Budget Analysis: Five objectives that underpin Budget 2012

Bobby Parikh, chief mentor, BMR Advisors

Budget 2012 was expected to put a bruised and hurting economy back on the path of growth. This requires that the Government contain a runaway fiscal deficit (estimated at 5.9% or FY 2012), address supply side constraints to help check inflation which has persisted at uncomfortably high levels for much of the year and kick start an investment cycle which has been particularly subdued ; given an environment characterised by high interest rates, elevated commodity prices, and weak investor sentiment.  The five objectives that underpin Budget 2012 appear to respond, among others, to these imperatives.

The Budget projects a nominal GDP growth of approximately 14%.  With real GDP growth targeted at around 7%, inflation for the year has been projected at 7%, a number that will be watched closely.  The fiscal deficit for the year has been projected at an uncomfortable 5.1%, potentially constraining a correction in interest rates.  This is predicated on a tax revenue growth of 15.6%, lower than the 18.4% growth predicted in Budget 2011.  Expenditure is expected to grow at 18%; subsidies are to be contained at 2% of GDP, to be achieved in part through better targeted subsidies delivered through cash transfers.

Thematically, a number of tax and policy initiatives have been proposed to facilitate and foster infrastructure growth and development.  In a departure from the policy on external commercial borrowings, the beleaguered power and airline industries have been permitted to raise foreign currency borrowings to finance working capital requirements, including, in the case of the power industry, to refinance rupee borrowings.  Tax holiday for generation or generation and distribution of power has been extended by a year until March 31, 2013.

Tax withholding on interest payments on such financing has been reduced from 20%to 5%  Basic customs duty on imported coal has been zero rated.  Airlines have been permitted duty free imports of aircrafts parts and testing equipments, to provide boost for India's potential as hub for maintenance, repair and overhaul of civil aircrafts; the policy to permit foreign airlines to acquire up to 49% stake in Indian airline operators is under active consideration.  The limit for issue of tax free bonds to fund infrastructure development has been doubled to Rs 60,000 crores.  Overall funding for the infrastructure sector has been set at Rs 50 lakh crore, with an expectation that half of targeted investment would come from the private sector.

In line with expectations, the Direct Taxes Code will not be introduced on April 1, 2012.  However, and again in line with expectations, a number of provisions contained in the DTC have been incorporated in Budget 2012.  Indirect transfers of assets located in India have been made taxable retroactively from April 1, 1961. This proposition is designed to tax Vodafone-like transactions and its constitutional validity is likely to be challenged.  General anti-avoidance provisions have been enacted, in a form more onerous than that proposed in the DTC and in disregard of a number of the Parliamentary Standing Committee