By CARE Research

The Union Budget for 2012-13 (FY13) is to be presented in Parliament on 16th March. This will be a critical Budget as it sets the tone for policy stance relating to not just fiscal issues but also monetary policy and economic reforms. Also, it is being announced at a time when the economy has shown distinct signs of a slowdown and is looking for a boost from the government through appropriate policy announcements. Global as well as the domestic investors would also be looking for signals.

The theme of the FY13 Budget would be on:

• Striking a balance between fiscal consolidation and public spending while maintaining sustainable inclusive growth
• Focusing on growth in rural areas and provision of more education and health facilities through centralized sponsored schemes
• Focusing on increasing infrastructure investment
• Moving towards implementing GST and DTC - Revision of tax slabs, rates and so on

Macro-economic environment: The economic conditions in India during FY12 have been challenging with the development of a sharp trade-off between inflation and growth being the driving factor. Policy formulation has been difficult on account of the persistently high inflation and slowing industrial growth clubbed with sluggish investment climate in the country. Further, volatility in the foreign exchange market has added to the difficulties of the policy markers.

Based on CSO’s projections for the year, industrial sector growth is expected to be subdued this year with manufacturing growing at 3.9% as against 7.6%, construction at 4.8% compared with the 8.0% growth in FY11 and the growth in mining and quarrying is likely to be negative 2.2% as against the 5% growth in the previous year. Service sector has acknowledged robust growth of around 9% throughout the year while electricity, gas and water supply segment is to register 8.3% growth this year. GDP growth would be 6.9% as against 8.4% last year.

Inflation has been persistently high around 9% throughout 2011 and it is only from December onwards that there has been a decline in the prices of primary articles, taking the headline inflation down to 6.6% for January compared to 9.1% for November. The declining trend in the food inflation is likely to help bring down Wholesale Price Index (WPI) though admittedly the base year effect has moderated such increases. However, though core inflation has started to come down since January, it needs to be tracked for some more time before we are confident that it will remain at lower levels. Therefore, RBI will lower interest rates only after it is convinced that inflation has come down permanently.

Monetary Policy Outlook: So far in the current financial year, the major driving factor for the RBI’s monetary policy had been the growth-inflation trade-off. However, in recent times the persistent deficit in liquidity conditions and the volatility in the exchange rate have also called for the Central Bank’s attention.

RBI in its recent monetary policy review cut cash reserve ratio (CRR) by 50 bps in order to ease the prolonged tight liquidity conditions prevailing since November. The 50 bps cut in the CRR (to 5.5%) would infuse approximately Rs. 32,000 crore into the banking system. The RBI has also infused liquidity into the system through Open Market Operations (OMOs) to the extent of Rs. 95,190 crore so far in the financial year (as on 10th February 2012). Further, the RBI has indicated that it would conduct more rounds of OMO auctions as and when the need arises.

Budget expectations: Expectations from the Budget would be look at   the overall macro economic background. Further, while the two major tax reforms, i.e. direct and indirect taxes have been defined broadly by the DTC and GST, modifications in the present system have to be consistent with this overall framework.

Infrastructure: In order to sustain a healthy GDP growth rate, equivalent investment in infrastructure is required. The Government can undertake several measures in order to encourage investment in infrastructure sector. A few have been noted below:

• Focus on fiscal incentives, which help in increasing the infrastructure spending in the country. For e.g.: 80 CCF tax benefit/rebate up to Rs. 20,000 on investment in infrastructure bonds need to be increased to Rs. 1,00,000.
• Increase in outlay to Jawaharlal Nehru National Urban Renewal Mission (JNNURM). This will not just lead to higher investments but also bring about improvements in the quality of urban infrastructure.
• Specialized institutions should be allowed to fund infrastructure projects as most banks are ill-equipped as it creates inherent Asset –Liability Mismatch (ALM) issues.

Banks: It has been observed that most banks are not well equipped for project financing as it creates ALM. In other words, bank deposits are of shorter duration while project financing is longer term. Therefore, the budget could provide an incentive to lengthen bank deposit maturity structure by offering fiscal concessions to bank deposits of maturity of 3 yrs and above instead of the 5 yrs and above currently.

Agriculture: The Agriculture Ministry has demanded lowering of interest rates on crop loans to 3% from 4% for those farmers who pay in time. Ministry has also suggested that the target of credit flow to agriculture sector by banks and FIs be retained at Rs. 4,75,000 crore in FY13 as well. Further, strong emphasis is laid on rural infrastructure to provide impetus to rural demand.

Food Security Bill: The Finance ministry should roll out the Food Security Bill in the Budget FY13. It is believed that the implementation of the bill would take place in the later part of FY13. However the allotment of around Rs. 5,000 crore could be made in the Budget itself. Currently the food subsidy stands at Rs. 63,000 crore and the Ministry expects that the subsidies provided under this Bill would increase the expenditure to the extent of 2% of the current expenditure.

Small and Medium Enterprises (SMEs): Access to finance can be enhanced by making NBFCs a vital intermediary financial institution for micro and small enterprises. These enterprises need to be actively promoted through supportive policies. Support through venture capital and private equity funds, SME dedicated banks, securitization of trade receivables and SME exchanges/ platforms would help this sector.

Health care: The Budget should raise the healthcare expenditure to a sizeable portion of the Gross Domestic Product (GDP) from 1.9% to 3.5% and target 5% in the budget of FY14. The Government should also reduce import duty on sophisticated medical equipment for India to be at par with the rest of the world and provide incentives for doctors who work in rural areas.

Real Estate: The Union Budget could target increasing business friendliness of the Indian tax administration and relax norms for repatriation of FDI in real estate. In case of SEZs clarity should be provided on its status in the light of the Direct Tax Code (DTC). For residential housing, scope of the1% subsidy announced last year should be amplified and broadened to include a wider price band to benefit home buyers, especially in lower income groups.

Power: The power sector would be expected to get some relief especially in terms of assistance on the interest to be paid on borrowed capital. The sector is under pressure of high bank debt which is difficult to service given the cost and pricing structures presently in the country. Restructuring of State Electricity Boards (SEBs) would be high on the agenda of the Budget given their tenuous state of financial health.

Defence: In order to modernize and strengthen the armed forces, India’s defence budget for FY13 is likely to touch Rs. 2,00,000 crore as against Rs. 1,64,415 crore, which was 2.5% of the GDP for FY12. The defence budget for FY12 had seen a 11.6% hike and if the trends and the need of the Armed Forces is to continue in FY13, as there is need to modernise against the background of political developments across our borders.

Pharmaceuticals: Excisable goods used for R&D purposes could be exempted from Central Excise Duty besides import of all capital goods, raw materials, consumables. Even reference standards for R&D purposes to be fully exempted from customs duty and other related duties. This will definitely boost R&D activities significantly. The Budget can provide a new drug delivery system by extending weighted deduction for R&D activity beyond 2012, giving incentives for core R&D activity players as well as incentives for expenditure incurred overseas.

Disinvestment: This would once again be important for the government and the decision on the 2G spectrum could also lead to some action on further auctions in this field. Disinvestment targets could be pegged to the last year’s level of Rs. 40,000 crore on the back of an assumption of a recovery in the economy and the markets recovering.

Subsidies: Bringing down subsidies would be a challenge, and while the Budget will plug it at a level lower than the revised number for FY12, there will be a move to open up prices of petro products, which will result in higher prices of diesel and petroleum to begin with.

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