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Pranab Plays It Safe

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Under pressure to trim the country's fiscal deficit amid cooling economic growth and a crisis of stability for the coalition government, Pranab Mukherjee preferred to play safe on Thursday by presenting a budget that did not contain any big ticket announcement but was rather a realistic one given the state of affairs. The industry however, was not happy. A disappointed India Inc said on Friday his Budget is a "missed opportunity" and would have cascading impact on inflation and consumer demand.

The Finance Minister proposed trimming the government's subsidy burden and called for speeding the pace of economic reforms, which have been stalled by political gridlock, in his budget speech on Friday.

High oil prices have swelled India's subsidy burden to roughly 2.5 per cent of GDP and Mukherjee called for reducing that to less than 2 per cent in the fiscal year that starts on April 1.

"We have to accelerate the pace of reforms," he told parliament.

In a manner the Budget was a directional one and the FM recognised the importance of capital markets and suggested changes in IPO guidelines steps to expand investor base as well as allow qualified FIIs into investing in corporate bonds.

But fiscal deficit Continues to pressure the govt borrowing programme.

"It is not going to stimulate growth in the economy," Ficci President R V Kanoria said.

CII President B Muthuraman said he was expecting much more and the excise-related proposals would push up prices.

However, the steps to control fiscal deficit would augur well for the economy.

"The Budget is a missed opportunity," said Siddharth Birla of C K Birla Group said while, Biocon CMD Kiran Majumdar Shaw expressed fears the Budget would be inflationary. Harshpati Singhania of J K Group echoed similar views.

"Increase in excise duty will have inflationary implications," he said.

"...deficit is still high which is disappointing. Things are going to become costlier for final consumer," Godrej Group Chairman Adi Godrej said.

Assocham President R N Dhoot said that he was expecting that the personal income tax exemption limit would be raised to 2.5 lakh per annum. "It is not done which is disappointing."

However, certain initiatives like liberalising the external commercial borrowing (ECB) rules and boost to investment particularly in infrastructure sector were hailed by industry leaders.

The BSE benchmark Sensex was almost flat during mid-day after the Budget was unveiled.

In a mix of sops and imposts, the General Budget on Friday proposed a marginal raise in income tax exemption limit of Rs 20,000 but hiked service tax and standard excise duty by 2 per cent across the board to net an additional Rs 41,440 crore a year.

Noting that the share of service taxes remains far below its potential, the Budget proposed to tax all services except those in the negative list which contains 17 heads.

Stage was set for costlier luxury which are now attracting duty up to 27 per cent. ACs, refrigerators, cigarettes are also to cost more while mobile phone bills are set to increase.

The Budget for 2012-13 presented by Finance Minister Pranab Mukherjee in the Lok Sabha, however, left corporate tax rate and peak customs duty unchanged while the import duty on gold bars and platinum and excise duty on cigarettes, bidis, pan masala and chewing tobacco were raised.

Customs duty on completely built large cars SUVs and MUVs of value exceeding $40,000 (Rs 20 lakh) was also raised.

While the direct tax proposals in the Budget will result in a revenue loss of Rs 4,500 crore, indirect tax proposals would result in a revenue gain of Rs 45,940 crore. Thus the tax proposals lead to a net gain of Rs 41,440 crore.

Raising Rs 30,000 Cr Through Disinvestment
Mukherjee set a target of selling Rs 30000 crore worth of stakes in state companies in the next fiscal year, roughly in line with forecasts. India has raised just Rs 13,900 crore in the current fiscal year from stake sales, far below its budget target of Rs 40000 crore.

The government's move on Wednesday to raise railway fares for the first time in eight years sparked an intense backlash from the Trinamool Congress, further eroding its ability to make politically tough decisions such as raising diesel prices in order to ease its fiscal deficit.

Mukherjee said he expects the economy to grow by 7.6 per cent in the fiscal year starting in April, up from an expected 6.9 per cent in the current year but below the 8.4 per cent growth of the previous fiscal year.

Prime Minister Manmohan Singh's government was already reeling from a dismal showing in recent state elections and more than a year of corruption scandals that have resulted in policy gridlock.

With general elections set for 2014, the budget a year from now is expected to be laden with populist spending measures. Friday's budget is thus viewed as a last opportunity for Singh's government to roll back a yawning fiscal gap.

India's fiscal deficit for the year that ends this month is expected to exceed the target of 4.6 per cent of GDP by more than a percentage point after economic growth slowed, the subsidy bill ballooned on higher oil and commodity prices and weak markets undermined efforts to sell state assets.

High inflation forced the RBI to continue raising interest rates even as its counterparts elsewhere turned their focus towards reviving growth. While inflation is no longer near double digits, it rose to 6.95 per cent annually in February.

On Thursday, the central bank disappointed market hopes that it would begin cutting interest rates after 13 increases between March 2010 and October 2011, and warned of renewed inflationary risks from high oil prices, a depreciation of the rupee and "fiscal slippage", a reference to the government's deficit.

The Budget makes a provision of Rs 1,93,407 crore for defence services including Rs 79,579 crore for capital expenditure, raising the outlay by 17 per cent. The allocation is based on present needs and any further requirement would be met, Mukherjee said.

Tax Incentives
Under the budget proposals, individual income up to Rs 2 lakh will be free from income tax as against Rs 1.80 lakh currently.

Income between Rs 2 lakh and 5 lakh will be taxed at the rate of 10 per cent while that above Rs 5 lakh but less than Rs 10 lakh would attract 20 per cent, and above Rs 10 lakh it would be 30 per cent.

The Budget also allows individual tax payers a deduction of up to Rs 10,000 for interest from savings bank account which would help a large number of small tax payers with salary income up to Rs 5 lakh and interest from saving banks accounts up to Rs 10,000 as they would be they would not be required to file income tax returns.

Within the existing limit for deduction allows for health insurance, the Minister proposed to allow a deduction of Rs 5,000 for preventive health check-up.

Senior citizens who do not have any income from business are proposed to be exempted from payment of advance tax, reducing their compliance burden.

While not proposing any change in the tax rate, the Budget proposes certain measures to allow corporates to access lower cost funds and to promote higher level of investments in several sectors.

Mukherjee also announced sops for aviation and power sector.

Service Tax Burden Goes Up
Noting that the share of service taxes remains far below its potential, the Budget proposed to tax all services except those in the negative list which contains 17 heads.

The important inclusions in the negative list comprise all services provided by government and local authorities except a few services where they compete with the private sector.

The negative list also include pre-school and school education, recognised education at higher level and approved vocational education, renting of residential dwellings, entertainment and amusement services and large part of public transportation including inland waterways, urban railways and metered cabs.

In addition to the negative list, there is a list of exemptions which include health care, services provided by charities, religious persons, sportspersons, folk and classical artists, individual advocate providing services to non-business entities, independent journalists, animal care and car parking.

Service tax proposals alone are expected to yield an additional revenue of Rs 18,660 crore.

The standard rate of excise duty on non-petroleum products was reduced from 14 to 8 per cent in the wake of global financial crisis in 2008-09 and was raised to 10 per cent in the Budget of 2010.

Proposing a fiscal correction that would result in higher prices across-the-board, the Budget now proposed to raise the standard rate from 10 to 12 per cent, the merit rate from 5 to 6 per cent and lower merit rate from 1 to 2 per cent.

However, the lower merit rate for coal, fertilisers, mobile phones and precious metal jewellery is being retained at 1 per cent.

(With agencies)