The Indian economy is eagerly waiting for the budget 2012 to be announced on 16th March. This budget is important for various aspects, but main issue is how government manages the issue of fiscal deficit and brings reforms to provide the pace for economic growth.
Let’s check the problem faced by various sectors in brief:
| Industry | Problems |
| Telecom | 2G spectrum Issue |
| Banking Sector | Inadequate Capital and lack of finacial inclusion in rural India. |
| Infrastructure | High input cost and Lack of Proper regulatory body |
| FMCG | Retail FDI not allowed |
| IT | Weak global economy |
| Metal and Mining | Coal shortages and lack of proper mining policy |
| Oil and Gas | Very high rate of petroleum import and subsidy burden |
| Power | Coal shortages and high equipment cost |
Fiscal Deficit, Taxes and Investors
The fiscal deficit has well crossed past the expectation of previous budget. It deters government to take constructive measures for quick growth of economy. The Government is expected to accept the recommendation by economic advisory council to increase the indirect taxes, fertilizer prices to be decontrolled and free petroleum pricing as a measure to contain the fiscal deficit. Disinvestment in various sectors is expected to be announced in this budget. The excise duty and Service Tax are expected to be increased about 12 percent from the current 10 percent level. Cigarette prices may increase more as again, it may see an increase in tax this time.
The government has received a recommendation to increase the deduction under Section 80C from Rs 1 Lac to 1.5 Lac.
With starting UID system, it is expected that FM would take measures to cut subsidy to mark reform and to check the leakages in subsidy, cash subsidy through UID would be in card.
Legislation on mining and land acquisition is expected to be announced during the budget session. It would help in proper utilization of resources and stopping illegal mining. Increase in Budget allocation to the defense is almost surely because recently China has announced 11% increase to its defense allocation, and India has the only choice to follow the neighbor country for balancing act.
Lets see what various sector is expecting from the budget 2012 and its effect:
| Industry/Sector | Group | Category | At Present | Expected | Effect |
| Auto Sector | Excise | 2 Wheeler, Car, commercial vehicles, three wheelers | 10% | Increase of 2% | Negative |
| Large Cars and Utility vehicles | 22% + Rs15000/Vehicle | Increase of 2% | Negative |
| Diesel Specific Charges on Vehicles | NIL | Fix Rupee/vehicle based tax | Negative |
| Banking Sector | FD (Tax Saving) | Lockin Period | 5 Year lockin | 3 Year Lockin | Positive |
| Maximum Investment Limit | 1 Lac | 1.5 Lac | Positive |
| FD (maturity of 3 year) | Tax benefit | No Tax Benefit | Interest income to be treated as capital gain | Positive |
| Capital Goods Sector | Import Duty on Power Generation Equipment | Import Duty | No Import Duty on Mega Power Projects | Levy of Import Duty | Positive for domestic capital goods company |
| Cement Sector | Excise Duty | Tax and duty | Excise at 10% advalorem + 160 /ton if cement price above Rs 190/bag else Rs80/ton if price below Rs190/bag | Increase of 2% | Neutral |
| Import duty on Pet coke | Input Cost | 2.5% on pet coke and 5% on thermal coke | Removal of Import duty | Positive |
| FMCG | Excise | Excise duty | 10% | increase by 12% | Negative |
| Media | Excise | Excise duty | 5% | Removal of Excise duty | Positive |
| Entertainment Tax | Taxes | Variable statewise | Bring Closer to GST | Positive |
| Metal and Mining | Import duty On Mangenese Ore | Import Duty | 2% | Increase by 3 % | Positive for domestice Mangenese ore company |
| Export Duty On Iron Ore | Export Duty | 20% | Decrease Expected | Positive for Mining Companies |
| Import Duty On Coal | Import Duty | 5% | Duty to be Removed | Positive for metal companies |
| Oil and Gas | Import duty on LNG | Import Duty | 5% | Duty to be Removed | Positive |
| Refineries | Tax Holiday | Available | To be continued for new projects | Positive |
| Subsidy | Subsidy | Available | To be Reduced | Positive for oil and gas sector |
| Power Sector | Tax Benefit | Tax | Deduction Under Sec80-IA | To Continue with Sec80IA | Positive for Power Sector |
| Import duty on Equipment | Import Duty | NIL | 19% for Mega Power Projects | Negative for power generation companies and positive for Equipment manufacturing companies |
| Import duty on coal | | 5% | Expected to removed | Positive for Power generation but negative for mining companies |
| Infrastructure | 80 C Benefit | Tax Benefit | IT exemption on home loan principal repayment upto Rs 1 Lac | Increase upto Rs 2 Lac | Positive |
| Section 24 benefit | Interest on home loan | Exemption upto Rs 1.5 Lac | 2 Lac | Positve |
| FDI | FDI in multi brand Retail | Not available | FDI to be allowed upto 51% in multi brand retailing | Positive |
Can Government present a Reform Centric Budget?
The government has no choice but to control the deficit before it’s too late. The fiscal deficit is expected to cross 5.5% marks for current financial year. The international Crude oil price is trading around $ 120 per barrel, and it further increase the deficit if the prices are not passed on directly to the consumers. The recent results of state elections have reduced the decision-making power of UPA government. At present, if government opts for reforms, then there is very much chance of political instability. In this situation, FM is expected to avoid any sort of risk that can put a question mark to the government’s stability. Hence, we can say that this budget is going to be a populist budget with a hint of little reform to control the deficit.
Let’s wait for the real show until 16th March 2012 and wish for a trend changing, growth oriented and a reform centric budget.
About the author:
Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent 8 years in Equity research and Stock broking sector. He can be reached at amvilube@gmail.com
