Toilets may stink, but money doesn?t,? was first said by Roman Emperor Vespasian to his son Titus, when he ordered a new tax on public toilets. What he probably meant was this: ?If you see an opportunity to make money, use it!? Instead, the honourable FM Pranab Mukherjee uses the quote from Shakespeare?s Hamlet: ?I must be cruel only to be kind.? His imposition of service tax on a whole host of services can have a cascading effect on inflation, besides creating administrative problems.
I am in the minority but I do commend the FM for bringing in measures to discourage treaty shopping?only I believe we should respect the SC judgment in the Vodafone case. Article 141 of the Constitution of India says that law declared by the Supreme Court is binding on all courts and authorities in the territory of India. Validation clause of Section 113 seeks to retrospectively amend provisions and could reopen the Vodafone case. Vodafone has been contemplating listing on Indian exchanges and this could face new headwinds. The Bilateral Investment Protection Agreement between UK and India also comes into question now.
It is apparent that the finance ministry got the debt/GDP estimate wrong?from 4.6%, it has climbed to 5.9% or an increase of R1,10,000 crore. The only way debt/GDP could be brought down to 5.1% as is envisaged in the Budget speech is by a GDP growth of 7% (difficult as the Budget is not facilitative) or by enhanced tax collections (advance taxes for the last quarter of FY11-12 are higher only for TCS. For others, they are just keeping in line with inflation).
A boost in terms of continuation of sunset STP or SEZ clauses with specific reference to IT companies would have been welcome. Instead, IT companies now face the definition of ?royalty? being widened to include computer software payments.
Government borrowing will remain high?the R4,79,000 crore referred to in the Budget speech is only central borrowing. No wonder the 10-year benchmark bond yield rose to 8.42%, up 6 bps from its level before the deficit estimate was released.
Anomalies abound. Cinema has been exempted from service tax. One wonders how this industry does a better job of nation-building than other service providers. Branded silver jewellery is exempted from excise duty, whereas customs duty on standard gold has been raised from 2% to 4%. One wonders why the white metal gets precedence over the yellow metal. Cancer and HIV medicines have benefited, whereas those for diabetes and hypertension have not even though these diseases can be equally life-threatening diseases. There are concerns the proposed Food Security Bill could create supply shortages besides leading to leakages.
Most of the ECB permissions announced in the Budget would benefit only top-rated power and power equipment companies. SMEs who have raised funds abroad to finance their overseas acquisitions (made without regard to their viability) are facing trouble since foreign lenders are not keen to convert loans into equities, keeping in view the state of capital markets.
The Budget allocations do not address the critical issue of reining in the rising cost of farm inputs. The catch-22 of the agricultural sector remains?escalating farm subsidies and spiralling farm input costs. Now the fertiliser subsidy will increase and at the same time the farmer will pay more for fertilisers. In the previous year, the fertiliser subsidy had been estimated at R50,000 crore but the actual expenditure is estimated at R90,000 crore. Given that we are import-dependent for fertilisers and therefore subject to continually rising global prices, this figure could increase. But farmers paid higher prices for all three categories of fertilisers?nitrogenous, phosphate and potassium?last year. In fact, owing to supply shortages, they paid premiums.
Mukherjee is enchanted with the success of the East India Green Revolution, which has managed to up production of rice by 20% in the region. The fact that this ?success? is based entirely on application of highly cost-intensive and water-intensive technologies with destructive ecological consequences finds no mention. There are no enablers in the Budget on additional provisions for storage processing. Only 60% of foodgrains stored can be put to use while the rest rot. By facilitating storage processing, the government could have substantially worked its way out of the food inflation problem.
The share of agriculture has come down to 13.5% of GDP from 50%, as in other emerging economies like Mexico and Brazil. However, in the US and Europe, although the total share of agriculture is as low as 3%, there are value-added contributions from processed agricultural produce, which help in hiking the share of agriculture and agricultural food and produce to 10% of their GDP.
The issue of tax-free infrastructure bonds is good for infrastructure companies, provided infrastructure targets are met. Only 50% of the targets envisaged in the 11th Five Year Plan for the power sector have been met.
Deduction of TDS on immovable property is a retrograde step. Already, the government is in possession of records of sale of immovable property exceeding R30 lakh. As most transactions involving immovable property are between individuals, this means individual taxpayers will now have to obtain TAN (tax deduction account number), appropriately deduct and deposit TDS with government and electronically file TDS returns?hardly an expertise that resides with individual taxpayers. Tax practitioners would however be laughing all the way to the bank.
An omnibus GAAR could vest huge powers in the commissioner of income tax, and is applicable now to both domestic as well as international transactions. There has been disregard of the Standing Committee recommendations, which had listed many safeguards to prevent unbridled powers being given to a tax official. From investment-based tax deduction, the government moved to profit-based tax deduction and back again to investment-based tax deduction now. Such ad hoc changes in capital-intensive projects tax calculations can act as a deterrent to savings and capital formation.
India is 80% dependent on oil imports. The figure of $115 for Brent crude factored in the Budget calculations could go haywire should the Iran-US-Israel problem escalate. I would not be surprised to see Brent crude touch $160 by May 2012, before starting to come off. The government needs to exercise skill and caution in seeing these trends in advance, else they could be entering into oil contracts at the wrong time and at wrong prices. The vital issue of reducing subsidies on diesel remains unaddressed.
Increasing allocations under MGNREGA would only motivate people to become redundant. Rather than trying to micro manage the economy, it would be better just to create a facilitative environment for growth of business. No wonder the stock market has reacted negatively to the Budget proposals. In fact, I expect heavy selling in stock markets between June 2012 and August 2012 due to certain domestic and global issues that I expect to gather centre-stage shortly, and to which the government needs to be attentive.
The author is CEO, Global Money Investor