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Budget 2009-10: Past perfect, future tense

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If there can be a perfect example for a damp squib, this is it!

Now let see some of the important budget provisions and find out what they mean for you, the financial markets and me.

1. India Infrastructure Finance Corporation Limited (IIFCL) has been granted flexibility in raising finances and lending to infrastructure projects, meaning that it has been left to fend for itself.

2. The allocation for NHAI has been increased by 23%. Good move this would help in the development of national highways.

3. Farmers, the darlings of the politicians (that’s not because they are voters but because most of the parliamentarians and politicians are farmers themselves!) have been offered an interest subvention @ 7% and a 1% subsidy for prompt payment (this means the effective borrowing rate farmers is 6% and they are not required to pay income tax too). It pays to be a farmer in India.

4. The Market development assistance for exporters in the form of interest subvention on pre-shipment credit extended up to 31 March 2010. Our finance ministry expects the global crisis to blow over by then and then we will be charging the same interest rate for our exporters as other manufacturers.

5. SARAL-2 will be introduced this year. Have you ever heard of a simplified simple tax form? Here it is!

6. NREGA the wonder child of Congress (How come the name does not start with Nehru-Gandhi name?) has been allocated Rs.39100 crores (Rs. 391,000,000,000) this year. Lets do a small analysis. NREGA guarantees 100 days of gainful employment for one individual in every household in rural areas and pays Rs. 100 per day per head. This amounts to wages of Rs. 10000 per household for a year. So if Rs.391 billion have to be spent then this money is expected to cater to 39.1 million households, out of approx 197 million households as per the official census of 2001. The corollary of this is that 20% of our population is in abject poverty and is not capable of raising Rs.10000 per household in rural areas. If this is true then Shame on us. If this is not true then, there seems to be a problem with the way our government works.

7. A national mission on women’s literacy is being set up and it will help in reducing illiteracy amongst women in the next three years. WOW a commendable job.

8. Students who take loans for education will enjoy a moratorium on interest payments until they finish their course. That is a great thing and it will go a long way in helping poor students to educate themselves.

9. A public Private Partnership is being envisaged in managing the good old employment exchange. That is a great idea, all you private placement consultants and had better watch out big brother has just entered the fray and he will gobble you up.

10. The Unique Identity Number project has been allotted Rs. 1.2 billion to start its operations. That will kick start the operations but we need more money to count the number of people in this country and provide smart cards for each of them.

11. GROSS FISCAL DEFICIT is expected to be 6.8% of GDP and the Gross State Domestic Product limit has been raised to 4%. Mr. Finance Minister Sir, your targeted Fiscal deficit was 3% and you went on to stretch it to 6.8%. How can you expect your counterparts in the State Governments who take pride in profligacy to contain themselves to 4%?

12. Direct Taxes: Rs.10000 has raised Individual Income tax slab at the lowest level for male individuals and women. The lowest slab for senior citizens has been raised to Rs. 240,000, a raise of Rs. 15,000. For the HNIs, the surcharge of 10% is abolished. Here the people in the middle tax bracket seem to have the wrong end of the stick.

13. Fringe Benefit Tax has been abolished. Now your company will allow you to go on tour, spend money, and not worry about paying FBT on part of the amount you spent on that junket.

14. Commodities Transaction Tax is abolished. I do not know what to say. the government keeps banning commodities trading whenever it sees a flare-up in commodities prices. Therefore, the right question would be which commodity is being allowed to trade right now to understand the impact of abolishing CTT. Any way removing CTT will help commodity exchanges and help stock brokers to start commodity terminals as a hedge against the failing fortunes in the stock broking industry.

15. Minimum Alternative Tax: the MAT under which the previous finance minister has swept corporate growth under has just got bigger. MAT has been increased to 15%. There is no incentive for tax management using the growth=depreciation route now. THE SINGLE LARGEST REASON FOR THE STOCK MARKETS TO REACT THE WAY THEY DID IN RESPONSE TO THE BUDGET.

16. Thankfully there have been no major changes in indirect taxes.

17. GST to be operational from 1 April 2010. Good move. GST to be bifurcated to central GST and State GST. BAD MOVE. This means we are going back to the good old days when we had central sales tax and state sales tax. So in Karnataka instead of CST and KST we will have CGST and KGST. (How to share the spoils of the tax revenue amongst the centre and the state could have been kept in wraps and a common GST would have been better)

That is about it. As far as disinvestments is concerned, no specific announcement was made.

Moral of the story: More the things change more they remain the same. The 1991 wave of reforms was not of Congress manufacturing, but out of compulsion of the IMF. Now that the economy is strong enough to withstand the perils of global financial meltdown we can do it our way, the NEHRUVIAN WAY. In fact, at one time the Finance Minister was singing paeans to Mrs. Indira Gandhi, for having the grand vision of financial crisis 40 years back and resorting to nationalization of banks.

WOW I am very happy that we had such visionary leaders who could predict turmoil’s four decades ahead. Our FM needs to read a little of modern economics and find out that this financial crisis happened to US because the Glass Steagall Act was repealed in 1999. There was no way how our Prime Minister could envision that this would happen in 1979.

Now for the markets, the immediate support for the markets is 3800 on the NIFTY. Nifty has to fill the gap it created on that euphoric morning after the budget first. Then lets see if a plunge protection team is formed and whether it works, else we will see the October 2008 bottoms again.

About the Author: ANILKUMAR GARAG, is a Teacher with an entrepreneurial streak. As a Teacher, he is a Professor in Finance at Belgaum Institute of Management Studies and the Finance Officer of Peoples Education Society and Trust Belgaum.

4 thoughts on “Budget 2009-10: Past perfect, future tense”

  1. One of the most moderate Budgets presented by an Indian Finance Minister So Far….
    This is what i feel as Shri Pranab .Mukherjee had not many options nor did he have enough sources to handle the current international crisis.He was reluctunt to do so . A thumping victory in the recent elections was the back drop of this budget,this is why people were expecting a thanks giving act from the government.This really did not happen as there was very little pocket money left in the kitty of the government after giving a big gift of Rs.71000 Crores to the farmers of India.Afterall with a limited income the wishes of only one child of a family can be fulfilled.This is what happened.
    Coming to some specific aspects:-
    1)The Decision to give an option to all small businesses having turnover of less than Rs.40 Lacs to declare income at 8% without the requirement of maintaining Books of Accounts will definately be welcomed.
    2)The Decision to increase the basic exemption limit will be welcomed but with a very less excitement.
    3)The FBT Ghost is gone atlast.
    4)Thank god Saral-2 is coming back.
    5)MAT at 15 % will surely not help.
    All in all What the finance minister could manage was adding to the fiscal dificit as it usually happens with every finance minister of India.

    Nitin Nimbalkar
    Chartered Accountant

  2. "You can fool all the people all the time if the advertising is right and the budget is big enough", may be this clause would have made all those people dissecting the Union Budget 09-10. The Economic survey and the President's speech was much enough for the publicity to hype the expectations of Economists and the Industry leaders to benchmark and expect the budget to be flamboyant than just having "substance". I truly feel the balancing act done by FM is commendable looking at the current situation of various economies around the world. Today, country needs boost in local consumption to maintain the momentum of growth (that most of us Indians have got habitual to in the last decade, money has been minted across industries and markets).

    Let's give a realistic look, cannot expect a new government to open the box filled with all expectations satisfied, they have still 4 more years to go and like any other smart politician they would want to materialize things slow and steady (like a scotch is never gulped in a shot, but enjoyed in sips). Referring to the last interim budget, UPA went full-blast with all goodies to get the votes, so i expect to see similar cycle again at the end of tenure. So, the act done is commendable, but with usual loop holes that had to be filled.

    Let's look at some key highlights of the Budget with a tinge of thought to it: Pro's
    1. Providing farmers at the most scope is definitely applaudable, since bottom of the pyramid (refer C K Prahalad) has always been reason of growth of many sectors in India,like automobiles, power, FMCG, healthcare etc.This was most needed as consumption is directly proportional to the growth of industries
    2. Personal tax bracket has been pushed a bit to higher level, which would intern leave some more money in my pocket. Hardly anything more, but something is better than nothing
    2. FBT abolished, employees of MNC's like me would much appreciate it, as my employers tax burden is cut
    3. Deduction of interest on loans borrowed under Section 80E substituted now includes studies in any field (including vocational fields), a good move that will help many students to think of better higher education
    4. A separate bench/person/forum to address foreign companies in India for there taxation, registration, legalization etc etc….Hope the lobbying would be reduced through this one.
    5. FDI limit untouched, anyway let's understand, today my client intends to invest in India,he would still do business with us, since for him the overall growth story is that matters for their business to grow rather than just how much share is he getting in the business. Let's also understand, it is just one of the reason's that our banking industry still holds strong in turbulent times, when we have seen n+1 banks closing their shops in developed world
    6. Saral-2 is another good initiative, but only should be made clear to the individual tax payer with all points before it's another pain for the working class

    • Other things proposed in this Budget seem to be favourable to some extent.

      On the contrary we are not fully convinced with abolishment of FBT (Fringe Benefit tax). Though the burden of FBT is proposed to be abolished resulting in the reduction of Tax Burden of Employer the relative benefits will be taxable in the hands of an Employee( Salary Earner) as a perquisite u/s 17 of Income Tax Act, 1961.

  3. Comment Continued:

    1. The most prestigious initiative of Congress – NREGS, an employment generating scheme or sounds more like manifesto words re-written. Last time achievement of 144% after spending more than what is allocated this time, so we could just imagine this time the results could be much unnoticeable.
    2. MAT at 15% is hitting right on the backbone of the industry that is already facing tough times to generate business and mark profits
    3. Food security act/bill – i'm still trying to understand, whether it as been assumed that food and oil prices are going to remain stagnated, as this bill would in-turn create a hole in the pockets of working class and the industry for getting it through
    4. New Pension Scheme (NPS), an ultra-low cost fund that was launched with lot of fanfare this year, was hardly addressed in-terms of making it completely tax-free as PPF. Money withdrawn from the scheme will continue to make it liable for tax, although contributions and returns are tax free. Another scheme by UPA back to bench.
    5. Fiscal Deficit, a big hurdle that tumbled the markets in a big way on B-Day, no exhaustive road map for fiscal consolidation from 6.8% to 4% by 2012, how in the world is Mr.FM going to do this?
    6. GST, definitely a good move till it is standardized across center and state, else just placing the old wine in a new bottle
    7. A mere allocation of Rs.1000+ crores on disinvestment, this was one of the biggest shocker in the budget. Since government schemes, initiatives, fiscal deficit would have been much better answered through raising money from by shelling-off some stake to private players.

    Point 2 and 5 were the prima facia reasons for market to tank 900 points

    About markets, it was a lesson to be learned (including myself as an investor). Budget was overblown to be an yard stick for markets to race. "Pick the best budget stocks", and each one of us accumulated at least 2 lots of the list of companies prescribed by ET, moneycontol, analysts etc. and then cursing the FM, where as traders, investors, analysts etc had over expected from the budget.

    A decent job in creating opportunities for everybody to spend a little bit more through his employment generation schemes, the abolition of surcharge and increase in the threshold of taxable income. But the government has to take immediate measures to clarify most of the points mentioned in Cons.


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