2012 Budget Reaction from Saravana Kumar, CIO, Tata AIG Life Insurance

Mr. Saravana Kumar, Chief Investment Officer, Tata AIG Life Insurance commented on Budget 2012. According to him the Union Budget 2012-2013 was a sincere workman like document where the Finance Minister made an attempt to deliver a moderate fiscal consolidation by increasing indirect taxes, both excise and service tax from 10% to 12% and widening the service tax net (by introducing a negative list of services). 

These measures could rein in the fiscal deficit to an estimated 5.1% of the GDP in FY 2013 as against the revised FY 2012 estimate of 5.9% of the GDP. The fiscal deficit for FY 2013 requires a net market borrowing of Rs.4.79 trillion, which was a tad higher than what the market was expecting and could potentially crowd out the private sector’s funding needs as and when the investment cycle picks up.

The Finance minister pegged the FY 2013 GDP growth at 7.6% (plus or minus 0.25%) with the GDP seen moderating to 6.9% in FY 2012,  services growth estimated at 9.4% while FY12 industry growth could moderate to 3.9% and farm growth to 2.5%.

The tax proposals aim to increase the Gross Tax to GDP ratio to 10.6% as increased tax buoyancy from higher indirect tax rates, widening tax net and accelerating economic growth could act as key enablers. Negative list has been introduced for service tax (with only 17 items in negative list) and this measure could see a robust increase in service tax, given the fact that the services account for a lion’s share of the GDP.

The corporate tax rates have been left unchanged while some concessions on Personal income tax were granted -the new tax slabs proposed are 10% tax on Rs.2 lakhs-5 lakhs personal income, 20% tax on Rs.5 lakhs-10 lakhs personal income and 30% tax on personal income above Rs.10 lakhs.

In an attempt to increase the retail participation in the equity markets, the Finance minister unveiled the Rajiv Gandhi Equity Saving Scheme, intending to allow for income tax deduction of 50 % to new retail investors, who invest upto 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.

The Finance minister has provided a corpus of Rs.15,880 crore for bank capitalization, to protect the financial health of Public Sector Banks and Financial Institutions and stated that he would examine the possibility of creating a financial holding company to raise resources to meet the capital requirements of PSU Banks.

With Infrastructure being the key thrust area of the Twelfth Plan period and investment in infrastructure expected to go up to Rs.50 lakh crore, the private sector participation is key to the Infra creation (as private sector would need to fund 50% of the total investment).. The Finance minister allowed Tax free bonds of Rs.60,000 crore for financing infrastructure projects in 2012-13 . He also stated that more sectors are being added as eligible sectors for Viability Gap Funding under the scheme “Support to PPP in infrastructure”.

The Finance minister alluded to the National Manufacturing Policy announced with the objective of to increase the share of manufacturing in GDP to 25% and create10 crore jobs within a decade, in a bid to kick start the industrial growth.

On the expenditure front, the Finance minister has focused on better targeting of subsidies by leveraging the UID initiative. There would be initiatives around direct transfer of kerosene and LPG subsidy through phase wise UID enablement. Similar efforts would be undertaken to effect the direct transfer of fertilizer subsidy to retailer and the farmer. The scale of the UID project would be expanded to enroll 40 crore more individuals in the next phase.

To summarize, though the Union Budget has fallen short of any big ticket reforms, it is broadly seen as credible as the key assumptions on growth and projections on tax revenue appear realistic. There is an attempt to increase the falling tax to GDP ratio and a broad commitment to cap the subsidies at less than 2% of the GDP in FY 2013 and less than 1.7% of the GDP in 3 years. The market was expecting more detailing of the concrete initiatives to achieve this subsidy curtailment roadmap.

The overall budget had little surprises and was on expected lines, being grounded in reality of a moderating Indian economy.  However, the Budget clearly was not a game changer that could have heralded the revival of the faltering investment cycle and transformed the economic growth trajectory.