Expectations, reality checks and educated guesses on what the Union Budget holds for 2012

Expectations, reality checks and educated guesses on what the Union Budget holds for 2012

The landscape setting for the Union Budget 2012 – 2013 couldn’t have been more significant in its timing. With elevated levels of inflation and with the economy showing signs of decreased momentum in growth, the Union Budget is expected to set the tone for future stance on reforms, policy and economic growth.

India Inc has shown distinct signs of slowing down and the fear of recession, stemming from the ongoing crisis in Europe and the US, has made its presence felt in India. The Union Budget to be announced on March 16, 2012, would be expected to boost faith and investor confidence – both local and global – through appropriate announcements in policy, reform, and taxation. This is also especially pertinent given the barrage of negative news and apparent policy paralysis stemming from scams and bribery issues that have stalled the government functioning.

Policy decision-making has been sluggish in the recent past and coupled with the high inflation rate that led to successive rise in interest rates, has impacted the profitability of Corporate India, impacting valuations for most companies.

The latter half of 2011 saw India’s investment climate being adversely impacted. There was risk aversion that resulted in money being pulled out of all the riskier assets like equities. However, with the positive rise of the markets in 2012, the liquidity flow seems significantly reversed. The government seems to have regained momentum, with the manufacturing bill which was tabled late last year and decisions being taken on retail FDI. We have seen important steps being taken by the Government on the power sector and there are expectations that there will be further reforms in areas like Goods and Service Tax (GST) and Direct Tax Code (DTC) going ahead in the next financial year.

So while we have started seeing some improvement on the policy front, the RBI has been working towards reducing inflation. The recent decision to reduce the CRR by 50 basis points, thereby creating additional liquidity, sends strong signals that interest rate cycles have peaked out, improving market sentiments. However, several important reforms are still pending.

Significant announcements to look out for are the raising of tax-exemption limits, change in tax deductions and Government policies on infrastructure and industry, thus focused equally on growth for Corporate and salaried India. There is also an increased demand, especially from political quarters on added focus on poverty alleviation programmes.

Another significant area that would be keenly watched by Indian and global spectators, would be the government’s stance on fiscal consolidation. With India’s balance sheet of earnings and expenditure not matching up evenly, there is expectation that the Budget would also focus on curbing fiscal borrowings while ensuring that revenues match up through efficient administration and not through increased income tax slabs. The trick here would be to ensure a wider gamut of items to be included in the GST category while increasing the initial slab for individual income tax. This, combined with a focus on simplification of the existing tax regime and ensuring early implementation of the Direct Tax Code, should benefit the Indian consumer and Indian businesses going forward. While a cut in subsidies is required to curb fiscal indiscipline, this appears unlikely given the perceived support to the poor that subsidies provide. However, a renewed focus on disinvestment in the public sectors would increase non-tax revenue and provide a buffer to Government

Focus on double digit growth and the ability to sustain it would also be of paramount importance as alluded by Mr Mukherjee in recent interviews. The Indian economy is estimated to grow 6.9 per cent this fiscal, lower than the 8.4 per cent growth recorded in 2010-11. While this is largely attributed to the stringent monetary policy decisions by the RBI to prevent the ill effects of inflation, the Budget would have to directly address the issues impacting investments and consumption growth. There would need to be definite signs of how the Government plans to keep the adverse impact of the ongoing turmoil in the Western nations and uncertainty on our economy to the minimum.

The tone of the Union Budget 2012, could also depend on the outcome of the UP elections and the position of the United Progressive Alliance (UPA)  and its allies in power post that. But for now, the Union Budget has large expectations writ upon it, if only to propel India back on the meteoric growth trajectory, we have witnessed in the past few years.

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