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PRANABDA DOES A BAD JOB

Monday, March 19, 2012
By Manik K. Malakar

Finance Minister Pranab Mukherjee presented the Union Budget on Friday. While the presentation was a landmark for the man being his seventh as Finance Minister, the second highest by any finance minister, the budget per se has been derided by most experts as wanting. And even the future portents for growth going forward will be hit by the budget.

“I am unhappy with the budget. There is no positive relief. Neither for corporates nor the industrial sector or even for the Aam Aadmi,” says Dinesh Vyas, Senior Corporate Council. In the budget the IT exemption limit for the general category of individual taxpayers has been hiked by just Rs 20,000 to Rs 2,00,000 from the earlier Rs 1,80,000. Pre-budget expectations had been that the upper limit would be up to Rs 3,00,000. “The Rs 20,000 would actually not translate into any real benefits for the common man considering inflation,” Vyas explains. Infact due to various budgetary provisions prices of goods for the Aam Aadmi are actually expected to rise.

Another tax issue that experts have slammed is the proposal to allow the individual tax payer a deduction of up to Rs 10,000 for interest from savings bank accounts. “Considering an average yield of around 9%, is this realistic?” queries Anil Sathe a Chartered Accountant. Service tax too has been hiked to 12 % from the earlier 10%. “The sectors which primarily will take the hit are  automobiles, FMCG, tourism and cement,” explains Varun Goel, Head Equity PMS at Karvy Private Wealth. 

And even the government’s very tax collection practice is being questioned by experts. “There has to be better compliance and rationalisation of the tax structure,” says Minoo Shroff, an eminent economist. India’s tax to GDP ratio stands at around 15 to 16% whereas in most developed countries it is around 20 %.
But Mukherjee did attempt to boost the equity markets. To boost retail participation in the equity markets, he  made public the Rajiv Gandhi Equity Saving Scheme, intending to allow for Income Tax deduction of 50 % to new retail investors, who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of 3 years.

But external factors will impact the FM’s plans. “Rising oil prices and their potential impact on subsidies may be a threat to the fiscal assumptions. The equity markets have been light at the event and   should take a breather at these levels,” says Navneet Munot, Chief Investment Officer, SBI Mutual Fund. The Sensex on Friday fell by 1.19%, a decline of 209 points to close at 17,466 points on the day of the budget.

In the long term however experts feel that equities will revive. “The broking industry will get a big boost with the proposed Rajiv Gandhi Equity Scheme helping to revive the retail investor interest in the equity markets,” opines K. Sandeep Nayak, CEO, Centrum Broking. Thus, more retail investors would come into the market to avail the tax benefit of Rs. 50,000 for investment into stocks. “This augurs well for the long term health of the broking industry,” Nayak continues. This coupled with the reduction in STT (Securities Transaction Tax) by 20% on investment transactions is positive for capital markets.

Another sector that is expected to continue in demand is gold. Customs duty has been raised from 2% to 4% on standard gold. India’s sweet-tooth for the yellow metal will continue regardless of the hike. “Gold Duty increase will not alter demand,” says Rajiv Popley, Director, Popley & Sons. An increase of just 4% will not act as a booster to illicit smuggling of gold into the country.

“The budget has given incentives to the agricultural sector will translate into increased incomes and boost savings, resulting in higher demand for jewellery which is the preferred form of investment for the rural consumer,” adds Mehul Choksi, CMD - Gitanjali Gems.

The housing sector and especially the mass housing sector is one that is a priority for the government. The Finance Minister has proposed various measures to address the shortage of housing for low income groups in major cities and towns including ECB for low cost housing projects and setting up of a Credit Guarantee Trust Fund.

Unfortunately on the realty front experts are miffed almost unanimously. “This budget was as per expectations which were low. No bold economic announcements were made which is the need of the hour,” says Anshuman Magazine, CMD, CBRE South Asia. While he was happy with the Service Tax Exemption on low-cost mass housing up to an area of 60 square metres, increasing the tax exemption limit on home loan interest and FDI in retail as well as further FDI reforms in real estate were items that Mukherjee could haveconsidered.

Industry bodies were also disappointed. The industry that contributes about 6.5% to the GDP was expecting a lot from the Finance Minister in terms of support to both the home buyer and developer community. “But sorry to say that the Finance Minister has disappointed all of us,” said Paras Gundecha, President of MCHI-CREDAI, the representative body of the developer community.

The Finance Minister has not considered the root cause of the high rise in the cost of construction, like the increasing cost of inputs like cement, steel, labour and multiple taxation. “We were honestly expecting some measures aimed at bringing about reforms in the real estate sector and even granting status of industry to it, but there is nothing but disappointment in this budget,” Gundecha said.

“We fail to understand as to how long the government will continue to ignore the capital and labour intensive sector,” he complained.

“However, the demand of increase in the limit on tax deduction available on home loans interest from current Rs 1.5 lakh remains unanswered. The Union budget has no real measure for the real estate sector as most of the industry expectations have not been met,” says Brotin Banerjee, MD & CEO, Tata Housing. Also an important demand from real estate companies that of an industry status being assigned to the sector has been long pending as well.

Another sector that is disappointed with the Mukherjee’s budget is the Insurance Industry. In the rising medical inflation regime, 80D benefits remain unchanged especially for senior citizens and neither is there any significant attempts made to increase health care infrastructure. “This will lead to increased healthcare costs and consequently to rise in health insurance premiums,” says Dr. Amarnath Ananthanarayanan, CEO  & MD, Bharti AXA General Insurance.

And the increase in service tax means that premiums will increase across the board for people buying insurance policies. “From a general insurance perspective there is very little the budget offers,” informs Ananthanarayanan.

The medical sector too is rather flat vis-à-vis the budget. Allocation for NRHM proposed to be increased from Rs 18,115 crore in 2011-12 to Rs 20,822 crore in 2012-13 and the National Urban Health Mission is being launched.

“I am happy to see preventive healthcare given more importance in the budget. However, the industry expected much more than this,” says Ameera Shah, MD & CEO, Metropolis Healthcare Limited & Co-chairperson of FICCI's Healthcare Committee. There has been no decrease in customs duty on life saving medical devices or diagnostic reagents, no subsidies for setting up healthcare in small towns in India, no tax benefits for investment in healthcare and no mention of a PPP model. “It shows that health of the common man is of little interest and will be ignored for one more year,” Shah expounds.

“Sedan lovers will be disappointed with an increase in the excise duty on large cars,” informs an analysis by Religare Retail Research on the budget. Given the current economic scenario and the revenue deficit of the country, the hike in excise duty was fully anticipated and the industry is expected to pass on the entire burden of excise duty to customers. “The demand will definitely remain affected for some time, however, if the interest rates come down in near future then the revival in demand could be possible in near future,” Religare continues.

“A rise in excise and import duty and input costs will not be very conducive for the auto industry as the additional burden of increased duty will directly affect the buyers and hence would lead to slowdown in sales,” continues Sandeep Singh, DMD- Marketing, Toyota Kirloskar Motor. He informs that they would have no choice but to pass on the hike to customers.

“There are factors which would support inflation rather than recession. FM has increased the burden of indirect taxes on the industrial sector,” says Raj Sharma, Co-Founder & President of Majestic MRSS, Global Market Research Firm. This sector was already fighting against high prices of raw materials registered lower growth as compared to last few years. The burden of taxes will further reduce the growth in this sector. “The increase cost of production will increase the prices of goods hence increasing inflation,” Sharma notes.

Industry heads feel that FM Mukherjee has missed a chance both at the macro levels as well as for the common man. “The FM has lost an opportunity to boost the manufacturing sector,” says Vijay Kalantri, President, All India Association of Industry. ‘The increase in service tax and excise duty will hit the common man which will also have a cascading effect,” Kalantri continues.

Even going forward things are not expected to brighten. The FM has not laid plans on which growth can be had. “Its basically political survival. There is nothing reformist about the budget or any provisions that will help growth,” ends Dinesh Vyas.  

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