Business Analysis CORPORATE WORLD
Union Budget 2012-13
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The Union Budget 2012-13, though lacking bold and radical reforms, has attempted to control the growing fiscal deficit. With the fiscal deficit for the year 2011-12 being close to 6% of the Gross Domestic Product (GDP), the Finance Minister has targeted to reduce the same to 5.1% of GDP in 2012-13. But, realistically, it seems that this could end up being more, due to under provision in certain key expenditure heads like oil subsidies, optimistic income targets in sale of shares in public sector companies and sale of spectrum. However, the Finance Minister has rightly rolled back indirect taxes like excise duty and services tax cuts which were earlier introduced as a part of the ‘stimulus’ package; this has provided some relief in narrowing down the fiscal deficit projections in the current budget. Pranab Mookherjee announced that the fiscal deficit has increased to 5.9% of the GDP for 2011-12 and Finance Minister will be expected to marginally drop Pranab Mukherjee to 5.1% of GDP during the budget likely to be below expectations due to year 2012-13. 5.1% is still a very high fiscal deficit figure and is perceived that increase in various heads of indirect the government needs to target a much taxes. Customs duty on gold has been lower figure. Further, even achieving the 5.1% fiscal deficit target has a number of doubled to restrict import of gold. challenges, especially, since the growth Measures have been taken to allow and the revenue receipt targets are more airlines to borrow from foreign lenders on the optimistic side. It is also unlikely to tide over working capital shortages. The budget has not touched upon that the inflation could be contained at the levels planned. If these projections any compelling reforms which are are optimistic and the actuals turn out pressing requirements for economic much lower, the fiscal deficit for 2012- growth. Implementation of Goods 13 could go well past 6%, raising and Services Tax (GST) and Direct serious concerns on the health of the Taxes Code (DTC) has again slipped. No commitment has been provided to Indian economy. Has the budget created an ease Foreign Direct Investment (FDI) environment for higher growth? The limits in a number of sectors. A little answer is not very encouraging; it does focus in these initiatives could have not seem that the monetary policy cycle been conducive for higher growth and will be conducive for any drastic interest lower fiscal deficit in the coming years. rate reduction through 2012-13, thereby Increase in personal tax exemption depriving investments that could have limits has been marginal and seems only resulted in higher growth. Economic cosmetic; basic limit has been raised growth is expected to increase from from Rs.1.5 lakh to Rs.2.0 lakh where 6.9% during 2011-12 to 7.6% during expectations were for an increase of up the budget year 2012-13, but this again to Rs.3 lakhs. seems a bit optimistic. With possibilities for reduction in interest rates being Industry Impact of Budget 2012-13 minimal, expected level of investments Companies operating in the telecom during 2012-13 does not seem to support sector will have a marginal negative a growth rate to the extent projected for impact as the budget assumes an inflow 2012-13. Further, consumption is also of around Rs.40,000 crore from www.advancedge.com
telecom license fees, including the fees for fresh licenses to be issued in lieu of the recent cancellations of 122 licenses under the directive of the Supreme Court. With Services Tax also increased from 10% to 12%, additional outflow from telecom companies could be passed on to subscribers through higher talk-time costs. The pharmaceutical industry is likely to be burdened with more costs. Increase in excise duty on active pharmaceutical ingredients and on formulations is likely to increase the costs of medicines. The pharma companies are likely to pass on these costs to the consumers and thereby the common man is the one who would be negatively impacted. However, tax benefit for Research and Development (R&D) expenditure has been extended for five years, which will have a positive impact on the profitability of pharmaceutical companies. Oil and Gas companies will be impacted by the increase in cess on crude oil production by around 80%; this is likely to impact crude oil producing companies such as Oil and Natural Gas (ONGC) and Cairn India. With acute coal shortage impacting power producing companies, the 5% import duty on coal has been abolished. This is likely to significantly impact the power producing companies improving their bottom line. Increasing customs duty on non-alloy imported steel is likely to make imported steel more expensive, thereby making products of local manufacturers like SAIL and Tata Steel more competitive. The infrastructure sector has got a boost in the budget 2012-13; announcing the proposal to build 8,800 kms of roads under the under National Highways Development Program, equating to around 25 Kms per day, which is an ambitious target. Allocations for infrastructure has been increased close to 15% and amounts to around Rs.25,000 crore. The Budget has allowed Qualified Foreign Investors to invest into the Indian Corporate Bond market. This would be a major source of financing for infrastructure companies and is a source of financing that the industry Advanc’edge MBA April 2012
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