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Along expected lines, the Budget presented a reasonably realistic assessment of the fiscal situation. In line with our expectations, the Budget raised the rates of excise duty and service tax to boost indirect tax collections, rolling back the previously announced stimulus measures, and raised the exemption limit for personal income tax.
The Budget announced several important measures towards alignment with the Goods and Services Tax (GST) such as a negative list for service tax and input tax credit for various services. However, the anticipated 20 per cent growth of gross tax collections in 2012-13 may be somewhat difficult to achieve, based on our expectation that economic growth would fall short of the forecast of 7.6 per cent growth made by the Government.
Recapitalisation for banks
The 22 per cent increase in plan expenditure and the provision of Rs 15,888 crore for bank recapitalisation are positive steps. The Budget has attempted to restrain the pace of growth of non-plan revenue expenditure. Notwithstanding the acknowledgment of the need to curtail subsidies, the ability to stick to the subsidy cap of 2 per cent remains to be seen. In particular, the funding for food subsidies would need to be augmented once the National Food Security Act is enacted even as the magnitude of fuel subsidies would depend on the crude oil prices and the extent of revision in fuel prices. This remains a key challenge to achieving the budgeted fiscal deficit of 5.1 per cent of GDP. Additionally, yields are likely to harden with the size of the announced borrowing programme (Rs 4.7 lakh crore) exceeding expectations.
While the Budget refrained from making any big-ticket announcements, a number of encouraging measures were introduced for the infrastructure sector. These included the extension of the Viability Gap Funding mechanism to support PPP initiatives, enhancement in the funds to be raised through tax-free bonds, wider use of ECBs in various sectors and steps to support specific sectors such as power. Other initiatives such as withdrawal of Dividend Distribution Tax and permitting Qualified Foreign Investors (QFI) in the corporate bond market are also expected to benefit companies in the infrastructure sector.
(The author is MD and CEO, ICRA Ltd.)
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