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UNION BUDGET 2012-13

16 March 2012

INTRODUCTION

The Indian Government finds itself in an unenviable economic position at the current

moment. First, the tight monetary policy adopted by the RBI in the past months has led to a

dip in GDP growth rates, from the 9% figure projected in the previous budget to a modest

6.9%. Second, there has been an increase in the fiscal deficit, which can be explained by

lower than expected revenue collections from taxes (due to slowing growth), low

disinvestment and spectrum sale revenues, and the growth of subsidies leading to an increase

in government expenditure during FY 2011-12. Indias fiscal deficit during FY 2011-12 was

5.9%, far above last years budget estimate of 4.6%. Third, given the current volatile political

scenario, the government has to project a pro-common man image.

Budget 2012-13 appears to be a realistic budget, balancing the objectives of financial

prudence, GDP growth and populist measures. Most of the policies put forth in this budget

were along expected lines. And, the initial response from the stock market supports the same.

Fiscal prudence

The finance minister clearly outlined measures the government is taking to increase its

revenues, including increasing the service tax rate to the pre-stimulus level of 12%,

increasing excise duty to 12% and setting a disinvestment target of Rs. 30,000 crore for the

year. This budgets big idea was the introduction of systems to enhance the simplification of

tax laws, increase tax net coverage, increase compliance and reduce tax litigations. However,

this years budget did not shed much light on how the government plans to rein in

expenditures. Apart from a brief mention on better targeting through mobile platforms, there

was no mention of fuel and fertilizer based subsidy reductions.

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GDP Growth Policies

The steps taken to promote infrastructure development like the increase in limit of tax free

infrastructure bonds and tax benefits for power and construction sector will, we believe, lead

to long term industry growth. Furthermore, financial inclusion reforms and the newly

introduced Rajiv Gandhi Equity Savings Scheme will help mobilize increased savings and

investment. However, the budget did not address a number of pressing issues, such as FDI in

multi brand retail and aviation.

Populist Measures:

On the populist front, the lower end of tax slab has been raised to 2 lakhs, in line with the

expectations. Its a welcome but a small change given the price rise in the economy. But, the

increase in higher end of the slab from 8 lakhs to 10 lakhs will contribute to substantial

savings for the middle income level groups. Further, proposals such as credit guarantee and

ECB loans have been put forth to provide affordable housing for the lower income groups.

SECTOR COVERAGE

REALTY

The real estate and construction sector is highly capital intensive. Obtaining funding is the

biggest challenge faced by this sector, which is why most proposals related to this sector in

this budget focus on increasing cash inflows into the sector.

Measures to increase cash inflow into the sector:Budget 2012-13 has allowed for doubling of infra bond issues (Rs. 30,000 crore to Rs.

60,000 crore), including bond issues from NHAI, HUDCO, and IIFCL. External

commercial borrowings (ECBs) have also been permitted to help in the financing of

low cost housing units. Additionally, the withholding tax on interest payments for

external borrowings has been reduced from 20 per cent to 5 per cent for 3 years.

Finally, a credit guarantee trust fund will be set up to improve the availability of credit

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in this sector. All these measures are intended to make investing in this sector simple,

thus increasing funding to the sector.

SOPs for realty companies:The investment linked deduction for capital expenditure in certain sectors, such as

cold chains, hospitals and affordable housing, has been increased to 150%. Certain

construction projects, such as dams, tunnels and affordable housing, have also been

exempted from service tax. All these measures are intended to benefit realty

companies, most of whom have underperformed the market over the past year.

Incentives for the common man:The current 1% interest rate subsidy allowed on home loans of less than Rs. 15 lakhs

for houses costing less than 25 lakhs has been maintained. This measure is intended to

depress the cost of housing loans, and allow more people to purchase their own

houses.

POWER

The power sector is far behind its targets, with the demand for power rising from 861 billion

KWh in 2010-11 to 933billion KWh in 2011-12, while the supply has only risen from 788

billion KWh to 837 billion KWh. Budget 2012-13 has proposed a number of policies toprovide a much-needed boost to this sector.

SOPs for power companies:Under section 80-IA section, an undertaking is eligible for tax holiday if it begins togenerate power by 31

stMarch 2011. The tax holiday under section 80-IA has been

extended till 31st

March 2013 to help boost power infrastructure projects.

Furthermore, the 5% import duty on coal has been removed for the benefit of power

generating companies suffering from shortage of fuel in domestic markets. Thermal

power companies have also been exempted from custom duty for two years. All these

measures are intended to support power companies, most of whom have

underperformed the market over the past year.

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Rationalization of Dividend Distribution Tax (DDT):The DDT will now be levied only once at the ultimate parent company level and

Special Purpose Vehicles (SPVs) will be exempted from it. This will benefit power

sector firms, which generally create SPVs to comply with the guidelines set out in

their licensing agreements.

TELECOM

Budget 2012 has been largely disappointing for the Indian telecom industry. The

governments silence on urgent demands from major players, such as granting infrastructure

status to the industry and clarifying tax legislation to reduce legal uncertainty, has been

disconcerting. It is possible that the 2G scam had something to do with this the Finance

Minister may have thought it unwise to publicly shower goodies on a sector that has brought

much criticism to his government. The key points pertaining to telecom in the Budget and

their impact on the industry are detailed below:

Exemptions for mobile phone parts from excise and customs:Some mobile phone parts have been exempted from basic customs duty. Furthermore,

the 2% hike in excise duty from 10% to 12% is not applicable to certain mobile phone

parts. Though this will reduce mobile handset costs and enhance accessibility to

telecom services for a major chunk of the Indian populace, the ruling is not of much

help to telecom service providers. Their biggest problem is declining ARPUs. Making

handsets cheaper will put mobile phones in more pairs of hands, but will not

incentivize people to use their phones more. Also, this will expand the market at the

lower end (the average smart phone buyer is less price sensitive, hence high-end

phone sales will remain largely unaffected), which is the consumer demographic that

mainly uses voice services. Revenues from voice services are also at an all-time low.

What the service providers need is a larger user base for their data services, which is

something this ruling will not affect materially.

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Viability gap funding for telecom towers:Viability gap funding refers to a scheme wherein the government pitches in to meet

the cost of a project with high economic returns but not nearly enough financial

returns. Government aid makes these projects financially viable as well, thus

attracting private sector investment in these projects. With this announcement, the

government has made clear its intention to expand the reach of the telecom revolution

into the Indian hinterland and increase the tele-density in rural India from its current

34%. Since tower construction is the most capital investment activity in this sector,

this announcement is likely to provide a much-needed thrust to the industry by

expanding its customer base in rural India.

HEALTHCARE

The Union budget 2013 has some positive changes for healthcare and pharmaceutical sectors,

but more could have been done. The budget proposes increased spending on primary

healthcare and aims to reduce the rising medical costs to the common man.

SOPs for domestic players in healthcare:Duty concessions have been introduced into some healthcare segments to make the

domestic industry more competitive against imported healthcare products.

Boost to the National Rural Health Mission and primary healthcare:The finance minister has proposed an increased allocation of Rs. 20,822 crore for

National Rural Health Mission (NRHM) which would improve basic primary

healthcare facilities for rural and the urban poor population. Further, focusing on theprimary healthcare front, the government has budgeted Rs. 14,000 crore for rural

drinking and sanitation in FY 13. These measures are intended to improve the

coverage of healthcare facilities.

Incentives for the common man:Given the rising medical costs, a deduction of up to Rs. 5,000 has been introduced for

preventive health check-up.

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AGRICULTURE

Agriculture (which supports) 50% of the countrys population continues to be a major

determinant of the socio- economic progress of the country. The recent years have seen a

declining contribution from the sector to the countrys GDP, a trend which continued in the

FY 2011-12 with contribution to GDP going down from 14.6% to 13.9%. The Economic

Survey of 2011-12 expects the sector to grow at a rate of about 2.5% in FY 2012-13. The

Government of India, realizing the problems of low productivity in the sector, has been lavish

in providing grants to the sector in the Union Budget 2012. The major highlights for the

sector from the Union Budget 2012 are:

Increased government spending on agriculture:Agriculture continues to be priority sector, with the total outlay for agriculture and

related activities being increased by 18% from Rs. 17,123 crore in 2011-12 to Rs.

20,208 crore in 2012-13. Of this, the outlay for Rashtriya Krishi Vikas Yojna has

been increased 17% from Rs. 7,860 crore in 2011-12 to Rs. 9217 crore in 2012-13.

Irrigation facilities have also received a major push from the 13% increased allocation

to the Accelerated Irrigation Benefit programme. Additionally, increased paddy

production in Eastern India has been rewarded by increased allocation of Rs. 400crore to the "Bringing Green Revolution in Eastern India" scheme. Finally, the Rural

Infrastructure Development Fund has been enhanced from Rs. 2000 crore to 5000

crore for creating warehouse facilities. These measures intend to provide capital to

agricultural projects which a long term returns.

Proposals to increase the availability of credit in this sector: The agricultural credit target for 2012-13 has been set at 5.75 lakh crore, which is an

increase of Rs. 1 lakh crore from 2011-12. The interest subvention scheme for short

term crop loans (at 7 per cent interest per annum) will be continued in 2012-13, with

additional subvention of 3 per cent available for prompt paying farmers.

New initiatives:The Budget proposes to set up an Irrigation and Water Resource to facilitate bigger

water development projects, as well as a National Mission for Food Processing to

promote food processing across the country. A sum of Rs. 200 crore has also been set

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aside for incentivizing agricultural research with rewards. Understanding the need for

efficiency in distribution systems, the government plans to computerize the PDS

system by Dec 2012, as well as increase the total storage space available for food

grains.

BANKING

The anti-inflationary monetary policy stance adopted by the Reserve Bank of India to tame

the inflation took a toll on the economic growth rate and on the performance of the banks.

Therefore, the Budget has proposed a number of policies to boost this sector.

Measures to increase cash inflows to the sector:The Budget has proposed the creation of a Rs. 15,888 crore Bank Recapitalisation

Fund for PSU Banks. Some hints were also given as to the creation of a financial

holding company to raise resources to meet the capital requirements of PSU Banks.

The government has also announced a proposal to allow individual tax payers a

deduction of up to Rs. 10,000 for interest from savings bank accounts, which should

lead to a decrease in the liquidity pressure on banks.

Negative impact of the budget on the sector:In this budget, the government has announced a financial package of Rs3,884 crore

for waiver of loans of handloom weavers and their cooperative societies, as well as

increased the target for agricultural credit raised by Rs. 1,00,000 crore to Rs. 5,75,000

crore in 2012-13, both of which are likely to lead to more write downs for the banks

in future. The high fiscal deficit and high market borrowing of Rs. 4.7 lakh crore will

continue to affect banks negatively and put significant pressure on yields amid tight

liquidity. The budget was also silent on reforms on insurance, and on the lock-in

period of FDs.

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RAILWAYS

The rail budget this year focused on the safety and modernization of infrastructure. Not

satisfied with the current safety measures, the railway minister proposed to setup an

independent railway safety authority and a special purpose vehicle to achieve better safety

protocols. According to the minister, the vision for the end of 12th plan is to contribute 2% of

GDP.

Modernization:An investment of 5.60 lakhs crores was proposed for modernization. Of this, Rs. 1.7

lakh crores are to be invested in the rolling stock. Improved infrastructure would help

bring down accidents and improve safety of the passengers.

Increase in passenger fares:After a gap of nine years, the passenger fares were marginally hiked by 10p per km

for AC-3 and 2p per km for the mail trains. This will directly impact the common man

and may have political fallouts. Mamta Banerjee whose party controls the railway

ministry was clearly unhappy at this hike and demanded a roll back. The minister also

announced feasibility study of setting up of an Independent Railway Tariff Regulatory

Authority which would look into the fixing tariffs to decouple this process from

political motivations.

Increasing operational efficiencies:The other four areas deemed important by the minister were consolidation, de-

congestion, capacity augmentation and bringing down the operating ratio. The current

operating ratio of railways is around 95 percent and target is 74 percent by the end of

12th plan. Given the socio-economic relevance of railways, the minister also asked for

a national policy for the network on the lines of defense and external affairs. An

improvement in operational efficiencies would increase the ability of railways to

garner money for expansion and modernization.

Edited by: Adoor Vikramaditya Rau, Abhinav Rishi

Contributions from: Adoor Vikramaditya Rau, Ankit Tulsian, Lipika Mitra, Abhinandan

Prasad, Rahul Sharan, Subodh Bhandari, Shantanu Agarwal, Sameer Garg