focuses on the infrastructure needs of our cities. We have identified 60 cities. Probably, we need to relook at the number in due course of time. Simultaneously, the emphasis on basic amenities for the poorer section, the slum-free India commitment, is also taken into account.

Any outlay on food security?

Well, it is too early because the whole (Food Security) Act has to be put in place. As the finance minister mentioned, we will soon come out with a draft that will be put (up) on the website.

What is it you view on state sub­ sidy on food grains?

If we go by the number of people who the Planning Commission records as people below the poverty line, I think the outlay on the Centre, even if we provide grains at Rs3 (per kg), additional outlay is within the limits of practical politics. But if we go by the much larger figure of people below the poverty line which are floating around, I think then there will be some problem. We will sort out these problems.

Any targets for disinvestment in public sector enterprises?

I haven’t done any detailed calculation. The finance minister has committed our government to increased disinvestment while maintaining the public sector character of public enter-

prises. Much depends upon the evolving economic situation, the state of the stock markets.

Any deadline to get back to fiscal responsibility and budget manage­ ment targets?

This is a matter which the government has also referred to the (13th) Finance Commission for advice. The Finance Commission will be reporting in October. Unless we take into account the recommendations of the Finance Commission, anything by way of new deadlines of what we achieve will be counterproductive. So, once the Finance Commission’s report is available, once the devolution pattern that they recommend is known for the next five years, it is only then that you can make credible guesses and work out credible strategies...how to handle the problem of fiscal deficit.

PEOPLE­ORIENTED

UPA replays winning poll theme, stays focused on common man B Y R UHI T EWARI ruhi.t@livemint.com

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udget 2009 may be the first of a balanced and reformist five-part economic plan the United Progressive Alliance (UPA) hopes to implement, but it is also a populist and people-oriented Budget that reflects the ruling coalition’s political aspirations.

The focus on “aam aadmi (common man) is continuous and enhanced,” said Congress spokesman Abhishek Manu

Singhvi. “The Budget is progressive, inclusive and growthoriented.”

Buoyed by the success of its farm loan waiver scheme—one of the key reasons behind the victory of the UPA in the 15th general election—the government decided to extend by six months the time given to farmers having more than 2ha of land to pay 75% of their dues.

The Budget also announced the creation of a task force to study the issue of indebtedness among farmers in certain parts of Maharashtra—a state that

has seen a significant number of suicides on this account, and also one that goes to the polls later this year.

The National Rural Employment Guarantee Scheme is another programme that helped the UPA come back to power, and the government announced a 144% rise in the funds allocated to Rs39,100 crore.

The populism, however, hasn’t gone down well with everyone. “In a democracy, everything has to be political... Disappointingly, however, what this Budget has done is to go on a

spending spree... One can say the Budget is populist, if by that we mean that the easy decisions are taken and the hard ones are not,” said Pratap Bhanu Mehta, political analyst and president, Centre for Policy Research, a New Delhi-based think tank.

Santosh K. Joy contributed to this story.

Is a goods and services tax possi­ ble by April 2010?

It is important that the government should reaffirm its commitment. If in the process of implementation there are some difficulties, they could be taken care of.

What about the security aspect?

Security forces need our understanding and support. We will do all that is necessary to modernize the security and intelligence services. feedback@livemint.com —Interview to Doordarshan

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UNDERSTANDING THE BUDGET Budget 2009 highlights | Relief to exporters, agriculture debt waiver extended

Reforms • Return to deficit targets at the earliest after the negative effects of the global economy are overcome. 13th finance commission will create a new roadmap in October

Highways and railways are being stepped up by 23%; railways by Rs15,000 crore

• To bring fiscal deficit under control need institutional controls; will cover subsidy, expenditure and disinvestments

Growth

• Fertilizer subsidy: a nutrient based subsidy scheme as opposed to product based scheme; subsidy to be transferred directly to farmer

• India infrastructure finance company IIFCL is given greater flexibility; will be used to take care of asset liability mismatch and free up capital for financing new projects; it can now facilitate incremental lending to infra sector

• Oil and petroleum subsidy: Three-fourths of our oil consumption is met through imports.

Task force to decide on oil pricing

• IIFCL will finance 50% of projects; involving total investment of Rs1 trillion, public investment in infrastructure to get a big boost.

• Direct tax reforms: Simplify returns form. FM stresses tax system that generates revenue on a sustained basis. More reforms spread over 5 years

• Budgetary allocation to highways and railways stepped up by 23%; railways by Rs15,000 crore

• Disinvestment: More shares to be offloaded to individuals; banks/insurance to remain in public sector

• JNUURM allocation up by 87%

• Average public float of companies should be expanded from current 15%. FM proposes to raise level of public shareholding

• Scheme for urban poor housing upped to Rs3,973 crore; Rajiv Gandhi Awas Yojana; slum free India • Mumbai drainage allocation up • Accelerated power development and reform progamme: Rs2,080 crore (160% increase in allocation)

Inclusive growth • Increase in allocation for NREGA to Rs39,000 crore • National food security act work has begun; 25kg of rice at Rs3 per kg

• Natural gas: long distance highway to facilitate a national gas grid • Agriculture: Loans will go up from Rs2.87 trilliion to Rs3.25 trillion; continuing interest subsidy scheme for farmer; govt shall pay an additional 1% subsidy to those who paid their loans on time — Rs411 crore over the February interim budget • Farm loan waiver covered 40 million farmers; six months extension on account of delayed monsoon. Maharashtra loan waiver coverage will be reviewed by a task force • Accelerated irrigation development programme:75% increase in allocation Exporters package • Small scale sector package

For Mint's video coverage of the budget, log onto http://videos.livemint.com/

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Click here to listen to how a gov­ ernment goes about raising the money from markets to finance this budget.

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WHAT THE BUDGET MEANS FOR YOU

5 SECTORS TO WATCH OUT FOR Here are some sectoral funds that could benefit from the Budget. It must be noted that the case for such funds is never very strong. The idea of fund investment is that a fund manager should decide which sectors are in and which out. This Budget is short on sector­specific measures, except for infrastructure­related sectors.By DHIRENDRA KUMAR

POWER

Increased allocation to power development marks the sector as a beneficiary

Reliance Diversified Power The fund was conceived way back in 2004 in the hope of power sector reforms. Though the reforms never took place, the fund did not disappoint. For the past five years, the fund has had an annualized return of 46.31%, while in the recent bull run (9 March-30 June), it turned in a whopping 76.52% return.

As was the case with all other equity funds, 2008 has been a poor year for the fund, to say the least. It was down by -50.39%.

As the name suggests, the fund has historically invested more in power sector-related companies such as Siemens; Crompton Greaves in

production of power generation equipment; and Reliance Infrastructure, Areva T&D in power generation and distribution. But at times, the fund manager has expanded its focus to bet on non-power or infra-related stocks such as banking (ICICI Bank) in order to take advantage of the opportunities in infrastructure financing.

The fund manager maintains a focused portfolio for tracking the power theme. Its average portfolio size has been 18, though of late, with more companies in the sector getting listed, the portfolio size has also gone up (as of 31 May, the size was 27).

OIL AND NATURAL GAS

Enhanced and rationalized tax benefits for the oil and natural gas sector will benefit a large chunk of this fund’s portfolio

IDFC Imperial Equity One of the top funds in the equity diversified space in 2008, it managed to pull through last year with just a 42% fall while the category and benchmark were down by 55% and 56%, respectively.

Though the fund managed to do well in tough times, it does not particularly shine during good times.

It has been able to beat the category average in only one of the five quarters during which the category was yielding positive returns. This could be because of its distinct large-cap bias, which holds back its returns when the mid-caps start rallying. Currently, the fund is betting heavily on the oil and natural gas segment. Its last three-month average exposure to the oil and gas sector has been 24.09% of the total portfolio, while as of 31 May, exposure was further hiked to 26%. Among companies, currently Reliance Industries (7.01%), Gail (4.50%), ONGC (5.26%) and IOCL (4.08%) dominate the oil and natural gas portfolio of the fund.

Traditionally maintaining a compact portfolio of around 26 stocks, it has been on the conservative side. But with its bias towards one sector, the fund manager is looking to reverse its record in the bull market.

PHARMA

Custom duty reduction on key drugs will benefit the pharma sector

Franklin Pharma The initiator of the pharma theme, the fund was launched in March 1999 to tap the sector’s potential.

Since most such companies are midand small-cap in nature, the

category has its share of volatility.

But compared to its peers, this fund is a relatively stable offering. In 2008, it lost -27.59%, which, considering the condition of other equity funds, is regarded as impressive. The fund has in the recent rally gained over 49%, while its five-year annualized return is 14.62%.

True to its calling, the fund’s major allocation in the healthcare sector, with stocks such as Ranbaxy, GlaxoSmithKline Pharmaceuticals, Cipla, Dr Reddy’s and Pfizer dominating its portfolio at one time or another. Currently its top five stocks account for 41% of the total portfolio, with Lupin alone accounting for over 10%.

Currently, the fund has a concentrated portfolio of 21 stocks (as of 31 May), which is very much in line with its historic average of 18 stocks.

INFRASTRUCTURE

A wide range of enabling actions for infrastructure development makes this the first choice for a sector that will benefit from this Budget

ICICI Pru Infrastructure The highest alpha generator in the category, it was the best performer in 2007 and 2008, thanks to a combination of successful sector rotation strategies with optimal exposure to derivatives and the Nifty. In 2008, the fund made the right moves. It hiked its exposure to large caps, went heavy on debt and used derivatives liberally.

But in the recent rally (9 March-30 June), it returned just 60.26% (category average: 81.82%). Not surprising when you see that its equity exposure dropped from 89% in March (including derivatives) to 57% in May. This is typical of the fund manager’s style and investment philosophy, which is valuation-driven. The rally pushed most infrastructure stocks above fair value so fund manager Sankaren Naren cut his equity exposure. He will re-enter when he sees long-term growth visibility to justify the valuations. He actively changes the portfolio’s complexion with no qualms about going against the herd. Though the portfolio looked bloated last year, this year it has averaged at around 40 stocks.

AUTO

Enhanced infrastructure spending will have a strong spillover effect on the companies that this fund invests in

UTI Transportation and Logistics The fund was launched together with five other thematic funds under the UTI Thematic Funds umbrella in April 2004. Later, in April 2008, its name was changed from UTI Auto Sector Fund to its present offering. The past performance of the fund may not seem very impressive. But its exposure to the transport sector and the recent revival of the auto segment has brought it into the limelight. Its five-year annualized return is barely over 10%. In 2008, it was down under with a return of -48.77%. But in the recent bull rally (9 March-30 June), it turned the corner with a 57% return while its year-to-date return is more in

line with the Sensex return (54.5% for the Sensex vs 52.21% for the fund).

The fund boasts a very focused portfolio, with the top 10 stocks accounting for 62% of its total investments. Its top holdings have mostly been concentrated among automobile manufacturers such as Mahindra and Mahindra, Tata Motors and Maruti Suzuki.

Currently, Bajaj Auto (10.73%) and Hero Honda Motors (8.48%) dominate the fund portfolio.

The author is CEO of Value Research, a mutual fund research firm.

Note: Rating as on 30 June; Portfolio-related data as on 31 May.

11 WEDNESDAY, JULY 8, 2009, DELHI ° WWW.LIVEMINT.COM

VIVEK LAWNATIONAL EDITOR, CNBC TV­18

INVESTING TO SAVE TAX? YOU NEED TO THINK AGAIN I

f you are one of the millions of Indians who invest their savings primarily to save tax, your life has changed. Forever. The key message coming out of finance minister Pranab Mukherjee’s Budget is: Days of tax exemptions are over, start doing your own financial planning. And that’s not all.

If you have been averse to equities, it’s time you started steeling your heart to put aside some part of your savings in equity—directly, or better still through mutual funds or unit-linked insurance plans (Ulips).

This is why. He has, perhaps for the first time by a finance minister in recent years, left exemptions on investments untouched. Moreover, he has stated explicitly his resolve to move to an era of no exemptions, but lower tax rates. This means: I will give you more money to keep but you decide now how to invest it. For starters, this year people earning exceeding Rs10 lakh get to keep 3% of the tax paid, through the removal of a 10% surcharge.

For the rest, the tax slabs have been hiked, but almost negligibly, giving a benefit of Rs1,000-3,000. And yes, fringe benefit tax has been abolished (though there remains confusion on the extent of it), so you get to pay less tax, as many perks and allowances will no longer be taxed.

So, while one hopes Mukherjee will lower tax rates next year, for now it’s time to focus on enhancing returns on investment. He has left rates of interest on small savings untouched, and given no further exemptions under section 80C, which in any case, meant little as it clubbed your child’s education fees, your home loan principal repayment, provident fund deducted by your employer and all other investments you made in equity-linked savings scheme, small savings, Ulips, etc., within the Rs1 lakh basket. Except for public provident fund, where the returns you earn on maturity are taxfree, all other “safe” investments tax your returns. In contrast, equity—direct and through mutual fund and Ulip—earns you tax-free income if you remain invested for a year. Yes, he has kept long capital gains tax exemptions intact.

The primary aim of investing is to see your wealth grow. And now that there is unlikely to be any further incentive in the form of tax benefits up front when you invest your money, your focus has to shift to ensure that as much of the wealth you have built over the years, comes back to you rather than going into the government’s coffers.

In other words, the focus of

your financial plan has to shift to building wealth and not saving tax.

Of course, you have to invest in equity only to the extent of your risk appetite. And do so keeping a long-term view. But do so, you must.

That is the underlying message of Budget 2009-10 for your wallet.

Vivek Law is national editor, CNBC TV18. Respond to this column at feedback@livemint.com

FBT AND YOUR TAKE­HOME PAY

7 CHANGES IN PERSONAL TAX

Under the 2009-10 Budget, fringe benefit tax (FBT) has been abolished. While this will be favourably received by the finance departments of companies, the impact on your personal finances might not be optimal for you.

Here’s why.

As you see in the graphic, we have considered the case of an employee earning an annual CTC (cost to company) of Rs750,000 under the current scenario and the proposed scenario. The annual fringe benefits offered to the employee are just under Rs300,000. Assuming that under both scenarios the taxpayer is using his/her full Rs1 lakh deduction under section 80C, the net annual taxable salary in the existing scenario is Rs3,68,000 and in the proposed scenario, Rs6,44,996. Under the existing scenario, the take-home salary (the CTC less the income tax and FBT on fringe benefits provided) is Rs7,00,418 (93% of CTC), whereas under the proposed scenario, it will be Rs6,49,576 (87% of CTC).

As this example demonstrates, you may be worse off under the proposed rules.

1. Marginal increase in tax exemption: The personal income-tax exemption limit has been raised for senior citizens

by Rs15,000 and for others, by Rs10,000.

iTrust Financial Advisors (www.iTrust.in)

2. Higher deduction under section 80DD: Annual deduction in terms of maintenance, including medical treatment, for a dependant with severe disability (more than 80%) has been raised from Rs75,000 to Rs1 lakh.

3. Elimination of surcharge: The 10% surcharge on taxes for those with an annual income above Rs10 lakh will no longer exist.

4. Abolition of fringe benefit tax (FBT): FBT on the value of fringe benefits provided by employers to employees has been abolished. Reimbursements will be taxed as perquisites at the marginal tax rate.

5. Increase in wealth tax exemption: The exemption limit for wealth tax has been increased from Rs15 lakh to Rs30 lakh.

6. Automation of tax-filing procedure: Re-engineering of the key business processes around the filing of direct taxes.

Expect simplified tax filing in the near future, with the prospect of quicker refunds.

7. Expanded scope of section 80E: Annual deduction in terms of interest on loans taken for higher education purposes has been expanded from the current limited list of courses to cover all fields of studies, including vocational studies, pursued after completion of schooling. iTrust Financial Advisors (www.iTrust.in)

12 WEDNESDAY, JULY 8, 2009, DELHI ° WWW.LIVEMINT.COM

CHAPTER 2 ­ FOLLOWING THE BUDGET: MARKET REACTIONS

Market tanks on lack of reforms but outlook remains positive Banking, construction stocks were the hardest hit on Monday; Bankex fell 8.17% on concerns of more govt borrowing

Manas Chakravarty, Mint’s Con­ sulting Editor and Mark to Mar­ ket columnist talks about why the Budget reacted negatively to the Budget.

We talk to Mint experts to gauge the Sensex­Budget relationship.

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igher fiscal deficit and an apparent lack of road map for reforms in Pranab Mukherjee’s Budget on Monday pulled down the Sensex, India’s most tracked equity index, by 5.83% or 869 points, the sharpest-ever decline on any Budget day, but most analysts and fund managers retained the positive outlook on markets.

Ahmed Raza Khan/ Mint“Fundamentally, there is no substantial change for the earnings outlook of the corporate sector,” said Bharat Iyer, head of research at JPMorganIndia Pvt. Ltd. “The finance minister has gone for continuity and stability in the backdrop of an uncertain global environment and weak monsoon.”

With no concrete proposal in areas such as disinvestment in public sector undertakings and foreign direct investment, or FDI, in critical industry segments, punters who had built positions offloaded their investments, bringing the market down, said traders.

They also said that the market didn’t like the projected 6.8% fiscal deficit, which would lead to higher government borrowing. This would crowd out the private sector and push up interest rates. In the interim Budget presented in February, the fiscal deficit was estimated at 5.5%.

The 30-stock Sensex closed at 14,043.4 points on Monday.

The broader Nifty index, which has 50 stocks, fell 5.84% to close at 4,165.7. The fall in equity indices eroded some Rs2.54 trillion of paper wealth

of investors. And the fall in indices was not triggered by any nasty surprise but by the lack of any signal on reforms that the market was eagerly waiting for.

Indeed, brokers and fund managers are blaming high expectations from the Budget and a sharp rise in indices in the run-up to the Budget for Monday’s market fall.

“The markets had gone up sharply in the past few days in the run up to the Budget,” said Deepesh Pandey, co-head of investments at India Infoline Ltd, a financial services group.

“They were expecting a lot on disinvestment, FDI and visible plans to bring down the fiscal deficit.”

Since the comfortable victory of the Congress-led United Progressive Alliance in midMay, the markets have risen sharply, pushed by hopes of reforms from a stable government that would not need to rely on support from the Left parties for its survival.

The Sensex had risen 22.51% since the elections till Friday before the crash on Monday.

This rise was in sharp contrast to other markets across the globe, which have been weak for some time now on fears that the global economic recovery may take longer than expected.

Indian investors have been buying local stocks for some months now on hopes that the government would push reforms that would lead to a recovery in the second half of this year. But after Monday’s crash, analysts expect the local markets to move more in tandem with other emerging markets.

Banking and construction stocks were the hardest hit on Monday. The BSE Bankex, index for bank stocks, fell 8.17% on concerns that the government’s large borrowing programme would push up interest rates. Bond yields rose after the Budget announcement and prices dropped. Rising yield will force the banks to make mark-to-market losses on their bond portfolio. Mark-to-market is an accounting practice of valuing a financial asset in accordance with its market value and not at the cost at whichit is acquired. Bond yields and prices move in opposite directions.

Also, higher interest rates will come in the way of corporate borrowing and if companies do not borrow money and invest, economic growth will slow down.

The finance minister also made it clear that “public sector enterprises such as banks and insurance companies will remain in the public sector”.

There had been widespread expectations that the finance minister in his Budget speech would signal bringing down the government stake and rise in FDI in banks, besides consolidation to build the scale.

The construction sector too fell sharply, despite the government commitment to spend more on roads, power and irrigation.

But infrastructure still remains the favourite for most fund managers, with the Budget introducing new financing schemes for the sector, boosting spending by 23% for its road construction programme, 87% for urban infrastructure and more than doubling its al-

Market collapse: The Bombay Stock Exchange building.

Mukherjee unveiled dashed those hopes. That number is truly inexplicable.

Not that this Budget had nothing positive. The scrapping of fringe benefit tax, extension of 10A/10B for information technology companies, removal of the commodity transaction tax and no rollback of excise cuts were all positives, partly offset by the hike in minimum alternate tax.

The scrapping of the

surcharge on personal income taxes may even be a limited consumption trigger. Tobacco companies were spared the axe this time and ITC Ltd was one of the few stocks that ended in the green, contrary to investor fears.

Yet, what the market wanted was a green signal that finally the drought on reforms is over, that a government, shorn of the Left parties, will press ahead with bold policy moves.

The charitable view is to accord finance minister the benefit of the doubt: He didn’t have enough time to unveil a big-bang budget and the best is yet to come, over the next few months and in the next budget.

The cynical view is that the market is running ahead of itself. Despite the electoral surprise, things will improve only incrementally and over a much longer duration than investors want. The truth, as often, perhaps lies somewhere in the middle. While investing in India, the virtue of patience cannot be overstated.

Respond to this column at cnbctv18@livemint.com

ICICI Bank

Elder Pharma

STOCK PLUNGE | UDAYAN MUKHERJEE

Overdose of hope H ope is a dangerous thing, as investors found out on Monday. If finance minister Pranab Mukherjee was guilty of presenting an insipid Budget that was low on the detail that the market wanted, investors were also perhaps guilty of expecting too much, too soon.

That doesn’t absolve Mukherjee of a Budget that is low on ambition, boldness and vision, but at least it teaches investors to not hope for the moon going into a policy event.

The real damage was done when the finance minister spelt out the 6.8% deficit number, implying a large market borrowing programme with little detail on how he would get back on the fiscal responsibility and budget management path.

Global rating agencies will pass their judgement in the next

few days but the bond market didn’t wait that long. The benchmark bond yield shot past 7%, raising fears of interest rate spikes and triggering off a collapse in stock prices.

At a macro level, that perhaps was the undoing of the market.

At a more micro level, a lot of sectors had run up expecting substantial boosts from the Budget. Education, real estate, textile and fertilizer stocks, which had meaningful rallies leading up to the event, collapsed. The surprise was infrastructure, where stocks sold off as well, as apart from an increased outlay for the National Highways Authority of India, the Budget was a bit low on bold moves.

Then there was disinvestment, which the market had pinned some hopes on. The pitiful Rs1,100 crore figure which

location for improving power supplies.

Ahmed Raza Khan / Mint“We are bullish on the infrastructure and domestic consumption-related sector,” said Navneet Munot, chief investment officer of SBI Funds Management Pvt. Ltd. “The long term story remains intact.”

The finance minister has put more money in people’s wallets by scrapping a surcharge on personal income tax, increasing tax-deductible income and abolishing the fringe benefit tax and this has encouraged many fund managers that Mint interviewed after the Budget on Monday to keep their outlook for the broader market unchanged.

They also said Mukherjee still had policy flexibility. “You can’t conclude that the government would not do anything on areas such as insurance or the 3G (third generation) spectrum auction,” said Sameer Narayan, head of equities at Fortis Investments. “He hasn’t said much about what’s already in process such as the

insurance bill.”

Indeed, in his Budget speech Mukherjee said that “a single Budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so.” According to analysts, following the Budget day fall, valuations of Indian stocks have become “reasonable”.

“After the election outcome, valuations were getting overstretched,” said Mukkaram Bhagat, executive director at ASK Investment Holdings Pvt. Ltd. “Now fundamentals should guide the stock market.” JPMorgan’s Iyer said the markets would trade in a range of 12,500-16,500, there is “no reason for the range being broken” by the Budget.

Disinvestment target “Someone in the government must articulate sooner than later that we are looking for foreign capital for growth and we are expecting to get $6 billion from disinvestment of PSUs (public sector units). ” Deepak Parekh Chairman, HDFC Ltd

Time required to react “This is a Budget that will take two­three days for the larger market to understand and then react to.

The budget is not the best place to announce measures on FDI... ...This is not something the market should have expected.”

KV Kamath Chairman, ICICI Bank Ltd

Budget has continuity “I don’t think it is a big impact Budget and, frankly, I don’t personally believe in the concept of big impact budget. ...one operating word I would like to use for the Budget is continuity…not retrograde, and this is a positive.”

Kumar Mangalam Birla Chairman, Aditya Birla Group

MOVERS & SHAKERS RIL

6.63%

The shares of Reliance Industries Ltd (RIL) declined 6.63% as no income­tax exemption on production of gas was announced in the Budget as expected by the market. Also, increase in MAT to 15% is likely to reduce the firm’s earnings per share by 5%.

ITC

3.13%

The ITC Ltd stock gained 3.13% as the excise duty on cigarettes was left unchanged. The market was expecting a 5­10% excise duty hike after Delhi and Maharashtra governments increased value­added tax on cigarettes from 12.5% to 20%.

9.97%

The shares of ICICI Bank fell 9.97% as foreign direct investment limit in the insurance sector was not raised in the Budget. The stock was also hurt due to bond yields crossing 7% and rupee depreciating by 1% against the dollar.

5.48%

The Elder Pharmaceuticals Ltd stock gained 5.48% on reduction of customs duty on nine life­saving drugs in three therapeutic areas and one influenza vaccine. The stock ended at Rs252.95 on the National Stock Exchange on Monday.

NIIT

16.48%

The shares of NIIT Ltd fell 16.48% as no specific announcement was addressed towardS the education sector in the Budget.

Moreover, education stocks have rallied 20­30% in last 7­10 days on expectation of a major boost in the Budget.

Unitech

9.43%

The Unitech stock declined 9.43% as the Budget did not increase the limit of housing loan deductions in income tax .

The market was expecting an increase in housing loan deduction limit from Rs1.5 lakh to Rs2.5 lakh.

13 WEDNESDAY, JULY 8, 2009, DELHI ° WWW.LIVEMINT.COM

A POPULIST BUDGET BENEFITING GRASS ROOTS

More focus on rural India, expenditure increased by 45% The spending on rural employment guarantee scheme has been raised to Rs39,100 cr from Rs30,000 cr in 2008­09

B Y M AITREYEE H ANDIQUE maitreyee.h@livemint.com

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n a bid to attack poverty, finance minister Pranab Mukherjee announced lavish spending to build rural infrastructure, reduce poverty and raise employment opportunities among the youth.

The year’s Budget till March 2010 has stepped up outlays for several social sector programmes, such as the National Rural Employment Guarantee Scheme (NREGS), and allocation under Bharat Nirman, the government’s time-bound rural infrastructure initiative, which includes housing, roads, drinking water and telephony, has been increased by 45%.

Outlay for NREGS, which guarantees 100 days of wages and work for one member in every rural family, has gone up by 30% to Rs39,100 crore from Rs30,000 crore in 2008-09.

Spending on health and family welfare has gone up 21% from Rs17,307 crore last year to Rs21,113 crore.

The Union government’s expenditure on primary education has increased 12%, from Rs26,026 crore last year to Rs29,099 crore.

Through such spending, the government hopes to address the problem of low levels of human development despite high economic growth. According to the United Nations Development Programme’s 2008 update, India ranks 132 out of 177 nations in terms of per capita gross domestic

Job security: A file photo of villagers in Dilwara district in Rajasthan building a channel for water harvesting under the government’s flagship programme, the National Rural Employment Guarantee Scheme. product, life expectancy and education.

Estimates of poverty in India differ. The data from the National Sample Survey shows that 27.5% of Indians were poor in 2004-05 while the National Commission on Enterprises in the Unorganised Sector estimated that 77% of Indians were poor in the same year.

Malnutrition remains high in India. About 79% of children below three years of age are anaemic; its incidence among pregnant women has grown from 49.7% to 58% in the decade to 2007. Because poverty is tied to issues relating to basic health and nutrition, the gov-

ernment aims to enhance guaranteed food supply, such as rice and wheat at subsidized rates to the poor, but the Economic Survey that was released last week has pointed out the failure of the government’s public distributing system due to leakages in the delivery system.

Mukherjee announced the government’s commitment to halve the current level of poverty by 2014 by revitalizing old schemes and introducing new ones: Swarna Jayanti Gram Swarozgar Yojana (SGSY) will be revived as the National Rural Livelihood Mission, which will provide interest subsidy of Rs1 lakh for poor household.

About 50% of women will be brought under the self-help group scheme in the next five years.

To improve literacy among women, a new scheme—the National Mission for Female Literacy—will aim to reduce illiteracy among women by half in three years.

With the aim of creating 12 million new jobs every year, the government plans to recharge the nation’s employment exchanges to bring employers and job-seekers on a seamless online platform. It also plans to offer skill development training to the country’s unemployed youth; an outlay of Rs450 crore will go

towards revamping the country’s industrial training institutes (ITIs) this year.

Health insurance continues to elude a majority of the country’s poor. Only 10% of India’s total organized workforce has any form of social security.

To widen the social security safety net to families living below the poverty line, outlay for Rashtriya Swasthya Bima Yojana has been increased three times to Rs300 crore from Rs100 crore last year.

The Centre must reform the budgetary processes and improve fund flow to states for the poor to benefit from the schemes, said Subrat Das, an economist with the Centre for Budget and Governance Accountability, which tracks the central budgetary trends. “The effort must be to link outlays with development outcome,” he said.

MOUNTING EXPENSES

Subsidies cross trillion­rupee mark, stretch finances B Y S ANGEETA S INGH sangeeta.s@livemint.com

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he subsidy on food and fertilizer has crossed Rs1.02 trillion in Budget 2009-10. While fertilizer subsidies have gone down by almost Rs26,000 crore, those on food have risen by Rs8,800 crore against the revised budget for 2008-09.

The food subsidy is expected to further rise if more people are covered under a proposed food security Act, the blueprint of which is being prepared by the food ministry. The Act promises to provide the poor 25kg wheat or rice at Rs3 a kg per household.

Subsidies have been a major component of non-Plan expenditures—typically recurring annual spending—which put undue pressure on government finances. The subsidies bill is largely on account of food, fertilizer and petroleum products.

Also, subsidies usually rise through the year and the gap between what is originally provided for in the Budget and revised

through the year is vast.

The outgo on fertilizer subsidy will be given directly to farmers rather than being routed through fertilizer companies.

“In due course, it is also intended to move to a system of direct transfer of subsidies to the farmers,” said Pranab Mukherjee in his Budget speech.

Food subsidy is provided to distribute wheat and rice to the poor and also maintain a buffer

stock. In 2008-09, food subsidy rose from Rs32,600 crore in the budget estimate to Rs43,600 crore in the revised estimate. In the new Budget, food subsidy is Rs52,500 crore, a 21% rise from the revised estimates for last year.

Expenditure secretary Sushma Nath said: “Higher food subsidy has been due to higher minimum support price (MSP) and also higher procurement of both wheat and paddy.”

MSP is the base price at which the government procures grains to be sold to the poor at subsidized rates through the public distribution system. This also serves as the base price for private traders.

In 2008-09, the MSP for rice was Rs850, 14% higher than in the previous year. The MSP on wheat was raised by 71% between 2003-04 and 2008-09.

The government has procured around 53 million tonnes of wheat and rice whereas it has the capacity to store only 25 million tonnes.

Finance secretary Ashok Chawla said the details of the food security Act still have to be worked out.

S.L. Rao, chairman of the Institute for Social and Economic Change, said subsidy amount will go up once the Act is in place.

“Offering wheat or rice at Rs3 when the current price is Rs9 will pose a burden on subsidy bill. But it is not the subsidy amount which bothers me, but who will be the beneficiary, how will the poor be defined and

how will the government plug leakages. A Planning Commission study suggests Food Corporation of India (FCI) is the most corrupt public sector undertaking,” he said.

Rao said the United Progressive Alliance is experimenting with food security Act just because the National Rural Employment Guarantee Scheme has been successful and the Chhattisgarh and Andhra Pradesh governments effectively distributed wheat and rice at low rates.

The government buys rice and wheat for the Central pool through its procurement agency the FCI. The foodgrain is then sent to states and sold at subsidized rates through the public distribution system.

Click here to watch Delhi’s aam aadmi sound out about what they want from the budget

14 WEDNESDAY, JULY 8, 2009, DELHI 째 WWW.LIVEMINT.COM

STIMULUS FOR THE ECONOMY

15 WEDNESDAY, JULY 8, 2009, DELHI ° WWW.LIVEMINT.COM

REFORMS BIRD’S­EYE VIEW

For FM, simpler laws, low rates would characterize tax reforms For cross­border deals, the finance minister has proposed a fast­track alternative dispute resolution mechanism

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NEW DELHI

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inance minister Pranab Mukherjee set the ball rolling on tax reforms by announcing a timeline on seeking comments on a new direct tax code, and tweaking the indirect tax structure to make it compatible with a goods and services tax (GST) regime.

In an interview to Lok Sabha TV after presenting the Budget, Mukherjee gave a bird’s-eye view of his idea of direct tax reforms. Elimination of exemptions, a simplification of laws, a low-rate environment and an emphasis on voluntary compliance are the main characteristics of tax reforms, Mukherjee said.

“There are two-three positive steps announced in the budget. First, announcement of direct tax code within 45 days, which people have been asking for (a) long time,” said Sudhir Kapadia, partner at consulting firm Ernst and Young, picking the announcement on direct tax reforms as the best aspect.

The direct tax code has been ready for a while; former finance minister P. Chidambaram worked on it during his stint. Now, Mukherjee has promised to place it in the

Spinning it: The Royal Classic Group textile mill. This year’s Budget proposals moved many items in the 4% slab, including some man­made fibres, to the 8% slab to converge towards the mean rate. public domain for comments.

Based on feedback, he is expected to eventually start the process of shepherding a direct tax Bill through Parliament.

India’s growing exposure to the international economy has

brought forth problems in taxation of cross-border deals or operations. Mukherjee has proposed a fast-track alternative dispute resolution mechanism.

“From the point of multinational companies existing in India to set up an alternative

dispute resolution mechanism for the resolution of transfer pricing disputes is the positive step,” Kapadia said.

A proposal to increase the minimum alternate tax (MAT) on companies has been designed to expand the base by

“plugging leakages on account of innovative accounting practices”, one of the Budget documents said.

An increase in tax base is a prerequisite for a low tax rate environment, which Mukherjee hopes to create through reforms. The Budget retained status quo on indirect rates, but simultaneously tinkered with the existing slabs to take a step towards the eventual transition to GST. GST, the ambitious indirect tax reform planned in India, aims to demolish barriers across states and fiscally unify tax policies and rates across states. The Union government will also be a part of the proposed dual GST structure, which is currently scheduled to be introduced from the start of the next fiscal. The mean excise duty rate today is 8%, and covers at least 70% of the merchandise subjected to excise duty.

The Budget proposals moved many items in the 4% slab, including some man-made fibres, to the 8% slab to converge towards the mean rate. This move is expected to smoothen the transition eventually to GST regime, where the Union government and states would separately levy taxes. sanjiv.s@livemint.com

UP TO 15%

FOUR ADDITIONS

MAT hike cancels tax break gains for oil cos

More services under tax net; coverage expanded

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he 2009-10 Union Budget left investors and analysts tracking India’s energy sector cold, with most of them saying it took away more through higher rates of taxes than it gave by extending a much-anticipated tax holiday on gas exploration.

In his Budget, finance minister Pranab Mukherjee announced a seven-year tax holiday on natural gas exploration and production, but raised the minimum alternate tax (MAT) from 10% to 15%, effectively negating gains oil and gas firms could have expected from the former proposal. This is one of the biggest negatives for all firms, irrespective of sector.

An analyst with a Mumbaibased foreign brokerage said the positives from this Budget are “either anticipated or mere pies in the sky” as “there is no clear timeline”, but that the negative impact arising out of MAT is “clear and visible”.

This anomaly was reflected in the Bombay Stock Exchange’s (BSE’s) oil and gas index—a sectoral index of 11 listed oil and gas exploration, refining and distributing companies—which fell 5.81% to close at 9,039.22 points on Monday. It moved in tandem with BSE’s bellwether index

Sensex, which slipped 5.83%.

“There’s nothing in the Budget on oil price deregulation, at least in a definitive manner or with a clear timeline. The tax holiday for gas production has been given, but most of us had already factored that in our models. The increase in minimum alternate tax is the real deep cut,” said the same analyst, who rated the Budget at “3, may be 4” on a scale of 10 for the energy sector.

The Budget allowed for setting up of an “expert group to advise on a viable and sustainable system of pricing petroleum products”, but left out the mechanics of how this deregulation would be achieved, saying that the details would be announced later.

Taking cognizance of the gas production from Krishna-Godavari basin, the Budget has also proposed developing a blueprint for long-distance gas highways that will eventually become a national gas grid.

The Budget extended the tax holiday, available under section 80-IB (9) of the Incometax Act, to profits from the commercial production or refining of natural gas, in new oil and gas blocks that are going to auctioned soon as part of eighth round of New Exploration Licensing Policy (Nelp).

This, said analysts, was one of the few, but anticipated,

positives from the Budget. Until now, the tax break only covered production of crude oil, creating an anomaly given the two hydrocarbon forms are usually found in close proximity. “They will benefit in the longer term but have no immediate benefit,” said Maulik Patel, sector analysts at Mumbaibased brokerage KR Choksey Shares and Securities Pvt. Ltd. One Centre initiative, however, that will likely get a boost from the budgetary announcements is the eighth round of bidding oil and gas blocks under Nelp, which could have been affected if the tax holiday hadn’t been extended.

KR Choksey’s Patel also said that Nelp VIII will now evince interest from all the international energy firms. Another provision in the Budget also enlarged the scope of service tax by extending its applicability to “installations, structures and vessels in the entire continental shelf of India and exclusive economic zones of India”.

This could imply a higher service tax outgo for hydrocarbon explorers such as Reliance Industries Ltd. bhuma.s@livemint.com

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inance minister Pranab Mukherjee expanded the list of activities covered by service tax and also extended the scope of coverage on some services already under the tax net.

Service tax receipts in 2009-10 will add up to Rs65,000 crore, according to Budget estimates; this is the only indirect tax which is expected to contribute as much as last fiscal’s receipts to the exchequer despite a 2 percentage point cut in the tax rate to 10% in February as a part of the stimulus package.

Four new services—legal consulting provided by firms, transportation of non-essential goods through railways, transportation of specified goods through coastal and inland shipping, and plastic surgery—have been added to the list of taxable services.

Bringing some of the freight transported by the railways under the service tax net was recently suggested by the chairman of the 13th finance commission, Vijay Kelkar, as a way to be evenhanded in taxing different arms of the transport sector.

The addition of new services

and extension of the scope of taxation of some services assumes importance as service tax is one of the indirect tax items that will be subsumed in the goods and services tax (GST), scheduled for launch at the beginning of next financial year.

A major change has been the expansion of the scope of tax on installations, structures and vessels in the entire continental shelf of India and exclusive economic zones of India. According to a Budget analysis prepared by Mumbai-based legal firm Economic Law Partners, this proposal will increase the cost of existing drilling contracts.

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CONCRETE PROPOSALS

Divestment commitment fails to enthuse markets, analysts The government would start its divestment programme by selling stake in two energy sector public firms

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lthough finance minister Pranab Mukherjee reiterated his government’s intention to divest stake in state-owned enterprises, he did not spell out a clear road map.

“While retaining at least 51% government equity in our enterprises, I propose to encourage people’s participation in our disinvestment programme,” Mukherjee said presenting the Budget for 2009-10 in Parliament on Monday, without elaborating.

Mukherjee also said statecontrolled banks and insurance firms will remain in the public sector and would receive all manner of support including capital infusion.

Finance secretary Ashok Chawla, however, said in a briefing after the Budget speech that the government would start its divestment programme by selling stake in two energy sector public firms.

Mukherjee also revived an earlier proposal of the finance ministry to increase the threshold for public shareholding for all listed firms.

To introduce greater transparency and public participation in the stock market, the finance ministry in early 2008 had issued a discussion paper proposing to raise the public shareholding limit for listed companies to at least 25% from 10%. The proposal was never taken forward after the stock

Public floats: The Centre may divest more public sector units this fiscal. markets went into a downswing, dampening the market for public offerings.

“The average public float in Indian listed companies is less than 15%. Deep non-manipulable markets require larger and diversified public shareholdings. This requirement should be uniformly applied to the private sector as well as listed public sector compa-

nies,” Mukherjee said.

The government has set a target for disinvestment proceeds of Rs1,120 crore for the fiscal to 31 March 2010, compared with Rs1,165 crore in 2008-09. The state enterprsies listed for disinvestment of a small portion of equity this fiscal include RITES Ltd, Cochin Shipyard Ltd, Telecommunications Consultants India Ltd,

Manganese Ore India Ltd, Rashtriya Ispat Nigam Ltd and Satluj Jal Vidyut Nigam Ltd. The divested amount will be transferred to the National Investment Fund (NIF). The government has constituted the NIF in the public account of India, into which the proceeds from disinvestment of government equity in select firms is channelised. NIF funds are managed by investments in selected public-sector mutual funds to provide sustainable returns without depleting the corpus. The transactions have been so accounted to make it deficit-neutral.

Harsh Pati Singhania, president of industry lobby group Federation of Indian Chambers of Commerce and Industry, said that his organization would have liked some concrete proposals is disinvestment.

Kaushal Sampat, chief operating officer of business credit information provider Dun and Bradstreet, India, said while disinvestment could have found greater articulation, there seems to be a “positive movement” in that direction.

Similarly, Mark T. Robinson, chief executive of Citi South Asia, said he is hopeful the government would in the near term announce more elaborate policy measures on key issues like divestment, foreign direct investment and financial sector reform. However, Tushar Poddar, vice-president and chief economist, Goldman Sachs, said a more clear-cut articulation about disinvestment was unreasonable. “The Budget is a

fiscal document and we think the short-term policy objective of stimulating demand will likely be achieved by this budget,” he said.

Later, addressing the customary briefing after the budget speech Chawla said stateowned Oil India Ltd and NHPC Ltd will hit the capital market with their initial public offerings in August and September.

“Four more companions based on overall framework and design will be identified (for disinvestment) by the department of disinvestment in consultation with ministries,” he said. Sale of the government equity as specified by President Pratibha Patil in her address to a joint session of Parliament and by the finance minister in his Budget speech will proceed in a phased manner, the finance secretary said.

PTI contributed to this story.

FOOD SECURITY

Nutrient­based fertilizer subsidy will benefit farmers directly Declining response of agricultural productivity to increased fertilizer use was a matter of concern, says FM

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ajiv Gandhi, former prime minister of India, had once estimated that less than 15 paise out of every rupee meant for the poor actually reached them because of leakages in the delivery system. Twenty years later, finance minister Pranab Mukherjee announced initiatives that would remove the intermediaries in the supply chain and deliver subsidies directly to the intended beneficiaries.

In the biggest indication of disintermediation, the Congress-led United Progressive Alliance (UPA) government said in its Budget for 2009-10 that it aims to move to a system of direct transfer of fertilizer subsidy to farmers and introduce a nutrient-based subsidy regime.

Highlighting the need for food security, Mukherjee said the declining response of agricultural productivity to increased fertilizer use was a matter of concern. This move will ensure balanced application of fertilizers through the nutrient-based subsidy regime instead of the current product pricing regime, he said in his Budget speech.

“The fertilizer subsidy is a very welcome move. Today the

fertilizer subsidy incentivizes large farmers and people who use more fertilizers because the subsidy is given to manufacturers. Direct transfer to small and medium farmers is a much better idea,” said Biraj Patnaik, principal adviser to the Supreme Court commissioners on the right to food.

The commissioners are authorized to monitor the implementation of the apex court’s orders on issues related to the right to food.

Mukherjee’s Budget further underlined the government’s move towards disintermediation with huge thrusts in key social sector programmes such as National Rural Employment Guarantee Scheme (NREGS), Food Security Act, National Rural Livelihood Mission, women’s self help groups (SHGs) and the education loan subsidy scheme, focusing largely on rural India.

“It is a small step in the right direction. You had 15 years of neglect of the rural economy.

The reason why the government is so serious now is because they can sense the rural distress with the farmer suicides and Naxalism,” said Patnaik.

NREGS, the UPA’s flagship scheme that guarantees 100 days of wage employment to one member of every household, alone saw an increase in budgetary allocation by

Farmer­friendly: A highlight of the Budget was the debt relief in the in­ terest subvention scheme for farmers. Under the scheme, farmers will now be provided additional subvention of 1% to be paid from this year.

144% to Rs39,100 crore to increase productivity of assets and resources under the programme.

“Very broadly, social sector schemes like the NREGS are basically meant to give stimulus to the economy. It has directly transferred money to people, especially those in the rural areas, who have capacity to consume,” said Dharma Kriti Joshi, director and principal economist at rating firm Crisil Ltd, the Indian arm of Standard and Poor’s.

The Budget has also announced entitlement of 25kg of rice or wheat every month at Rs3 per kg to poor families in rural and urban areas.

Another highlight of the Budget is the debt relief in the interest subvention scheme for farmers. Under the scheme, farmers will now be provided

additional subvention of 1% to be paid from this year, as an incentive to those who repay short-term crop loans on time.

“There is high growth in agricultural credit and to make sure it gets absorbed in the rural economy, this Budget has given 1% more to those farmers who repay their loans on schedule. Banks end up spending a lot on the recovery of loans, so, with this, the cost of recovery will also come down,” said A.K. Bandyopadhyay, chief general manager, economic analysis and research, National Bank for Agriculture and Rural Development.

Extending the reach of its programme for rural women under the women’s SHG scheme, the finance minister said at least 50% of all rural women in India will be enrolled as members of SHGs

over the next five years.

Poor households that have taken loans of up to Rs1 lakh and students applying for higher education loans will also be given interest subsidies.

“This time, the Budget has moved towards inclusiveness in keeping with the spirit of the 11th Plan,” added Bandyopadhyay. However, while the disintermediation was viewed as beneficial in the short and medium term, questions were raised over its sustainability and delivery in the long term.

“I don’t think disintermediation is a good strategy in (the) long term. The economy should be able to generate jobs on its own and government should just introduce measures for growth of the economy,” said Joshi.

The Economic Survey 2009 showed that leakages in the welfare programmes have prevented the government’s schemes from fully reaching the needy.

“NREGA is a very good programme for inclusiveness, but it’s main problem is delivery.

There is no clarity on what kind of jobs will be created and the programme is being abused as well. So the delivery is still lacking,” said Satya Poddar, tax partner for policy and advisory group, Ernst and Young. radhieka.p@livemint.com

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CHAPTER 3 ­ BREAKING IT DOWN: SECTORAL ANALYSIS

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CHAPTER 4 ­ PRE­BUDGET: NEEDS AND EXPECTATIONS

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TECHNOLOGY ECONOMICS

Extend tax relief to IT industry by at least three years B Y H IMANSHU P AREKH & A SHISH A GRAWAL ························· he information technology (IT)/IT-enabled services (ITeS) industry has played a key role in putting India on the global map. The Indian IT/ITeS industry is now a $52 billion (Rs2.5 trillion) giant and its contribution to the country’s gross domestic product (GDP) has quadrupled from 1% to 4% in the last decade. However, the industry is plagued with some issues on the taxation front.

Extension of tax holiday to software technology parks (STPs)/export-oriented units The IT/ITeS industry is eligible for a tax holiday under section 10A/10B of the Incometax (I-T) Act, the benefit of which is set to expire on 31 March. Considering the global turmoil and its impact on the IT/ITeS industry in India, an extension of this tax holiday by at least three years will provide a major fillip to the industry,

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especially when the country is witnessing a downward trend in exports.

Tax holiday for units in special economic zones (SEZs) The formula provided in section 10AA of the I-T Act for computation of deduction available to SEZ units, in most cases, would result in the profits of the SEZ unit not being entitled to the 100% tax holiday as was promised at the time of introduction of the SEZ regime. The government needs to address this anomaly so as to avoid unnecessary litigation.

Fringe benefit tax (FBT) One of the key FBT issues affecting this industry is that with a large number of employees travelling to and from India on a regular basis, it becomes extremely difficult to ascertain the “employees based in India”, which is a prerequisite for the levy of FBT. Further, a major incentive provided by the IT/ITeS industry to their employees is in the

form of employee stock option plans (Esops) and levy of FBT thereon proves to be a major dampener. Considering the major compliance burden cast

by FBT on taxpayers and also considering the meagre revenues which FBT contributes to the exchequer, the FBT regime could be given a burial, especially for the IT/ITeS industry and in particular for FBT on Esops. Further, the benefit of lower FBT on conveyance and hotel expenses needs to be extended to the ITeS industry also.

Issues surrounding computation of deduction under section 10A/10B Plenty of controversies surround the computation of deduction vis-a-vis the set-off of business loss of an STP unit against a non-STP unit and vice versa, adjustment of profits of an STP unit against the losses of another STP unit, adjustment of business loss brought forward against the profits of current year, etc. De-

“Make grads more employable”: S Gopalakrishnan CEO, Infosys I f you were granted three wishes as the FM what would you wish for?

I would like to focus on investment in infrastructure. The rapid growth of the country over the past few years has considerably strained the infrastructure.

The government must prioritize the transportation and energy sectors in its infrastructure development plan. Investment in social infrastructure like education and health is also imperative for growth. The government should also look at public private partnerships to fuel infra-

structure improvement.

I would also stimulate the economy to grow faster and create jobs. One of the biggest challenges is to achieve inclusive growth when the global crisis is taking a toll on almost every sector. There should be an equal focus on the informal sector to ensure a level playing field.

My third wish would be to promote e-governance projects.

This will improve citizen participation and streamline the government. It will also stimulate the domestic IT industry.

If you could put an end something, w hat would it be?

I would like to simplify procedures, which will speed up governance. This may mean eliminating some arcane laws. Labour laws also need to be overhauled.

Name one thing outside your industry you would like to change.

I would like to open up investment in education, as this will greatly fuel the education bill when it is passed. The government must also look at work-

spite several tribunal rulings on these issues, the tax office and taxpayers continue to be at loggerheads with each other.

A suitable clarification on the issues outlined above will provide much-needed respite to the industry.

Amid the benefit of the tax holiday enjoyed by the industry, the various tax controversies have played spoilsport. India can well be described as the land of litigation, what with at least 70,000 cases pending before the Income-tax Appellate Tribunal. The several issues described above have only contributed to this perilous situation. The need of the hour is for the government to come out with appropriate amendments/clarifications on these issues. Further, extension of the tax holiday under section 10A/10B would provide a major boost to this industry, enabling India to truly become a global IT superpower.

ing with the private sector in a substantial way to understand its needs and how the current education system can be honed to make graduates more industry ready.

What is your idea of inclusive growth?

My idea of inclusive growth is addressing the income and digital divide through government policies and investments while creating incentives for businesses also to focus on this sector.

“Continue to focus on rural economy” Sunil Duggal, CEO Dabur India I f you had three wishes for the upcoming budget what would they be?

1. Immediately chalk a roadmap for the implementation of a national-level Goods and Services Tax (GST) that should be shared between the Centre and the States. The government has already announced its intent to do away with our multi-layered and complex indirect tax structure, which has also been scaring many foreign investors. But what’s clearly missing is the action plan for the same.

2. Open the tap for greater FDI inflows by permitting FDI in retail. Opening up FDI in Retail will lead to increased employment, besides offering consumers easier access to competitively priced goods and services.

And as for the exchequer, there’s no doubt about the multiplying effect this single move would have on inflow of collections for the government.

3. A continued, rather deepened, focus on improving rural economy in India. I expect the government to continue their fo-

cus on the rural sector with rural employment guarantee schemes and profitable supply of funds to the area. But what’s needed most now is a greater focus on execution of policies.

If you could end something in the budget what would it be?

I would certainly look at abolishing the Fringe Benefit Tax (FBT). This new levy was announced by the government a few years back and was estimated to add a lot to the exchequer.

While FBT has no doubt added to the coffers, its contribution still remains at a miniscule 2%.

Name one thing you would want outside your industry The reduction of excise duty on small cars has resulted in a surge in demand for mini cars in the country. A good thing, no doubt. On the flipside, it has also resulted in a manifold increase in the vehicular population on the roads and our road infrastructure seems ill equipped to support this sudden surge in numbers, pushing it to

Himanshu Parekh is executive director and Ashish Agrawal is manager at PricewaterhouseCoopers.

Respond to this column at feedback@livemint.com

the verge of collapse in some cases. What is needed today is a proper retirement policy or roadmap for old vehicles, be it personal or commercial. The government must start fixing an age on vehicles certified to run on the roads. And, incentives should be offered to owners for phasing out older vehicles.

One thing you wouldn’t touch/ change Rural economy focus would surely be the one thing that I would not like to change. The government’s move to waive farmer loans and increase focus on agri-economy last year has paid rich dividends, with this sector driving demand for a host of industries which in turn has helped India keep its head above troubled waters. This loan waiver policy of the government is one thing I would not want to change.

What is your idea of inclusive growth?

Inclusive growth, according to me, is a growth process that

yields broad-based benefits and ensures equality of opportunity for one and all. Almost every big corporate today has a clear inclusive growth charter as part of their larger Corporate Social Responsibility programme. At Dabur, we believe that for growth to be responsible, it should go beyond numbers… it should do good to the society, create a better world.

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Audio story: “More PPP Projects” Rana Kapoor, Yes Bank Ltd W

Click here to hear Yes Bank’s Rana Kapoor on what he expects from the coming budget.

hat is your wish list for this budget?

Allocating higher expenditure for social sectors along with private sector partnerships to work towards sustainable incomes, education for all and health and medical services for all at affordable costs will receive topmost priority.

It is imperative to raise the level of public investment in agriculture and in rural India with emphasis on strengthening and modernization of marketing infrastructure and investment in agri-logistics, among others.

My next priority will be in removing bottlenecks that impede investment in infrastructure, especially in power and roadways, wherein a stable

policy framework is an essential prerequisite to attract private capital, both domestic and foreign. In this context, I plan to prescribe not just clear guidelines for funding but also place equal emphasis on strict monitoring of new and ongoing PPP (public-private partnership) projects.

India’s vibrant entrepreneurship has positioned its business excellence on the global map across sectors. In addition to the large, global Indian companies, the smallscale sectors have huge untapped potential and present the next big opportunity.

However, additional spending comes hand-in-hand with funding concerns. While the government’s revenues face challenges due to the external

economic slowdown, rationalization in the current taxation and subsidy regime is clearly not going to be enough. A defined action plan on the disinvestment front will act as a definite “sentiment” positive, and send out a strong pro-reform message along with ensuring that the government is able to fund its fiscal deficit in a non-market-disrupting way.

Additionally, financial reforms with an emphasis on implementation will significantly address funding impediments and transmission concerns.

With India remaining an attractive investment destination, we can expect foreign capital flows to also resume as risk appetite returns to the global economy.

What is your interpretation of inclusive growth?

In my opinion, the key to unlocking India’s long-term, high-growth potential is in initiating inclusive programmes that will enable “growth to grass roots” by driving food and agriculture so that rural infrastructure becomes a platform for sustainable growth, invigorating small and medium enterprises and (spurring) broad-based infrastructure growth.

“Budget should define a per child cost for elementary schools” ­ Madhav Chavan, Pratham D

irector of Educational NGO Pratam, Dr. Madhav Chavan stresses the need for the budget to define an average per child cost, both at state and union level so that education programmes are carried out more effectively.

As part of Mint’s budget coverage, we talk to NGOs across various sectors to get a grassroots perspective on what they need and expect from the upcoming budget. To get an analysis about major issues pertaining to education in India, we interviewed Dr. Madhav Chavan, the director of educational NGO Pratham.

Director of Pratham, Madhav Chavan, stresses the need for the budget to define an average per child cost.

What are the biggest challenges within your area of work?

Within elementary education, the biggest challenge is governance and reforms in the education sector. Most of the schools are managed by the

government.

That has problems related to accountability of the management system and the teachers and so on. On the side of vocational training, the biggest challenge is capital.

There’s a lot of infrastructure owned by the government, but this is not available to people who can be trained to use it effectively for the needs of the economy.

More sector/industry opinions on our budget microsite If you had one wish related to the budget, what would it be?

Money allocation is more or less decided in the eleventh plan. I don’t see how the budget is going to change this in any way. However, I would like to see the budget start to define a per child cost for elementary schools. The first UPA government came out talking about outcome budg-

ets, but funds were allocated as basically inputs and not related to any outputs or outcomes.

We really don’t know how much we are spending on education as a nation. This number is very elusive. If you ask how much the state government is spending, the answer is not very precise. If you break this down to a per child cost, the answer is even less precise. If you go to a school and say okay there are so many students and so many teachers, that is not it – the overall cost seems to be completely different. So I think there is a need to put an average per child cost, state by state and at the union level also. Once you have the per child cost then many things start flowing.

Is there a particular provision within the budget that you

would drop?

I would not drop any provision as such. What I would like to do is reorganize the budget. Now mid-day meals fall under education. I would like to put this under child welfare or health. I’m not convinced that mid-day meals are leading to better enrollment or attendance.

How would you define inclusive growth and how do you think this concept could best be achieved?

Expansion, inclusion and excellence, not just inclusive growth, are all important.

We should acknowledge that excellence is not just for a select few – that is the real essence of inclusion.

We already have some things going in the rural areas – Jawahar Navodaya Vidyalaya has led to some important achievements. I think we need

to take that a little further.

There should be mechanisms for identifying bright and brilliant children, not only based on their examination aptitude.

Apart from that I think a bigger focus needs to be placed on developing human resources in Adivasi (tribal) areas and Muslim minority areas.

While money has increased, you still have the problem of not finding science teachers for Adivasi areas, or not finding enough educated people in backward districts to teach in schools. So the challenge of creating human resources to deliver education in these areas is something that really needs to be addressed.

“Tax exemption across sectors” Mr. Vellayan, Murugappa Corporate Board M

r Vellayan, ViceChairman and Director-Strategy of the Murugappa Corporate Board shared some of his expectations for the budget across various segments of the manufacturing sector: Automobiles (Two wheelers and cycles) India has the potential to be an export hub for bicycles.

Appropriate fiscal supports like export subsidies, tax exemption from excise duty on steel inputs as well as service tax on input service will help reduce costs and boost sales of bicycles.

Insurance Sector & NBFCs The Government should extend the scope of tax exemption to all sectors including vehicle insurance and help the insurance industry to penetrate the market with a variety of products to meet the needs of all sections of

the society. It should give incentives to rural sector by removing service tax to a notional rate to make it more affordable to common man.

The insurance industry is in need of various reforms, especially motor vehicle insurance and renewal should be made mandatory in terms of both third party liabilities as well as damages. Government should also make suitable amendments to the SAFRESI act to include NBFCs so that this sector can take use of securitization and asset re-construction. General Insurance sector is also awaiting government’s favorable considerations on various taxations. This includes amendment or addition to Proviso in Sec 195-exempting premium remittances made to foreign re-insurers from deduction of withholding taxes. Parity with other assesses

to be rendered for insurance companies with respect to long term capital gains on sale of equity shares and exemption from Service Tax of small policies.

Agriculture sector and Farm inputs The growth of Agri industry has been constant over many years at the rate of 2.5% and the stock of food grain Vs use ratio is becoming thinner clearly indicating depletion in buffer stocks. To infuse dynamism into the sector, government should introduce a comprehensive package which covers; irrigation, farm input usage, viability of industrial units involved in farm input supply and other services.

Government should protect the domestic industry against vagaries of imports while ensuring that the country’s food security is uncompromised

and reduce India’s dependency on imports.

Inclusive Growth The upcoming budget and industry demands should coincide towards fiscal incentives for removing demand and supply side gaps in the economy.

The foremost aims of the budget should be: * Ensure inclusive growth with special incentives to backward regions, * Ensure food security through subsidies and * Provide incentives for demand generation through rural welfare schemes.

The proposed 100 day plan by the prime minister already includes Rs.3/kg wheat, employment generation through NREGS, export incentives to sectors hit by the economic downturn, social welfare programs for girl child health and education and infrastruc-

ture projects. As all these are going to put enormous pressure on the already burgeoning fiscal deficit, one needs to prioritize what is of utmost importance. At the same time government is hard pressed by the FRBM act to ensure fiscal discipline. We are eagerly awaiting the budget 2009-10 to see how the government balances its objectives of demand generation and control fiscal deficit.

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RURAL THRUST

Farm loan waiver success sets the tone for a populist budget B Y V IDHYA S IVARAMAKRISHNAN S ANGEETA S INGH ·························

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angu M., a 33-year-old farmer who owns an acre of land in Sivaganga district of Tamil Nadu, got a loan waiver of Rs7,000 last year.

One of the 34,000 farmers in the district whose debts were written off, he said he voted for the Congress in the Lok Sabha elections earlier this year for two reasons: being a “Congress family” and because of the agricultural loan waiver scheme.

“I hope that another scheme is announced during this budget. I am quite confident but let us see,” Sangu says.

The Congress-led United Progressive Alliance (UPA) government announced in February 2008 a populist loan waiver scheme to bail out some 36 million farmers who had borrowed from various public sector banks. However, there were no handouts for those farmers who had paid their dues on time.

The total cost of the populist, scheme to the Central exchequer is estimated at Rs65,000 crore, but is said to be one of the key reasons behind the surprise victory of the UPA in the 15th general elec-

tion.

The waiver cost the government Rs66.63 crore in Sivaganga district.

A Jaipur-based official with a public sector bank, who did not want to be identified, said: “The farm loan waiver has given immense mileage to the Congress as farmers have voted heavily for it. But as a banker I would say it has killed the credit system and encouraged wilful defaulters. Now we get a lot of inquiries on whether there is scope for another round of loan waiver.” His bank played a leading role in extending the loan waiver across Rajasthan.

In Rajasthan, the Congress won 20 out of 25 seats in the Lok Sabha election held in May. Expectations are that the first budget of the new government that is to be unveiled on 6 July will have more such populist offerings.

A senior finance ministry official, who did not want to be identified, said the government is thinking of giving some incentives to farmers who paid their dues on time and were thus not covered under the loan waiver scheme.

“There is a thinking that such farmers be charged 1% less on their fresh farm loans,” he

added, hinting that this may be announced in the coming budget.

A.R.K. Manikam, president of Tamil Nadu Farmers Association, Sivaganga district, said while it is largely the “high level” (big) farmers who benefited, the loan waiver scheme did help the Congress garner a considerable amount of votes.

Giving an example, he says that in a taluk (sub-division of a district) called Devakottai in Sivaganga district, out of nine villages in a particular panchayat, only four farmers have got their loans waived under the scheme. He also claims that those who have benefited from the Union government’s loan waiver scheme and the Tamil Nadu government’s cooperative banks’ loan waiver scheme in 2006 have worked for mobilizing people to vote for the Congress.

The Congress-Dravida Munnetra Kazhagam alliance won 26 out of 39 seats in the Lok Sabha elections elections in Tamil Nadu.

The loan waiver is not the only populist measure the Congress relied upon.

In Karnataka, the Congress had made several populist promises—such as free colour TVs for all below poverty line card holders and rice at Rs2

TAX ECONOMICS

A strong case for more rational income tax B Y V IKAS V ASAL ························· very year, taxpayers have a lot of expectation from the budget. Employed and self-employed individuals constitute a large percentage of the overall taxcompliant population. India has seen a reduction in overall tax rates over the past few decades which, in turn, has resulted in increased compliance and more revenue for the government.

Due to the global economic slowdown, there has been increased pressure on the average household income and expenditure. Therefore, there is a general expectation of some relief from tax this year.

Rationalization of tax slab rates and reduction of tax is a fundamental issue and not just

E

restricted to the current year’s budget. In this context, three points merit attention: revising the slab rates upwards; reducing the number of rates, currently three; and reduction in the peak tax rate.

It would be prudent to look at the global landscape as to how personal tax rates have evolved over years, before a case could be argued for rationalization in India.

In general, there is a slow global decline in top personal income-tax rate from an average of 31.3% in 2003 to 28.8% in 2008. However, specific regional and country-level analysis varies considerably and needs to be factored in, before building any scenario.

The highest personal income taxes in the world are payable by the citizens of the

European Union. Also, there has been steepest fall in the average tax rate from 41.5% in 2003 to 36.4% in 2008 in this region. A few notable examples include France, which made a significant cut from 48.1% in 2003 to 40% in 2008, and Germany, which reduced the top tax rate from 48.5% to 45% during this period.

A significant development in the last few years has been the introduction of a flat tax rate in Europe. The flat rate introduced in few European countries is at a much lower level than the highest variable rate, thereby reducing the overall tax impact for the individuals.

So far, many eastern European states have moved forward in this direction. These include Estonia, where rates have fallen from 26% in 2003 to a flat rate of tax of 21% in 2008, Slovakia from 38% to 19% and Romania from 40% to 16%.

Also, two noteworthy examples of flat rate structure are the Czech Republic, with a flat tax rate of 15%, and Bulgaria with a flat tax rate of 10%.

Among the highest individual taxpayers on certain types of income include people in Denmark, where the top tax rate is 59%, followed by Sweden at 55% and the Netherlands at 52%.

After the Europeans, in general, the highest tax is paid by people in the Asia-Pacific.

Also, there has been a general decline in tax rates from 36.4% in 2003 to 34.6% in 2008 in this

per kg through the public distribution system—before the polls to score over the rival Bharatiya Janata Party, which won 19 seats, against the Congress’ six seats in the Lok Sabha elections.

Economists such as Y.K. Alagh and S.L. Rao feel the National Rural Employment Guarantee Scheme (NREGS) has earned good dividends for the Congress. The flagship welfare initiative promised at least 100 days of work in a year to one member of a poor rural family and was extended to all 596 districts in Budget 2008. It was launched in 2006, covering some 200 districts.

“I would give the UPA eight out of 10 in its rural initiative. I have been travelling in the interiors of Rajasthan, Andhra Pradesh and Gujarat and I see a different rural India after NREGS. The 15-20% people who were totally unheard of now have a voice and work,” Alagh, chairman, Institute of Rural Management had said in March.

According to Rao, chairman, Institute for Social and Economic Change, no doubt the UPA government introduced several populist measures.

“For this we have to thank the communists because when Manmohan Singh was the fi-

nance minister in the early 1990s the Congress only helped get in foreign investments, led to industrial development and opened the financial sector.

Immediately after being reelected, the UPA signalled it would take fresh stabs at populism.

In her first address to the newly elected Lok Sabha, President Pratibha Patil on 4 June emphasized measures such as a Food Security Act which promises a monthly 25kg of wheat or rice at Rs3 a kg for the poor, enlarging the scope of NREGS and enforcing social audit in flagship programmes, expanding the Rashtriya Swasthya Bima Yojana aimed at providing insurance cover to the poor, enhancing Rashtriya Krishi Vikas Yojana, aimed at improving agricultural productivity, and initiating Bharat Nirman phase II, an ambitious Rs1.76 trillion rural infrastructure programme started in 2005.

A senior Planning Commission official said a lot of emphasis is being placed by the Prime Minister’s Office on Bharat Nirman.

“Very soon, targets would be set for Bharat Nirman phase II and details will worked out in the commission,” he added.

region. Incidentally, the big emerging economies of China and India have not seen a significant change in the tax rates over this period, whereas other emerging economies have reduced their top tax rates. For example, Vietnam has reduced its top tax rate from 50% in 2003 to 40% in 2008.

In India, the highest tax rate is 30%, and with a surcharge of 10% and education cess of 3%, it effectively works out to 33.99%.

A few striking examples in the Asia-Pacific include countries such as Hong Kong, with a tax rate of 16% since 2003 and Singapore with a tax rate of 20% since 2006. The highest rate of tax in this region is charged by Japan at 50%, followed by Australia and China at 45% on income above certain threshold.

The personal income-tax rate in Latin America has stayed low but relatively stable, averaging at 25.6% in 2003 and rising to 26.9% in 2008.

This was mainly due to introduction of individual income tax in 2007 in Paraguay at 10% and in Uruguay at 25%. Thus, the tax rates have remained stable in Latin America or are being reduced. For example, in Panama, tax rates have been reduced from 33% in 2003 to 22% in 2008 and in Mexico from 34% to 28% during the same period.

In 2008, among the Bric (Brazil, Russia, India and China) countries, Russia took the lead with lowest individual tax rate. It levied a flat tax rate of 13%, while Brazil levied the top tax rate of 27.5% at the income level of 32,919 Brazilian reals, equivalent to about Rs8 lakh.

In comparison, India’s top tax rate is 30%, while in China, the top tax rate of 45% gets triggered at an income level of 100,000 yuan of monthly income, equivalent to some Rs7 lakh of monthly taxable income.

It is pertinent to note that

the top tax rate in all the Bric economies has remained unchanged during 2003-2008.

The country’s highest tax rate is only one indicator of what individuals pay as tax on their income. An equally important aspect is the income threshold above which the highest tax rate is charged.

It is pertinent to note that in India the highest tax rate of 30% is triggered at a relatively low level of income of Rs5 lakh. In comparison, in the US, the highest tax rate of 35% gets triggered at income over $357,700, equivalent to about Rs1.6 crore. Similarly, in Singapore, the top rate of tax 20% is payable only on income over 320,000 Singapore dollars, equivalent to Rs1 crore approximately.

Overall, taxes on personal income are on a slow decline in many countries, which is akin to a fall in corporate income-tax rates across the globe. Keeping in view the global trend of rationalization and reduction in rates, it may be an appropriate time for India to consider reducing the slab rates from three to two and maybe gradually to one.

Also, a cut in the highest rate from 30% to 28% initially and gradually to 25% will make India’s top rate more competitive in comparison with other progressive economies. Further, increasing the threshold limit for the top tax rate from Rs5 lakh to Rs10 lakh in the near future will only be reasonable.

These steps will help provide more disposable income in the hands of the individuals and hence boost consumption, savings and investments in the economy which, in turn, would help India to continue to grow and achieve its GDP growth targets.

Vikas Vasal is executive director, KPMG. Respond to this column at feedback@livemint.com

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CHAPTER 5 ­ VIEWS POLICY TRACK: SNARAYAN

A MIXED BAG, AT BEST W

riting a column immediately after hearing the Budget speech is not very easy. But it has been made a little easier this time, as there is a throwback to the budgets of the 1980s. The approach to Plan expenditure and public outlays is very similar to that followed in the 1980s—and very different from the one adopted in the 1990s, after the reforms started. The framework has been set to target major goals—50% reduction in poverty by 2014 (a millennium development goal), 9% growth, a social supply net, global quality education, energy security and universal primary health—not immediately, of course, but over the next five years.

To reach these goals, the government would do more of the same, incrementally, by providing greater allocation to existing programmes. There is, of course, focus on flagship programmes that have done well—the National Rural Employment Guarantee Scheme gets an allocation of Rs39,100 crore. There is an increase of 59% for the Pradhan Mantri Gram Sadak Yojana, additional funds for the Bharat Nirman scheme and enhanced outlays for the Integrated Child Development Scheme, female literacy as well as the announcement of a programme for social security for unorganized workers. There is a step up of 23% for national highways, another Rs5,000 crore for the railways and a significant increase in the outlay for the Jawaharlal Nehru

National Urban Renewal Mission.

It’s easy to criticize this initiative, as the Sensex has. First, a lot of the spending and delivery is still in the hands of the states, and there’s no mention of how the additional funds will be used more effectively than before. The statement about improved delivery mechanisms hasn’t been fleshed out, and unless the government is serious about reforming the mechanics of governance, there is little hope that the additional outlays will result in better outcomes.

Second, and more importantly, issues high on national priority have not been given adequate financial support.

Only Rs120 crore has been allocated to the national identity card scheme—a priority programme. Modernizing the police forces gets only Rs420 crore—and a substantial outlay is for police housing, not equipment and weaponry. The National Rural Health Mission gets only Rs350 crore, and so all biometric cardholders will have to wait a while to get their entitlements from hospitals.

Next, there is little on agriculture barring greater credit—much was expected from the Budget for this sector. Finally, the fiscal deficit of 6.8% is a deeply worrying figure, and the revenue deficit of 4.8% is even more so.

At the same time, there are some nuanced approaches that indicate the finance minister has opted to push for growth.

In the infrastructure sector, clearly, a lot of the play is in the hands of the private sector,

and the Budget recognizes constraints to financing these projects. The initiative to grant the Infrastructure Financing Corporation much greater flexibility by allowing it to refinance 60% of all bank lending for infrastructure, providing take-out financing for asset-liability mismatch and increasing allocation for the national highways programme, provide a stimulus package for growth in infrastructure that is likely to speed up projects. There is a focus on textiles and construction, which have traditionally been employment-intensive sectors.

The removal of the fringe benefit tax is a great relief for companies, though the increase in minimum alternate tax has a dampening effect.

The incentives on personal income-tax through the removal of surcharges, increase in the limit of exemption for personal income tax and relief for senior citizens, etc., are likely to put more spending power in the hands of the citizens. By not changing indirect taxes adversely, the finance minister has carried forward the benefits of the earlier stimulus packages for one more year—just as in the case of software exports.

There is also room for disinvestment receipts, though this was not clearly spelt out, but there is a provision of substan-

tial additional revenues budgeted under non-tax receipts.

There is also mention of a revision in fertilizer subsidies, through the introduction of a nutrient-based subsidy regime.

These measures are likely to provide the minister with some fiscal space during the year.

There are some hidden market incentives as well—if the limit on non-promoter public shareholdings in listed companies is raised, one is likely to see a lot of investor activity that would be good for the markets.

Finally, there is a promise of tax simplification—the new direct tax Bill to be tabled for discussion within the next 45 days and an approach to simplifying transfer pricing, both of which would be very welcome.

In short, there is an attempt not to do too much, but to steer towards greater growth within the constraints of the spending commitments. The time available is only nine months of the year, and so it is a calculated risk. At the end of it, the fiscal deficit may well turn out to be lower than projected—if growth returns and the monsoon does not play truant.

S. Narayan is a former finance secretary and economic adviser to the prime minister.

We welcome your comments at policytrack@livemint.com

SUJIT GHOSHPARTNER, BMR ADVISORS

FOR A MORE INCLUSIVE DEVELOPMENT PROCESS I

ndia has seen an economic slowdown in the recent past, much to the chagrin of the domestic industry. We faced lower production due to erosion in consumer demand.

We also saw stimulus packages and reduction in excise and service tax rates in the last quarter.

It is heartening to note the government has not taken any step to destabilize the expansion of consumer demand by increasing indirect tax rates.

Maintaining status quo is a prudent step, for it was easy for the government to get carried away by relying on April growth rates, which does indicate a possible bottoming of the economy.

The second important aspect of the Budget is the commitment to introduce a goods and services tax (GST) by 1 April, 2010, and a sneak preview of its basic structure—a dual GST comprising Union and state GST. This is a desirable step, given that multiplicity of indirect taxes and break in the credit chain for goods and services have often led to costprohibitive supply chain.

Indirect taxes in their current form is not entirely a tax on consumption for it taxes business as well. However, with the introduction of GST, we hope that cost efficiencies

Click here to watch Indian industry reactions to the budget are achieved in supply chains, and consumers bear the impact of indirect taxes and businesses are freed from its impact.

The third important aspect is the alignment on the territorial jurisdiction of the three federal indirect taxes—customs, excise and service tax.

Until this Budget, the territorial jurisdiction of the customs and excise laws extended to the entire exclusive economic zone and continental shelf of India, whereas service tax laws extended only to designated coordinates in the continental shelf.

Territorial jurisdiction of service tax laws are now being extended in line with that applied under customs and excise. This can have a far-reaching impact on oil and gas exploration in the east coast. The cost of exploration and production is likely to increase.

The finance minster has indicated elaborate budgetary support to provide infrastructure development and made policy announcements to provide stimulus to public investment in infrastructure and public-private partnerships.

However, purely from an indirect tax perspective, the Budget falls short of expectation for the infrastructure sector.

There are no significant in-

direct tax changes introduced that can provide a fillip and impetus to this sector and several industry demands have remained unfulfilled. Instead, one notices a slew of countermeasures, such as a service tax on transportation of goods by railways.

The Budget proposals undoubtedly are aimed at making the development process more inclusive, a plank forming the basis of this United Progressive Alliance government’s road to power. One hopes that some of the unfinished agendas would be taken up in the course of this year.

We can surely pin our hopes on the statement of the finance minster when he says, “A single Budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so.”

These words make one expect that fiscal rationalization and tax as tools for intervention may be used throughout the year and some of the unfinished agendas may be addressed as we move along this fiscal.

Sujit Ghosh is partner, BMR Advisors. The views expressed here are personal and do not represent the views of BMR Advisors. Respond to this column at feedback@livemint.com

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HASEEB A DRABUCHAIRMAN, JAMMU AND KASHMIR BANK LTD

THE NUMBERS COULD SPIRAL OUT OF CONTROL T

his Budget has to be assessed in terms of five Ms: the mind of the finance minister; the message that the government wants to communicate through the Budget; the method in which the finance minister seeks to implement it; the mechanism through which the Budget will work its way into the economic system; and finally the macroeconomics that underlies the Budget estimates.

There is a distinct sense that there is uncertainty in the mind of the finance minister about what is going to happen in the next three quarters. As such, it is a Budget for uncertain times.

And quite rightly so. Realistically speaking, the minister had no choice, as the Budget was bound to be conditioned by the global circumstances more than the mind of the finance minister. Policy adventurism at this time could have been very dangerous. Policy has to be worked out on the basis of not what is likely to happen, but what could happen. It can be said that the mindset is that of the 1970s: Cautious and wary of the markets and international environment.

The message, though, is clearly of the 1990s: Reforms are the only way forward. It is only a question of pacing them. The big message, loud and clear, is that the government believes that reforms are the only way for ensuring long-term inclusive growth.

The stage has been set for direct tax reforms with specific action on simplifications and increase

in the exemption limits. The commitment on a goods and services tax, or GST, is a big measure whose significance has not been adequately appreciated.

Similarly, a big reform, which can be seen as a new and innovative way of financial inclusion, is the government’s intention to broaden the equity ownership base in the country by reducing the threshold for promoter-owned equity. This step, if carried out properly, holds enormous promise for financial inclusion. This, along with the liberalization on

pension funds, holds promise for equity markets and makes them more attractive than mutual funds.

In terms of the method, it is a Budget of uncertainty. This is why all divestment has been deferred; there was no intent expressed on the banking and financial sector, especially insurance. To a large extent this is prudent. Also, the government has chosen continuity in so far as it has continued to do what worked for it in the Budget of 2008-09. So, everything has been

RAJIV MEMANICOUNTRY MANAGING PARTNER, ERNST YOUNG

POSITIVE ON TAXATION, BUT MUTED ON REFORM G

iven the absolute majority enjoyed by the new government, the direction outlined by the Economic Survey last week and the upbeat business sentiment, expectations from the Budget were running at a high. That the finance minister would refrain from big-bang reforms became apparent at the start of the session, when he mentioned that “a single budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so”. So while we have seen some significant and positive pronouncements on the tax front and also on infrastructure, but on other macroeconomic aspects, the finance minister has relied more on “intent”.

On the fiscal deficit, the Finance Commission will set new fiscal responsibility and budget management targets, effective 2010-11. Also, the issue of petroleum pricing has been referred to an expert group, which will advise on a viable and sustainable pricing mechanism. In the case of fertilizers, the government intends to move towards a more consumer-based regime. On disinvestment, which was being seen as a means to cover the mounting fiscal deficit, the finance minister has not said much and the Rs1,200 crore earmarked to be raised from disinvestment receipts is much less than the proposed Rs35,000 crore expected from the pan-India 3G licences. The minister was also quiet on the critical aspect of foreign direct investment.

extended—be it the debt waiver, interest subvention to agriculture and to exports, or export credit guarantee corporation (ECGC) cover—to 2010.

The other aspect of method is that it is an expenditure-oriented Budget with high incidence of revenue expenditure. In these times, the real issue is not the size of the fiscal deficit. In the current environment, the 6.2% can perhaps be justified; it is the structure of the fiscal deficit that is the problem. The revenue deficit accounts for nearly 80% of the fiscal deficit. Incrementally, this will be more than 100%. The primary account would have now gone into a deficit. Add to this the states’ fiscal deficit of 4%, primarily incurred in revenue expenditure. This is the method of budgetary management of the 1980s.

In terms of mechanics, the sectors identified as prime drivers, and correctly so, are agriculture and infrastructure. Both have been binding constraints on growth, and even as the focus in the short term may be consumption drivers, they will facilitate and induce investment in the medium term. In terms of a specific measure, the really big initiative that will get banks to finance long duration infrastructural projects is the move to formalize and institutionalize takeout financing. If India Infrastructure Finance Co. Ltd does work out the modalities for refinancing 60% of bank lending to PPP (public-private partnership) infrastructure projects, this will give a huge fillip not only to infrastructure but also to a particular mode of organization, i.e., PPPs. The underlying macroeconomics of the Budget is confusing. At one level, current expenditure or consumption is seen as the driver of economic revival.

The way this has been distributed and structured is bound to have

an adverse impact on the savings rate in the economy. This, along with the fact that the Budget pursues an extraordinarily expansionary fiscal policy, even after two earlier fiscal stimuli, and with a very loose monetary policy, will force the monetary policy to pick up the fiscal slag. The Reserve Bank will have no option but to pursue a tighter monetary policy in the third quarter when the busy season credit policy will be announced. By then the demand would have picked up and a suboptimal monsoon could have created an adverse macroeconomic climate.

As such, there is bound to be pressure on interest rates. This will increase the cost of borrowing for everyone, including the government. And that will have an impact on the credit offtake and private investment scenario.

Add to this the supply of government paper and the way bond markets will absorb it, and it is clear that we are looking at interest rate hardening in the third quarter. This could have a significant impact on growth prospects and the 7% target looks unachievable. This will set in motion a vicious circle where the budgetary numbers eight months from now could spiral out of control.

All told, the budgetary numbers were expected, but the language was not. It was expected of the finance minister to show greater concern on the fiscal situation and outline a road map for restoring fiscal balance. This has not happened. The reason why markets tanked seems to be that they expected a branded chocolate, but have been served a piece of unbranded sandesh!!

Haseeb A. Drabu is the chairman and chief executive of Jammu and Kashmir Bank. The views are his own and don’t necessarily reflect the views of the organization he works for. Respond to this column at feedback@livemint.com

The market reaction on day one was not positive, which is on account of the above factors and because no definitive timelines have been set for macroeconomic reform. Considering that Mukherjee has been in office for only 45 days, let us not begrudge the lack of big-bang announcements immediately; yet hope that actions will follow soon.

Measures have been more specific and positive on the taxation front. Axing of the surcharge of 10%, applicable on personal income tax, shall have an overall impact of reducing the tax incidence by 3% on individuals earning more than Rs10 lakh.

The abolition of fringe benefit tax has also come as a welcome relief to the corporate world.

However, this benefit would be partially offset by application of perquisite tax in the hands of the employees. The list of items on which perquisite tax will be applied remains to be seen to fully understand the impact of this tax.

The taxation of limited liability partnership, which had been hanging in balance ever since its introduction in early 2009 has now been clarified. It is now proposed that an limited liability partnership would now be taxed

on the same lines as a general partnership. The introduction of an alternative dispute mechanism and formulation of “safe harbour” rules by the Central Board of Direct Taxes to reduce the impact of judgemental errors in determining transfer price in international transactions would go a long way in reducing time and costs involved in litigation.

The rectification of the dual levy of taxes on packaged software by removing additional countervailing duty on the portion of software used for commercial exploitation is also a much needed reform. A dampener in this year’s Budget has been an increase in the minimum alternate tax (MAT) rate from 10% to 15%. This would have a significant impact on the corporate world as the increased rate would apply to all companies availing exemption under chapter VI of the Income-tax Act. However, an attempt has been made to tone it down to some extent by increase in tax credit available from seven years to 10 years.

Rajiv Memani is country managing partner at Ernst and Young.

Respond to this column at feedback@livemint.com

Click here to watch Indian industry reactions to the budget

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