To be fair, any critical analysis of Budget should be based on both its proposals and economic environment in which it has evolved. The interest rate cycle and slowdown in the western economies has led to a deceleration in domestic industry. This has led to tax revenues falling, export growth slowing down, divestment targets failing and the subsidy bill soaring.
All leading to the previous budget's fiscal targets being missed. The stressful economic environment still continues. Evaluated in this economic background, this Budget is based on fairly sound ideas.
Tax more services
The service sector GDP still continues to grow over 9 per cent and service tax revenues are growing over 30 per cent. As the service sector accounts for 60 per cent of GDP, bringing the entire service sector except 17 services under the tax net (apart from 200 bps hike in excise duty) alone will contribute Rs 2 lakh crore to the government coffer over 2-3 years.
The Government has also found an innovative way to get the private sector to share the oil subsidy burden. It has done so by increasing the cess on crude oil by 80 per cent at one go. These tax measures would enable the Government to contain magnitude of crowding out of private investments in the country. Bringing back fiscal reform and introducing new parameters like “effective revenue deficits” impose restraints on rulers in taking up wasteful welfare expenses.
Selective spending
Increasing the overall Plan outlays by 22 per cent, containing growth in non-Plan expenditures to 8.7 per cent and increasing the allocation to the road sector by 14 per cent are positives for capex.
Providing access to external borrowings to part-finance rupee debt of power projects and to the aviation industry for its working capital requirement, and doubling the quantum of tax free infrastructure bonds should provide a boost to the infrastructure sector. The infra sector, which has strong linkages with other industries, will provide boost to falling capex and also to demand for other core industries.
Deterring gold buying
Doubling of import duty on gold will curtail the outflow of dollars at least by about $15 billion in 2012-13.
These anticipated savings are quite large; the RBI sold $15 billion in the open market during December 2011 and January 2012, triggering a 7 per cent appreciation in the rupee. This duty hike would not only reduce the trade deficit but may also help strength the rupee.
The Rajiv Gandhi Equity Savings Scheme would not only increase the penetration of stock market investing, but also promote long-term equity investments.
Not so bad for stocks
While it is true that the hike in excise duties and service tax will be inflationary, it is the “rate of change” rather than absolute price rises which matter most to equity markets.
Due to inflation and consistent rise in oil prices, the base index of headline inflation has gone up by 18 per cent and oil prices up by about 27 per cent in two years.
Given record food grain production and loss of pricing power in the manufacturing sector (manufacturing inflation has fallen by about 200 basis points in the last couple of months), the base effect will kick in. It will ease the pressure on overall inflation.
Lower rates
Expected reversal of interest rate cycle by 100-200 bps in 2012-13 and moderation in commodity prices in the wake of the global slowdown will also partly offset margin pressures from duty hikes.
A possible political realignment could also help the government push through pending reform measures and economic bills.
Hence, post-budget, the reversal of interest rate cycle, successful implementation of reform measures and robust outlook for rupee would lead to both the domestic equity markets and also inflow of investments by the FIIs hitting record high in the year 2012! The risk to our view would be any major failure of coming monsoon.
(The author is Group CIO, Centrum Wealth Management).