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| Mukesh Butani: Some well-timed choices | | Pranab walks fiscal consolidation path with prudence |
| Mukesh Butani / Feb 27, 2010, 00:43 IST |
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Budget 2010 was expected to be more than just an exercise in annual fiscal management and first indications are that the Finance Minister managed a delicate act in balancing fiscal consolidation and economic prudence. Supplementing the data released in the Annual Survey, the FM pegged the GDP growth for the current fiscal at 7.2 percent and laid an ambitious path for double digit growth. Revised estimates shows fiscal deficit for the current year at 6.9 percent; only a marginal deviation from the original Budget Estimates though disappointing third quarter growth of 6 percent. Other important indicators of macro-economic health were encouraging with tax-to-GDP ratio at 10.3 percent, despite huge fiscal stimuli throw-in over last eighteen months to keep the economy afloat (tax stimulus alone totaling to 3.5 percent of GDP).
While the fiscal stimulus of $37-billion for the 15-month period offered much needed impetus, the Budget was expected to set the tone for strategic shift in the government spending pattern and a calibrated roll-back to tame deficits and ever-increasing debt-to-GDP ratio. The ‘big bang’ expectation in terms of a roadmap for key reforms in direct and indirect tax other than announcing date of April’11, did make the budget exercise appear a mere formality. Industry was pinning its hopes on major announcements that would have given the much-needed push to key strategic sectors such as infrastructure, renewable energy, education and healthcare. None of those materialised.
Fiscal prudence prevails
Though the Budget contained proposals for rationalisation of tax rates, the fundamentals for managing the fiscal deficit and achieving inclusive economic growth guided most of the announcements. The broader focus clearly was on revenue mobilisation rather than (non-plan) expenditure curtailment in line with the recommendations of the 13th Finance Commission. The key recommendations on which the FM acted include a calibrated exit strategy from the expansionary fiscal stance and capping the combined debt of the Centre and the States at a sustainable proportion of the GDP.
Additional revenue mop up of Rs 25,000 crores from disinvestment programme and even more ambitious deficit targets for next three fiscals (deficit pegged at 4.1 percent in 2012-13) would be a tall order.
Tax rates swing
Decent direct tax collections in a slowdown allowed the FM to rationalise Income tax rates for individual tax payers, which is expected to benefit at least 60 percent of individual taxpayers. A status quo in the corporate tax rate barring a marginal reduction in surcharge from 10 to 7.5 was no surprise, as there was little room to maneuver. Increase in the Minimum Alternate tax rate would, however disappoint India Inc, particularly Oil E&P and refining sector enjoying tax holidays.
No change in the service tax rate was indeed a pleasant surprise, as the FM targeted excise and custom duty rationalisation for mopping up targeted revenue collections. Much as expected, a full or partial excise duty exemptions available to several items has been proposed to be withdrawn and duty imposed at 4 percent or 10 percent. The peak custom duty rates however, remained unchanged at 10 percent.
Rejigging of petroleum taxes
The Kirit Parikh report announced early this month made its recommendations for petroleum sector reforms. Whilst the FM acknowledged the expert group recommendations and assured discussion of recommendations in due time, significant rejigging of taxes for petroleum products were proposed in the Budget. As the peak custom duty on crude oil was restored to 5 percent, duty on petrol and diesel was raised from 2.5 percent to 7.5 percent and for other specified petroleum products to 10 percent. Also, the standard excise duty on petrol and diesel has been increased by Re l per litre.
Restoration of custom and excise duty rates for petroleum products is likely to hurt the end consumers, as oil companies shall pass the burden in totality. These measures may not, however, give any relief or immediate respite to oil companies reeling under a de facto pricing regulated regime and one has to wait and see what the Ministry of Petroleum does for implementing Parikh committee recommendations.
From an Income tax standpoint, the Budget is a mixed bag for the petroleum sector, as the midstream sector saw relaxation in the threshold for common carrier pipeline capacity from 1/3 to 1/4; the upstream sector would be hit with narrowing scope for beneficial deemed profit regime for oil-field service operators.
R&D incentivized
In line with expectations, the Budget proposes to introduce renewed and more impactful tax incentives for R&D activities across all industries. The enhanced weighted deduction for in-house and outsourced R&D most certainly underlines the importance given to promoting state-of-the art technology.
Tax reforms top on agenda
Without taking his eyes off the reform agenda set out in his last budget, the FM has re-affirmed the government’s commitment to pursue two most important tax reforms in the country: introduction of the Direct Tax Code and Goods and Service tax by April 1, 2011 though he seemed less upbeat about GST in his speech. Though, delayed by one year, GST if introduced by the revised deadline would be path-breaking and read with Finance Commissions recommendations to disincentivise states playing spoil sport, developments in this space would be most watched. Although I would have felt more reassured if GST rate was brought down from 2 percent to 1 percent, it seems the government is still seeking the consensus of all states for GST implementation.
Budget with sound fiscal vision
Given the difficult economic landscape with early signs of recovery just showing, I believe the FM has done a tremendous job of aligning medium-to-long term growth objectives with economic realities. As the FM himself said in the speech – “Managing a complex economy is a difficult task…and yet, choices have to be made and they have to be well-timed”.
Well said, Pranabda!
Mukesh Butani, Partner, BMR Advisors
(The views are personal)
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