For hundreds of millions of inflation-ravaged low and middle income consumers, Budget 2012-2013 may well be the last straw that breaks their resilience. This may trigger further slowdown in private consumption activity, and thereby, lead to a deceleration of the growth trajectory of Indian economy.
To the economists, analysts, and commentators, widening of the service tax net and an increase in the tax rate to 12%, and a complete withdrawal of the stimulus given earlier in 2009 by way of restoration of the excise duty rate to 12%, up from 12% was inevitable and generally on the expected lines. However, to aam aadmi, it would be very difficult to explain this fiscal reality and even harder to make them absorb this without affecting consumption volume.
Unfortunately, for manufacturers and marketers, business margins have already been under stress for many quarters, largely on account of very high cost of borrowing, and an incessant rise in cost of most inputs, including raw materials, energy, transportation and logistics, and salaries and wages. Hence, at this time, most manufacturers will have no option but to directly pass on all or almost all of the taxed induced cost increase to the consumers. The sectors that would be most vulnerable in the very near term will include relatively high-ticket items of consumer spending such as automobiles, consumer durables and appliances. Other highly vulnerable sectors include textile and footwear, jewellery, restaurants and other food services, and domestic tourism.
The reliefs announced in direct taxes are largely cosmetic in nature, with tax savings ranging from about R2,000 to about R22,000 for those in the relatively higher income bracket of R8-10 lakh. However, with inflation likely to be in the range of 8% – 10% in this current fiscal, these meagre savings in income tax liability are likely to be neutralised very soon by higher consumer prices of almost all goods and services.