India Budget surprises with surge on spending, tax on super-rich

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SummaryChidambaram announces higher-than-expected spending, proposes tax on wealthy people, cos.

India unveiled new taxes on the rich and large companies in its Budget 2013 on Thursday to fund higher-than-expected spending for the next fiscal year, that aimed to revive growth amid the country's worst slowdown in a decade ahead of a 2014 election.

Stocks, bond prices and the rupee all fell despite Finance Minister P. Chidambaram's vow to cut next year's fiscal deficit to 4.8 percent of GDP, which some watchers said counted on ambitious revenue assumptions given hefty spending targets.

There had been widespread expectation, fuelled in part by comments by finance ministry officials, that Chidambaram would present an austere budget in line with the spending cuts he forced on government ministries in recent months.

But the spending plan appeared to have been drawn up with a looming general election in mind, some economists said.

"With a general election not much than a year away, political pressure from within the Congress Party may well have had an influence on the make-up of the Finance Minister's budget," Credit Suisse said.

Chidambaram, a three-time finance minister seen as a candidate for prime minister in 2014, has staked his reputation on cutting swollen fiscal and current account deficits that have alarmed credit rating agencies and triggered warnings that India's sovereign bonds could be downgraded to 'junk' status. There was no immediate comment from the agencies.

"Fiscal consolidation cannot be effective only by cutting expenditure," Chidambaram said in his speech, seen as a balancing act to stave off a credit rating downgrade while meeting demands for populist spending heading into an election year.

HEFTY REVENUE GROWTH ASSUMPTIONS

Total budget expenditure will rise by an unexpectedly high 16 percent in the 2013/14 fiscal year that begins on April 1 to 16.65 trillion rupees ($309 billion).

Next year's fiscal deficit target is in line with expectations but assumes hefty revenue growth, including 558 billion rupees from the sale of government stakes in companies, or more than double the 240 billion rupee target for the current year, which falls short of the initial target.

"From a macro perspective, the budget is disappointing in our opinion as it lacks any expenditure control," Nomura analysts wrote.

The budget also assumes revenue of 408.5 billion rupees from telecoms sector fees, more than double what it will generate this year, with its next auction of mobile airwaves poised to flop after attracting just one bidder.

"The government may fall short of its tax and disinvestment targets and end up cutting spending closer to the end of the year to attain its fiscal deficit target," said A. Prasanna, economist at ICICI Securities Primary Dealership Ltd.

Net market borrowing of 4.84 trillion rupees for the new fiscal year met investor hopes that the figure would not top 5 trillion rupees, but the gross figure exceeded expectations.

The budget included several measures to spur investment both in markets and by corporations, including an incentive on investments in plant and machinery exceeding 1 billion rupees and extending tax breaks for small companies that grow larger, and an expansion of tax-free bonds for infrastructure.

Chidambaram has focused on winning back foreign investors unnerved by proposals of his predecessor, Pranab Mukherjee, to tax merger deals retrospectively and clamp down on tax evasion. Since September, he has implemented a spate of investor-friendly reforms, including allowing entry of foreign supermarkets.

"India, at the present juncture, does not have the choice between welcoming and spurning foreign investment. If I may be frank, foreign investment is an imperative. What we can do is to encourage foreign investment that is consistent with our economic objectives," he said.

HEY, BIG SPENDER

While the added spending included capital investment that many have said is sorely needed, including a 29 percent increase in funding for infrastructure and development, it also included a 46 percent jump in funding for development programmes in rural areas, the core voter base of the ruling Congress party.

An added surcharge on local firms with incomes of more than 100 million rupees and a 10 percent surcharge on individuals with taxable incomes topping 10 million rupees - a level of earnings currently declared by just 42,800 people - will be put in place for one year.

Dozens of corporate executives, watching a telecast at an industry event in New Delhi, exchanged nervous smiles as Chidambaram introduced the surcharge on the rich.

"In the larger scheme of things, I guess that is one way of reducing his deficit. Am I going to lose sleep over it? No," Ganesh Natarajan, CEO of IT outsourcer Zensar Technologies , said by phone from Pune, where the company is based.

Indian economic growth for the current fiscal year is on track to hit just 5 percent, nearly half its level in 2007/08.

"This country must not lose any time - India must get its act together to accelerate the tempo of growth," Prime Minister Manmohan Singh said in a TV interview after the budget speech.

The budget also reflects the realities of a country of 1.2 billion people, many of them poor. "On the one side is the economic policy, on the other side is economic welfare. We are a developing country. The link between policy and welfare can be expressed in a few words: Opportunities, education, skills, jobs and income," Chidambaram said.

COMMENTARY ON BUDGET PROPOSALS

ASIM WARSI, VICE PRESIDENT, SAMSUNG MOBILE, INDIA, NEW DELHI

"The 15 percent investment allowance on manufacturing investment should give a fillip to domestic manufacturing. However, in overall terms, we do not see the budget reviving the consumer sentiments in the absence of any specific incentives to boost consumer sentiment itself. Further, the increase in the excise duty on mobile phones will not have a positive impact on the mobile industry and should lead to an increase in prices for end consumers."

KAPIL WADHAWAN, CHAIRMAN AND MANAGING DIRECTOR, DEWAN HOUSING FINANCE CORP, MUMBAI

"It is a very balanced budget and is great for mid- to lower-income housing. The rural housing fund allocation of 60 billion rupees and an increase in tax exemption of 100,000 rupees on home loans of up to 2.5 million rupees is a welcome move.

"We continue to draw a lot of funding from the National Housing Bank (NHB) as refinance for our lending activities. The money we receive from NHB comes to us at a very low cost. So if NHB releases more money through the rural housing fund to players like us there is incentive for us to reduce absolute interest cost to the end customer."

MEHUL CHOKSI, CHAIRMAN & MANAGING DIRECTOR, GITANJALI GEMS , MUMBAI

"For the jewellery sector, the budget was quite pragmatic. The finance minister introduced measures so people start investing in other financial instruments and move away from gold.

"I don't think that will have a major impact on spending patterns or people's preference to buy gold and gold jewellery. It is a cultural necessity and so that will not get impacted. The positive bit was that there was no hike in import duty on gold which I think is welcome because firstly it is already very high and then it would also increase black market activities and the government will only lose more."

SYED SAFAWI, CEO, VIOM NETWORKS, NEW DELHI

"The budget's focus to bolster the country's infrastructure has positives for the private sector by way of encouragement of infrastructure debt funds.

"However, the high expectation of assistance to telecom tower companies that have been granted the status of harmonized infrastructure sector has gone in vain. The telecom towers are critical for enabling deeper broadband penetration."

MAHENDRA SWARUP, PRESIDENT, INDIAN VENTURE CAPITAL ASSOCIATION, NEW DELHI

"The tax pass-through has been given only to angel funds and early stage venture capital funds. We were expecting that the base could widen, to private equity funds, but it did not happen. It's a slight disappointment."

R.C. BHARGAVA, CHAIRMAN, MARUTI SUZUKI, NEW DELHI

"A budget can't provide solutions to all the problems in the economy. Solution lies in various ministries of government of India. Finance Minister doesn't have capabilities to take action on their behalf. Actions have to be taken at state levels, at ministry levels, if we are talking about 6 to 7 percent growth.

"It is neither political nor populist. He has kept the fiscal deficit down. He is trying to bring in investments to the country. Overall it's a good budget."

ISSAC GEORGE, DIRECTOR, GVK POWER & INFRASTRUCTURE LTD , NEW DELHI

"Our expectations were higher this time. We expected the budget to be a big growth booster but within the constraints that he had, he has handled it fairly well.

"Couple of positive things were the extension of tax holiday on power projects by one more year. The investment allowance of 15 percent he is planning to give for projects where investment is greater than 1 billion rupees is positive. This will bring back capital.

"Infrastructure debt funds being encouraged is a very big positive because that will ease some of the financing problems that infrastructure projects are facing today."

BHASKAR PRAMANIK, CHAIRMAN, MICROSOFT INDIA, NEW DELHI

"The intent is very strong. It is really to see how they implement this. There seems to be a lot of focus on reviving growth. A lot of issues in the IT sector has been addressed. One of the areas which was a concern is that we have been seeing a decline in new investment in R&D units."

PRANABH MODY, PRESIDENT, J.B. CHEMICALS & Pharmaceuticals , AHMEDABAD

"The budget looks good on investment side. The incentive for investment above 1 billion rupees is attractive. Other than this, there is no concrete announcement on tax front, nothing on the proposed goods and services tax. So it's neutral budget."

P. BALENDRAN, VICE PRESIDENT, GENERAL MOTORS INDIA, NEW DELHI

"The hike in excise duty is not on expected lines, specially when automobile industry continues to remain sluggish.

"Unless you see the fine print, you may not be able to know how much is going to be the impact. In auto industry, for the commercial vehicles, it is a good (budget). From GM India perspective, the budget doesn't get more than 5 out of 10 points."

H.M. BHARUKA, MANAGING DIRECTOR, KANSAI NEROLAC, MUMBAI

"There was nothing exciting in the budget but it's not a populist one which is good. What remains to be seen is how the fiscal deficit will come down to 4.8 percent when planned expenditure has been increased by 30 percent and that I think is the most important part.

"The other bit is he has increased expenditure in rural markets so overall consumer spending should not be affected in the coming year. The consumer industry will also cheer the development on the GST front. The finance minister indicated that there has been some consensus that has emerged on the issue and that it will get passed in the near future.

SUNIL DUGGAL, CEO, DABUR INDIA, NEW DELHI

"Rural stimuli has been continued which is good for the consumer sector. We are expecting the implementation of the goods and services tax from April 2014 and the finance minister indicated a positive build up to that which was good.

"Major issue for us will be to watch the impact this budget will have on inflation, which will have an impact on demand for us."

S. SANDILYA, PRESIDENT, SOCIETY OF INDIAN AUTOMOBILE MANUFACTURERS AND CHAIRMAN OF EICHER MOTORS, NEW DELHI

"Overall tax rates not having gone up ... is very good.

"However, on the SUVs, he increased excise duty, saying they occupy more parking spaces, which is totally surprising. We need to find out how it affects the overall sales. It was one area where growth was significant and yes, this will have an impact.

"Also on imported vehicles, he increased the customs duty which was not expected."

MALVINDER MOHAN SINGH, CHAIRMAN, DION GLOBAL SOLUTIONS, NEW DELHI

"It's a good budget ... portrays an optimistic picture. I hope the higher taxes on corporates is only for a year."

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COMMENTARY ON TAX SURCHARGE ON INDIVIDUALS WITH TAXABLE INCOME OF MORE THAN 10 MLN RUPEES

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ISSAC GEORGE, DIRECTOR, GVK POWER & INFRASTRUCTURE LTD , NEW DELHI

"I honestly do not agree on that because, if you see history anywhere in the world, you cannot spur growth by taxing the rich. That could have been avoided. I have always maintained that he should have ensured compliance so that more people who have avoided taxes are brought into the net of taxes.

"That is something that could have yielded better results rather than taxing the top 1-2 percent of the people.

"I am an affected party and that is why I am shouting on top of my voice."

H.M. BHARUKA, MANAGING DIRECTOR, KANSAI NEROLAC, MUMBAI

"Minor modifications in personal taxation for the 43,000 or so people who have an income of more than 1 crore (10 million) rupees is not so much of a problem because it is just for a year. I don't think people in the industry will have a problem given the current circumstances."

SUNIL DUGGAL, CEO, DABUR INDIA, NEW DELHI

"That was unnecessary. It takes away very little revenue, very little extra money into the tax net. It will lead to more avoidance. There are very few people at that level. Just penalising people who are paying the tax does not make any sense. There are substantial number of people with good income who are not paying taxes and the focus should have been more on bringing them under the tax net."

GANESH NATARAJAN, VICE CHAIRMAN & CEO, ZENSAR TECHNOLOGIES , PUNE

"It is obviously tough but if the numbers are right, and there are only 42,800 people, then some of us who are earning will have to bite the bullet.

"In the larger scheme of things I guess that is one way of reducing his deficit. Am I gonna lose sleep over it? No."

MALVINDER MOHAN SINGH, CHAIRMAN, DION GLOBAL SOLUTIONS, NEW DELHI

"I don't think he had a choice. It was pretty much expected that he would do something. I think as long as it is for a period of 1 year, its understandable. I am hoping that next year, this will end.

"I think what's important from tax perspective is really to widen the tax net and to ensure that more people are compliant. In an environment like this, one would hope that, I mean nobody will go and say, yes increase taxes. But we do understand that today he needs to do it." ($1 = 54.4 Indian rupees)

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