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Friday, February 26, 2010

I-T’s A Special Stimulus:Everyone’s Getting Richer

FINANCE MINISTER PRANAB Mukherjee sprang a pleasant surprise on personal income-tax payers, lightening by Rs 20,600 the tax burden for those with an annual income of Rs 5 lakh and a saving of as much as Rs 51,500 for individuals earning Rs 8 lakh. 

    For individuals hurting from a sharp spike in prices, the concession should compensate for the anticipated increase in the cost of living after he raised the excise duty rate, expanded the ambit of service tax, and increased the prices of petroleum products. 
    The relief is a direct fallout of a rejig in tax slabs (see chart). Concessions that were available to women and senior citizens will continue. The tax burden for women will be Rs 3,000 lower than for men while that for senior citizens Rs 8,000 less. Income-tax slabs were last changed in 2008-09, and with the latest propos
al, the government appears to be making a gradual attempt to align the slabs with those recommended in the draft Direct Taxes Code. Of course, it is a long way before the income-tax slab for the 10% rate is widened to Rs 10 lakh. 
    "The widening of the slabs is a reward to the missing middle for better compliance," observed Kaushik Mukherjee, executive director at PricewaterhouseCoopers. He added that the introduction of a simplified Saral form for tax re
turns along with lower tax liability should improve compliance levels among individuals. 
    The introduction of infrastructure bonds, with a separate ceiling of Rs 20,000 outside Section 80C deductions, will also increase investment avenues for individuals. As a result, an individual can claim deduction of up to Rs 1.20 lakh from next year instead of Rs 1 lakh now. 
    The bad news is that the education cess of 3% will continue for another year, at least.


What A Middle-Class Act! Fiscal Health Gets A Booster Shot

IT'S A MIDDLE-OF-THE-ROAD BUDGET, neither harsh nor soft, neither left nor right. Finance minister Pranab Mukherjee is neither a populist nor radical reformer. Curbs on non-Plan spending rather than stiff taxation (net additional taxes are barely Rs 20,000 crore) will reduce fiscal deficit to 5.5% of GDP next year, with further reductions to 4.8% and 4.1% in the next two years. 

    This conforms to the targets of fiscal consolidation in last year's budget. Banks are relieved that they will be able to fund the reduced borrowing requirement of the government. Disinvestment of public sector shares will fetch Rs 40,000 crore, and the 3G spectrum auction another Rs 35,000 crore or so. 
    This exceeded the markets' low expectations, and the Sensex zoomed 175 points. Reliance Capital was a top gainer, after the finance minister's statement that more private sector banking licences would be given out. 
    Conditions today were good for a reformist budget. Only one state election (in Bihar) occurs this year, and the current coalition partners lack the muscle to topple the government unlike the Left Front 
in the 2004-09 coalition. 
    But Mr Mukherjee avoided any significant reforms. FDI could have been allowed into retail and the FDI limit hiked in insurance; foreign investors could have been given voting power in line with their bank shareholding. 
    The budget assumes 8-8.5% real growth and 4% inflation, giving 12.5% nominal GDP 
growth. This very optimistic scenario assumes that the global economy will not slow down. If it does, all bets on deficit reduction are off. 
    The surcharge on corporate tax has been cut from 10% to 7.5% while the minimum alternative tax (MAT) has been raised from 15% to 18%. This will raise the overall effective tax rate. The tax break for software parks has not been extended, so the likes of TCS will now be taxable, but for the refuge they get in SEZs. 
    The aam aadmi will get more rhetoric than cash: NREGA gets just a marginal boost to Rs 40,100 crore from Rs 39,100 crore last year. The fiscal stimulus was rolled back very partially. Cenvat went from 8% to 10%, well short of the pre-stimulus 14%. Cenvat and service tax 
now stand unified at 10%, preparing for the transition to a single-rate goods and services tax next year. 
    Import and excise duty on crude and petroleum products were cut in 2008 when crude hit $112/barrel, and these cuts have been reversed in the budget. Petrol and diesel will go up in price by Rs 2.67/litre and Rs 2.58/litre, respectively. But petrol and diesel prices remain to be decontrolled. 
    The Economic Advisory Council recently said the fiscal stimulus comprised accelerated spending much more than tax cuts, suggesting that the rollback should focus on spending. Mr Mukherjee has followed this advice—non-Plan spending is up only 6%, and non-Plan outlays are actually down for several sectors, including defence, subsidies, police, economic services, social services and other general services. Plan 
spending is up 15%, a desirable trend change. 
    The middle class will be angry with the rise in petrol and diesel prices, and Mr Mukherjee has sought to mollify it with a widening of incometax slabs, which will provide some relief. But inflation remains a major concern, and the budget hope that inflation will fall to 4% over the next year is a triumph of hope over experience. 
CORNER ROOM

MUKESH AMBANI


SUNIL MITTAL


NARAYANA MURTHY


AZIM PREMJI


KUMAR BIRLA


MARK MOBIUS




ARTIST AVA NAGPOREWALLA 
• CLASS IX 
• SCHOOL BAF PETIT, MUMBAI

TIME to SHINE

The elephant has been synonymous with India from time immemorial, through history, mythology and belief. For decades, the Indian economy, too, came to be likened to an elephant, but in a pejorative, lumbering sense. Today, as the balance of global power shifts to the East, and India is regarded with awe for weathering the financial storm better than most, the elephant analogy is back – but with the positive attributes of size, stability, solidity and strength. With our economy projected to become the second largest in the world, after China and ahead of even the US, there's a growing sense that we're riding a quiet but powerful giant, one that needs to be taken care of if we want it to travel far and carry over a billion people on its back. Just as the elephant-god is worshipped by millions as remover of obstacles and bearer of good fortune, our Budgets are awaited with a prayer that they will lead us to a better tomorrow. Will this Budget make a difference to our lives, will it help the elephant dance?

Shankar Raghuraman | TIMES NEWS NETWORK 



    When finance minister Pranab Mukherjee presented the interim budget last year on the eve of elections, the phrase 'aam admi' figured five times in his speech starting with the opening paragraph. In his latest Budget speech on Friday, the aam admi figured only twice and had to wait till well into the speech to be invoked. 
Is this more than just trivia? It might well be. The salaried middle class can celebrate an entirely unexpected windfall of up to Rs 56,000 per annum from the reworked personal income tax slabs and a new tax exemption option. Most Indian corporates have reason to be happy with the surcharge on corporate tax coming down from 10% to 7.5%, even if some among them will be unhappy about the minimum 

    alternate tax (MAT) being 
    hiked from 15% to 18%. 
    Reformers will welcome the declaration of intent implied in a disinvestment target of Rs 40,000 crore for the coming year—and another Rs 14,000 crore in the one month left in this year—and the assertion that the return to fiscal rectitude has begun with the deficit being pruned to 5.5% of GDP. The proposal to issue new banking licences to the private sector after a gap of over 10 years should also please business groups that have been hankering for entry into the sector. 
    In contrast, the aam admi might wonder why the 'flagship' rural employment scheme (NREGS) has 
been given just 2.5% more than in last year's budget and the ambitious Bharat Nirman has got just 6% over the budgetary allocation last year. In real terms, adjusting for inflation, both would amount to a cut in outlays. 
    The aam admi is also hardly likely to be pleased with the hike in fuel prices by way of excise and customs duty increases on crude oil and petroleum products—which alone are estimated to yield 
the government an additional Rs 26,100 crore in the coming year. This is bound to stoke fears of further inflation. The fact that excise duty hikes are more or less across the board—in a partial exit from the stimulus package rolled out through late 2008 and early 2009—does not help. 
    Mukherjee's announcement that excise duty on petrol and diesel will go up by one rupee per litre prompted what might well be the first-ever boycott of a Budget speech, or a part of it, by the opposition. That's a sign that these parties believe they can gain some political traction on the issue. 

    True, the middle class too will not be spared the impact of these duty hikes, which the FM later insisted would directly raise the inflation rate by just 0.4%. It can also point to the fact that the extended coverage of service tax to things like domestic air travel and underconstruction houses will do it no favours. But it would be difficult to dispute that on balance the Budget has saved more money for this section than it has taken away. 
    As for corporates, the 175-point rise in the sensex on the day was a fair indicator of how the markets perceive the overall impact of the Budget on India Inc. While excise duty hikes are never good news for 
industry, the much lower-than-expected borrowings of the government—projected at Rs 3.45 lakh crore—means business need not fear being either crowded out of the credit market, or being hit by the kind of rise in interest rates that a larger borrowing programme would have meant by increasing the demand for credit. 
Trouble brewing with Mamata 
    
An ugly spat is brewing between the Congress and its ally Trinamool Congress. Mamata Banerjee is not only opposed to the petrol price hike, she is distressed by the extension of service tax to the railways. Many of her plans could go awry. Didi is particularly hurt that she learnt about this proposal only in the FM's Budget speech. P 13 
INVESTORS RICHER BY RS 70,000 CR 
The unexpected cut in income tax, combined with a hike in infrastructure spend, sent investors into ecstasy—and the sensex soaring over 400 points, for a while. It looked as if the market would clock its biggest-ever Budget day gain. But on 
closer scrutiny of the fine print, investors sobered up; the sensex ended 175 points up, still the fourth-biggest B-Day rise. Proposed service tax on under-construction houses and on rental income on commercial establishments, the latter with retrospective effect from June 2007, was a dampener, as was an excise hike on cigarettes. 
    Ironically, auto stocks were among the biggest gainers, despite a 2% rise in excise duty on all cars. The rationale was that the hike had already been factored in, and there was a sense of relief that it wasn't more. 
    All in all, it was a good day for investors, who ended the day Rs 70,000 crore richer, taking the BSE's market capitalization (investor wealth) up to Rs 58.8 lakh crore. 
Direct tax changes to cost Rs 26,000 crore 
    The FM is clearly betting on growth to help him raise revenues on the scale he expects, while the fact that the pay commission arrears and farm loan waiver are no longer a millstone around his neck has helped enormously in keeping expenditure from rising too much. The direct tax changes for individuals and corporates, he said, would cost him Rs 26,000 crore over the year, while the excise, customs and service tax changes would get him an additional Rs 46,500 crore, thus yielding a net Rs 20,500 crore. On the corporate tax front, a higher MAT will fetch him Rs
6,000 crore, while lower surcharge will lose him Rs 5,000 crore— a modest additional burden of Rs 1,000 crore on India Inc. Mukherjee said in his speech that the proposed move to a goods and service tax (GST) would have to wait till April next year and that he would introduce the proposed direct tax code, which is premised on lower rates with fewer exemptions, from April 2011. He told a channel that while he was sure about the introduction of the direct tax code next year, since that was within his purview, GST coming into force would require the concurrence of the states and hence was something he couldn't guarantee.




Thursday, February 25, 2010

‘Bharti’s long-term forex rating faces downgrade’

FITCH MOVE MAY HIT CO'S FUND-RAISING PLANS

FITCH Ratings has said that Bharti Airtel's long-term foreign currency rating could be downgraded following the company's announcement of a potential acquisition of Zain's African operations for an enterprise value of $10.7 billion. 

    "Fitch expects the ratings to be downgraded by one notch assuming that the deal is completed and substantially debt funded, as this would increase Bharti's funds from operations (FFO) adjusted net leverage ratio to a level inconsistent with the current rating," the rating agency said in a statement. 
    Bharti's debt is rated by Fitch as 'BBB minus' which places it at the bottom of the so-called investment grade. The rating symbol BBB minus indicates that the company has adequate capacity to pay. 
    The category below investment grade is the 'speculative' or 'junk' 
category; territory that companies like to stay away from. A downgrade by Fitch would mean that Bharti's foreign debt would be dubbed as speculative, meaning that it may or may not be able to pay. 
    Amit Tandon, head of Fitch India, said the agency would seek clarification from Bharti once its funding plans became clearer. Bharti Airtel's spokesman said the company did not comment on actions of rating agencies. The move comes five days after rating agencies Crisil and Standard & 
Poor's placed Bharti's long-term bank facilities and debt programme on 'rating watch with negative implications' or RWN. 
    In the press statement, Fitch said in the event of a downgrade, the rating could be under further downward pressure reflecting the potential costs associated with any bid for a 3G licence and related capex. However, Fitch will seek to resolve the matter once the funding mix for the acquisition is finalised, which according to the company's announcement, is expected by March-end.


THE ECONOMIC SURVEY 2009-10

India firmly on growth track

ECONOMIC Survey 2009-10 is very upbeat on India's growth prospects, urges commencement of fiscal consolidation, introduces 'skewflation' to sarkari jargon and admits, pretty much, that the government messed up on releasing food stocks to contain inflation. It calls for liberalising foreign investment in sectors such as higher education, health insurance and rural banking; usefully highlights there's a lot of sand in the transmission mechanism between RBI policy signals and the banks' lending behaviour; and exhibits considerable political naïveté in identifying the reasons why India ranks so low in any global survey on ease of doing business. 

    India is well on its path to achieving double-digit growth and becoming the fastest-growing economy, says the Survey, citing an entrenched shift to higher savings and investment rates (well above 30%), comparable to those of Asia's miracle economies. That Indian growth has found its feet again, after the slippage induced by the global crisis, automatically becomes proof that India's macroeconomic management has been sound. The Survey endorses the 13th Finance Commission's recommendations on fiscal responsibility by both the Centre and the states. 
    Fiscal consolidation, says the Survey, has to be calibrated to revival of capital formation. The IMF, incidentally, chose Wednesday to make its recommendation that fast-growing economies like India should kick off fiscal consolidation. And growth in the core sectors has been 9.4% in January, according to figures released on Wednesday, 
suggesting that investment growth is, indeed, robust. 
    The Survey makes the point that given the extremely low rates of interest in the developed countries, capital is likely to flood into a 
fast-growing country like India. And stops short with the bland observation that there could be problems if such inflows are in excess of the economy's absorptive capacity. At a time when even IMF economists are recommending capital controls in specific situations, it is perplexing that the Survey plays coy on debating whether India should levy a tax on capital inflows a la Brazil or adopt some other form of restriction. Survey points to skewed inflation 
THE Survey introduces a new chapter on the micro-foundations of macroeconomics. Its high is inducting an insight from the theory of industrial organisation to identify the right way to offload food from the government's stocks to have optimal impact on inflation — it turns out that the way in which the FCI has been carrying out openmarket sales has not helped. Frequent, geographically-dispersed sale to a large number is much superior to selling grain to a handful of large merchants, as has been the FCI practice. The chapter's low, arguably, is blaming political philosophy for Indian entrepreneurs' myriad difficulties while doing business: the Indian state wants to be provider, rather than enable the provision of, goods and services. 
    Why do Indian businessmen have to routinely bribe their way past dozens of hurdles, merely to carry on with their business, a fundamental right accorded by the Constitution? Does the failure to institutionalise political funding and the resultant need for every party and every politician to mobilise funds, making use of the opportunity to sell patronage and abusing the state machinery to extort money from the public, play a role in this? The question is not, obviously, genteel like a choice of political philosophy. 
    The Survey rightly argues for ending the unsustainable subsidies on petroleum fuels in a scenario in which global crude prices remain ever upwardly mobile. It argues for better ways to distribute subsidy as well, whether on food or fertiliser: transfer the subsidy directly to the beneficiary, leave product prices to be determined by a competitive market. 
    While this is eminently desirable, a design of implementation that the Survey explores has 
huge gaps. Give the poor food coupons, and let them choose to buy food from whichever PDS outlet they like, says the Survey. As if every village had multiple PDS shops that would compete to lure coupon-holding customers by offering good quality food at competitive prices! 
    The Survey highlights the skewed pattern of inflation in India of late. Food prices have risen sharply (17.8% for the week ended February 13, lower than the 19.5% reached early January, but still unacceptably high) but other prices have not. Similarly, retail price increase has been several times as high as wholesale price rise. But the Survey refrains from making the logical recommendation to reform the supply chain between the producer and the consumer by encouraging organised retail. The net contribution of this discussion is to add the term skewflation to the official jargon.

TIME FOR CHANGE 
Gradually roll 
back stimulus measures, including tax concessions to industry


DOLLAR DELUGE 
High FDI inflows in excess of the country's absorptive capacity could pose a problem


OPENING AVENUES 
Liberalise 
foreign investment in sectors such as higher education, health insurance & rural banking



FISCAL DISCIPLINE HOLDS THE KEY

With the economy on a firm footing, it's time to wind up stimulus measures and return to fiscal consolidation... accepting the Finance Commission proposals could be the perfect start

 STATE GOVERNMENTS HAVE GOT a bonanza from the 13th Finance Commission: their share of central taxes will go up to 32% from 30.5%, and local governments will get an additional 2-2.5%. So, the states and local governments should get around Rs 71,000 crore more of the divisible pool of central taxes next year. The central government has accepted all major recommendations of the Finance Commission. Taking shared taxes and central grants together, devolution to the states will go up to 39% from the current 37.6% of the central divisible revenue. Grants-in-aid to the states over the next five years are projected at Rs 318,581 crore. This includes Rs 50,000 crore to compensate the states for any revenue shortfall from the shift to a Goods and Services Tax (GST). They will get the unspent balance, if there is little or no shortfall. However, they will get this Rs 50,000 crore only if they abide by the model GST of the Finance Commission. That conditionality will ruffle the feathers of sensitive states. 

    The model GST specifies a single tax rate for all goods and services, something many states have opposed. The Finance Commission believes that it may be feasible to levy GST at a single rate of 7% for the states and 5% for the Centre, but this is not a binding recommendation. Several states want much higher rates, and also several exemptions that the Finance Commission frowns upon. 
    Local bodies will get a basic rate of 1.5% of central taxes. In 2010-11, they will get an additional performance grant (dependent on performance) of 0.5% of the divisible pool of the preceding year, and this will rise to 1% in the following
years. This is a landmark shift in federal relations: local governments are getting a guaranteed share of central revenue for the first time. However, the proposed devolution will average barely Rs 16,500 crore per year for five years, which is peanuts for a country of India's size. 
    To ensure that local bodies also collect taxes and don't depend just on grants, state governments may deduct "deemed local tax collection" from their own transfers to local governments. Alternatively, they can give matching grants depending on the tax effort of local governments. 
    Central and state GST will be levied on imports. If the state rate is 7% and the central rate is 5%, then goods entering the Mumbai port will pay 7% to Maha
rashtra, with the central levy of 5% being shared with all states, according to the Finance Commission's formula. 
The sharing formula has been altered slightly by the 13th Finance Commission. The share of poorer states will go up. Grants-in-aid over the next five years include Rs 26,373 crore for disaster relief; Rs 51,800 as a non-Plan grant for eight states with serious revenue deficits; an additional Rs 
24,068 crore for education; additional Rs 19,930 crore for maintaining roads and bridges; additional Rs 15,000 crore for environmental protection; and Rs 14,446 crore for improved performance in areas like infant mortality and supply of justice. 
    The Finance Commission has offered carrots and sticks to improve state performance. Many performance grants are available for improved policies and outcomes. Some grants (for GST adoption, road maintenance) are conditional on states following the Commission's norms. 
Commission wants Centre to cut debt to 45% 
THE Finance Commission has made a series of suggestions for reducing the fiscal deficits of the Centre and states, but these are not mandatory. It wants the Centre to reduce its total debt to 45% of GDP, and the states to reduce theirs to below 25% of GDP. 
    The target is 68% of GDP for the Centre and state together. This would represent a sharp reduction: the Centre's debt in 2009-10 was 56.7% of GDP.



Fin Comm hikes states’ share of central taxes to 32%, links rewards with results

Proposes Grand Bargain On GST

The Vijay Kelkar-headed Thirteenth Finance Commission has hiked the share of the states in central taxes from the existing 30.5% to 32% while making a strong pitch for greater fiscal discipline both at the Centre and in the states. The commission also made 

a case for disinvestment and privatisation of state public sector units (PSUs), saying non-working ones should be closed down by 2011. 
    The action taken report submitted in Parliament by finance minister Pranab Mukherjee on Thursday said the government had accepted most of the major recommendations, 
while some others like the ones related to the goods and services tax (GST) scheme or the fiscal roadmap were accepted in principle but the modalities were yet to be worked out. 
    The commission has advocated 
a calibrated exit from the government stimulus package in response to the financial crisis and also suggested that proceeds of disinvestment should be made available for funding infrastructure projects. It has also recommended financial incentives for states with good performance in areas like infant mortality and administration of justice. 
    The report estimated that during 2010-2015, the states would get Rs 14.5 lakh crore as their share of central taxes and duties and another Rs 3.1 lakh crore as grants-in-aid if its recommendations were implemented. 

    The latter sum includes Rs 50,000 crore to be set aside for compensation to states for moving to GST, slated to be introduced from this April. 
Who'll Gain, Who'll Lose 
Share of states in central taxes increased from 30.5% to 32% 
Over 2010-2015, states will get 
Rs 14.5 lakh cr as share of central taxes and duties and Rs 3.1 lakh cr as grants-in-aid 
Rs 50,000 cr as compensation for states accepting 'grand bargain' on GST, including veto rights of Centre on any change in rates 
Rs 5,000 cr each for reducing infant mortality rates and introducing renewable energy programmes 
Rs 51,800 cr for 8 states—North-Eastern states barring Assam 
and Sikkim as well as Himachal Pradesh and J&K—to help bridge non-Plan revenue deficits 
Rs 5,000 cr for improved administration of justice 
Rs 3,000 cr for implementing unique identification (UID) system 
Slams Centre for raising revenues through cesses and surcharges, which do not form part of the pool to be shared with the states 
Big gainers: UP, Himachal, J&K, N-E states and Maharashtra Big losers: Southern states, Gujarat, Jharkhand, Orissa and Chhattisgarh 

Biggest deal for Maha 
Mumbai: The 13th Finance Commission has sanctioned Rs 91,709 crore for Maharashtra for 2010-2015, an increase of around Rs 54,795 crore from the previous five-year period, reports Prafulla Marpakwar. It is probably the best deal the state has got so far from the finance commissions. P 2 
WAY TO GO'Govt should have no revenue deficits by FY14' 
    It also includes Rs 5,000 crore each for reducing infant mortality rates (IMR) and introducing renewable energy programmes. 
    Also part of the tranche is a sum of Rs 51,800 crore set aside for eight states — the North-Eastern states, barring Assam and Sikkim, and HP and J&K — as a grant to help them bridge their non-Plan revenue deficits. 
    Like the grants for reducing IMR and for introducing renewable energy, there are others linked to outcomes. One of these is a Rs 5,000 crore grant for improved administration of justice and one of Rs 2,989 crore for implementing the unique identification (UID) system. 

    Local bodies like panchayats and municipalities are to get an estimated Rs 87,519 crore over the next five years, which would be around 2.3% of the divisible pool of central taxes. The commission has also said states should share royalty income derived from things like minerals with the local bodies in whose jurisdiction the income arises. 
    The changes made by the 
commission in the formula for sharing this pool among the states are likely to leave some states crying foul that they have been short-changed while others quietly celebrate a windfall. 
    In its indicated roadmap for fiscal correction, the commission recommended that the Centre should have no revenue deficits by 2013-14 and its fiscal deficit should be less than 3% of GDP. As for the states, they would have 
to meet the same targets in a staggered manner depending on their current deficit levels with the last of them meeting a 2014-15 deadline. The total debt of the Centre and states should also come down to 68% or less of GDP by 2014-15. 
    Recognising that Pay Commission awards have had serious adverse implications for state governments in particular, the finance commission suggested that in future, recommendations of pay panels should not be made retrospectively effective. Instead, they should take effect only after they have been accepted by the government. 
    A recommendation made in this context that could have a far 
reaching impact on senior citizens in particular is that the small savings schemes should have market-linked interest rates to reduce the distortions the current higher rates introduce. 
    On the move to GST, the commission said that states should be offered a grand bargain, and only those states that accept it should get compensation from the Rs 50,000 crore fund for that purpose. The bargain would in
clude a binding agreement between the states and the Centre that would allow the latter veto powers on any changes in the rates. 
    The report came down on the Centre for its practice of raising a substantial chunk of revenues through cesses and surcharges, which do not form part of the pool to be shared with the states. In fact, this is cited as one of the reasons for enhancing the states' share in the divisible pool. 
    It also criticised the Centre for tax exemptions which not only lead to sizable revenue foregone, but also skew the benefits in favour of certain states because some of them are areabased exemptions. It pointed out 
that the revenue foregone due to tax exemptions was of the order of Rs 4.2 lakh crore in 2008-09, by the government's own admission. 
    Another bone of contention between the commission and the finance ministry was that according to its calculations, the Centre was actually not giving the states the 30.5% share they were supposed to be getting under the 12th Finance Commission's recommendations. It said the Centre had explained that its accounts do not entirely reflect the true position and that in fact it was passing on 30.5% to the states. The commission said if this was the case, the Centre should ensure greater transparency in its accounting. 

    The commission also suggested that it would be better to move away from centrally-sponsored schemes to formula-based sharing with the states to preclude the possibility of the regional dispersion of the funds going askew for such schemes. 
    The practice of moving several major liabilities like the oil and fertilizer bonds off-budget also came in for sharp criticism on the grounds of lack of transparency.

Thursday, February 18, 2010

Stimulus package should be removed gradually

WHEN THE previous Union Budget was announced, the global economy was slipping into a recession with unprecedented business upheavals. As a result of the government of India's prudent economic policy, particularly the timely stimulus package and the inherent strengths of the economy, India has managed to withstand the global disruptions. 

    The last quarter has shown, not only did India survive the recession but is also well placed to take advantage of the opportunities arising from the global economic revival. A sound Union Budget will strengthen India's chances of capitalising on these opportunities and accelerating growth. 
    While the finance ministry recently revised the expected GDP growth for the current year to touch 8%, there have been some concerns expressed by industry that the government may see this as sign to withdraw the stimulus. Since the revival is still in early stages, the government should be gradual and measured in the removal of the stimulus package. 
    In the last budget, the finance minister spoke about the creation of twelve million jobs, reaching a growth rate of 9% and investment in infrastructure at the rate 9% of GDP. As we strive to achieve these goals, the budget needs to ensure adequate provisions to lend impetus to these efforts. The need to upgrade India's physical infrastructure is critical to maintaining and accelerating the growth rate. The budget must provide for suitable incentives to promote investment in the infrastructure sector. 
    Education is another sector which requires greater focus and investment. The finance minister should allocate more mon
ey to the education sector which will ensure quality supply to the booming services industry in this country. 
    The fiscal deficit is an area of concern and the aim is to reduce it to 5.5% of GDP from the current 6.8% of gross domestic product. While the budget deficit understandably widened after the government borrowed Rs 4.51 trillion ($97.3 billion) to protect the nation's economy from a global recession, the efforts to reduce this deficit needs to be handled carefully, without impeding economic recovery. Some areas for review include—rationalization of expenditure, augmentation in revenue, enhancing the efficiency of funds spent on various flagship programs like NREGA, etc. The government should come out with a clear road map on bringing the fiscal deficit within the acceptable level as mandated in the FRBM Act. This will enhance the global investors' confidence on India. 
    Direct taxes are an area of some interest as well. The implementation of the Direct Taxes Code (DTC) could broaden the tax base, simplify the tax structure and possibly improve tax compliance. The government should provide a clear road map on the implementation of the DTC and come out with a mechanism to address certain concerns raised by the industry. Specifically with regard to the IT/ITeS industry, extension of the sunset clause under section 10 A and 10 B beyond Mar 31, 2011, for at least the next 5 years would help new undertakings and buffer the industry which is major foreign exchange earner. This should be done at least for smaller companies with a group turnover of Rs. 100 crore. 
    Another big ticket reforms relates to implementation of GST. 

ET 
SECTOR WATCH 
INDUSTRY 

• The Indian IT & BPO industry constitutes nearly 6% of India's GDP 

• The industry serves top global customers such as GE, Citibank and JPMorgan 

• With almost $50 billion in revenues, the industry helps these firms maintain their IT and business systems 
BACKDROP TO THE BUDGET 

• Predominantly exportoriented, India's top tech firms have been helped by tax incentives including STPI incentives over past decade 

• The incentive is set to expire by March 2010. Effective tax rates for companies in the sector expected to cross 20% from 10-13% until three years ago 
WISHLIST 

• Extension of STPI tax holiday, at least for smaller firms with Rs 100 crore in revenues 

• Increased government technology spend from less than 1% currently to 2.5% of the total spend by 2020 

• A dispute resolution authority for sorting out tax-related litigations

WHILE THE BUDGET DEFICIT WIDENED AFTER THE GOVT BORROWED RS 4.51 TRILLION, THE EFFORTS TO REDUCE THIS NEEDS TO BE HANDLED CAREFULLY. 
KRIS GOPALAKRISHNAN CEO OF INFOSYS

 

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