FM delivered better-than-expected Budget: Fullerton Sec

By Pallav Sinha

Fullerton Securities

The second Union Budget delivered by Mr. Pranab Mukherjee was better than market expectations with the focus shifting towards fiscal consolidation while ensuring that the growth trajectory is maintained.  The budget also addressed some of the key medium term issues like the implementation of the GST and direct tax code by April 2011. The government has laid out a road map to reduce fiscal deficit (including below the line items) to 5.5% in FY2011 and 4.1% by FY2013 from 7.2% in FY2009 and 6.9% in FY2010 respectively. The Indian economy is expected to grow by 7.2% in FY2010 as compared to a growth of 6.7% witnessed in FY2009. The Indian economy is expected to accelerate in FY2011.

The Union Budget has announced that gross tax receipts for FY2011 are estimated at Rs, 746,651 crore while non tax revenue receipts are estimated at Rs. 148,112 crore. Planned expenditure is estimated to grow by 15% to Rs. 373,092 crore while non plan expenditure is estimated to grow by 6% to Rs. 735,637 crore. The net Government borrowings for FY2011 are estimated at Rs. 345,010 crore.

The Government has also emphasized on inclusive development with an increase in spending on social sector being increased to 137,674 crore representing 37% of the total plan outlay for FY2011. Moreover another 25% of the plan allocations are devoted to the development of rural infrastructure. Plan allocation for school education has also been increased by 16% to Rs. 31,036 crore. Defense outlay for Fy2011 has been increased from Rs. 141,703 crore to Rs. 147,340 crore.

Partial rollback of stimulus

With a pick up in economic activity the Government has begun the process of rollback of the stimulus package with a 2% hike in basic excise duty to 10%. The service tax rate has been left unchanged at 10% to bring it in line with the basic excise duty. This is in line with the Government’s vision of implementing the GST regime which is important as it would complement the proposed direct tax code which is likely to be implemented from April 2011.

The Government has clarified that it would continue export sops and has extended the 2 per cent interest subsidy given to exporters on rupee export credit on certain items till March 2011 in order to help Indian exports sustain growth and stabilize it at 15 to 20 per cent.

Implementation of GST

The Government has pushed back the deadline for implementing GST from April 1, 2010 to April 1 2011. This has happened because some of the states were not ready for implementation of the GST as some of them feared that they may lose financial autonomy while others just fear the novelty of the tax in the country.

Securities Transaction Tax

As expected the government has left the STT unchanged. STT is now charged at the rate of 0.125 % both on the buyer and the seller for equities in the case of delivery-based transactions, a paltry 0.025 % for day traders and 0.017 % for the derivatives segment.

Deficit reduction through disinvestment

The Government has re iterated its intention of offloading partial stake in approximately 60 state-owned companies over the next couple of years which includes steel giant SAIL , coal major CIL, telecom giant BSNL . The government would come out with a detailed action plan for offloading its stake in PSUs by March which would be to ensure maximum returns for the government and bigger retail participation. The disinvestment target for Fy2010 and FY2011 are pegged at Rs. 25,000 crore and Rs. 40,000 crore respectively.

Savings & investments rate in India

Due to the financial crisis in 2008 -2009 there was a decline in the gross domestic savings rate as a ratio of GDP to 32.5% in Fy2009 from 36.4% in FY08. Also, the domestic capital formation rate also declined from 37.7% to 34.9%.The fall in savings rate was largely on account of deteriorating public finances on account of the fiscal stimulus which led to a sharp rise in fiscal deficit from 2.7% of GDP in FY2008 to 6.2% of GDP in FY2009. A large part of the decline in the gross savings ratio is due to a deep contraction (of 68%) in the growth of public sector savings over the preceding year.

However household savings that saw a minimal impact in FY09 which points to the resilience of the Indian economy. The savings and investment rate in FY2010 were relatively unchanged from FY2009 at 32.5% and 34.9% respectively largely on account of high fiscal deficit and a tepid growth in investment demand. The savings and investment rates as a ratio of GDP are expected to resume their pre-crisis growth trajectories from FY11 onwards on account of increased momentum in economic activity manifesting in higher GDP growth.

Higher GDP growth rates coupled with fiscal consolidation through expeditious expenditure reforms would lead to lower fiscal deficits which will augur well for India’s impressive growth story remaining intact in the long run.

Direct Tax

Some of the major highlights of the Union Budget with regards to direct taxes are as follows:

The basic income tax exemption limits for individuals, women & senior citizens were left unchanged at Rs. 160,000, 190,000 and 240,000 respectively. However the slabs were broadened which would increase the disposable income in the hands of the common man and at the same time is a step forward towards implementing the direct tax code by April 2011.

For individuals a further amount of Rs. 20,000 would be tax exempt over and above the limit under Sec 80(C) if invested in long term Infrastructure bonds as notified by the Government.

As expected corporate tax rates have been left unchanged at 30% for FY2011. India Inc would have to wait for fiscal 2011-12 for the rate to be 25 per cent as proposed in the draft Direct Tax Code. However surcharge was brought down from 10% to 7.5%.

Rate of Minimum Alternative Tax (MAT) has been increase from 15% to 18% of book profits which would impact the profitability of companies currently paying MAT. Weighted deduction on expenditure incurred on in-house R&D enhanced from 150% to 200%.

Indirect Taxes

Some of the major sector specific highlights of the Union Budget are as follows:

The specific rates of duty applicable to portland cement and cement clinker are also being adjusted upwards proportionately. Similarly, the ad valorem component of excise duty on large cars, multi-utility vehicles and sports-utility vehicles are being increased by 2 percentage points to 22 per cent.

The basic duty on crude petroleum is being restored to 5 per cent while duties on petrol and diesel are being increased to 7.5 per cent. The duties on other refined products are being raised to 10 per cent. Central Excise duty on petrol and diesel are being enhanced by Re.1 per litre each. Scheme of one per cent interest subvention on housing loan upto Rs.10 lakh, where the cost of the house does not exceed Rs.20 lakh which was announced in the last Budget has been extended by one year till March 31, 2011.

Conclusion

Overall the Union Budget was above market expectations and paved the way for fiscal consolidation while maintaining the growth trajectory. In the Union Budget the government has also provided clarity on implementation of GST as well as the proposed direct tax code.