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Saturday, 17 March 2012 10:48
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Contempt for investors and unreal expenditure/tax premises makes a mockery of the deficit again

 

If the markets fell 405 points after rising 196 points from Thursday’s close despite the finance minister promising a reasonably decent 5.1% fiscal deficit for FY13, it was because they don’t trust the Budget numbers any more. What rattled investors even more was the amazingly brazen behaviour of the taxman in changing the tax law retrospectively (all the way to 1962!) to effectively reverse the Chief Justice of India’s ruling against the government in the Vodafone tax case—several more such judgements, by the Delhi High Court for instance, are also up for review thanks to some other retrospective changes that recalled the infamous case when, after losing the ITC tax case in the Supreme Court, the government simply issued an ordinance changing the law with, you guessed it!, retrospective effect.

It’s too early to pass judgement on the feasibility of the 5.1% deficit target but, as in 2011-12, the finance minister has resorted to aggressive budgeting, which is why 10-year bond yields rose 5 bps on Friday. Indeed, in order to keep his borrowing target low, the finance minister has even taken credit for R20,000 crore from the market stabilisation bonds. While expenses are budgeted to rise a more reasonable 13.1% in FY13 compared to last year’s unbelievable budgeted 3.4% (expenses finally rose 10.1%), even this is unreal. Fertiliser subsidies, for instance, are expected to fall by R6,225 crore with no plan even announced to cut them and oil subsidies are projected to fall R24,901 crore (as compared to FY12’s budgeted R23,640 crore, oil subsidies rose to R68,481 crore in the revised estimates). In other words, of the 0.8 percentage point fiscal correction, 0.3% of GDP is to come from these two iffy items of expenditure compression. Another R45,000 crore is to come from the 2G/4G auction and R30,000 crore from disinvestment—take all these away, and the genuine deficit compression is negative! And this, mind you, when the Budget is equally aggressive on tax revenues. The 22% hike in net tax revenues doesn’t look overly aggressive when you keep in mind the hike in excise duty rates from 10% to 12%, but the last time such a high growth in excise revenues was seen in 2010-11 (at that time, rates were hiked from 8% to 10%), industrial growth was double what it is right now. It has to be a very bold finance minister who thinks he can get away with a 20% hike in excise rates on a sluggish industry, and when there’s no sign of any rate cut by RBI—a clear case of someone who believes the rhetoric of his ministry’s own Economic Survey on the recovery’s inevitability.

Given the obvious fudges, not surprisingly, few paid attention to the few genuine reforms in the Budget. Giving Aadhar-linked direct cash transfers in lieu of PDS and other subsidies in at least 50 selected districts is not just a good idea, it promises to transform the way India conducts its anti-poverty programmes. The fact that no major additional allocations have been made for the Food Subsidy Bill suggests it has been put on the back-burner even though this is Sonia Gandhi’s favourite programme—the flip side, of course, is that this could be another Achilles’ heel! Two-way fungibility of IDRs, killed at the time of the StanChart IDR two years ago, will encourage greater foreign participation in Indian markets. Expanding the list of areas where viability gap funding will be given shows positive thinking and, apart from the SME exchange that was inaugurated a few days ago, the R5,000 crore India Opportunities Venture Fund with SIDBI will go a long way in helping SMEs. The idea of a holding company structure for capitalising PSU banks, similarly, suggests the government is getting innovative in its attempts to raise finance. And, given the abuse of the Mauritius treaty, some checks have been introduced; luckily this is one amendment with prospective effect.

What is worrying, however, is the way the government is liberally opening up the market for ECBs. This is largely a response to industry’s need for finance, and RBI’s reluctance to lower interest rates till government consumption and inflation appear in check. Given the LTRO-induced liquidity in Europe, there is little doubt funds will flow, but the consequences of a reversal can be quite severe—just some months ago, we saw Indian corporates scrambling for cover when the rupee fell dramatically and when share prices fell way below the conversion prices of FCCBs. Despite the seemingly sedate nature of the Budget, what we have seems a bit of a high-risk gamble, but with no visible upside. All this when, whether in terms of the fiscal or the current account deficits, India looks ominously close to where she was in 1991. If this is not an election year Budget, one shudders to think of what lies ahead next year.


 

 

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