Review - Union Budget 2008-09

This year’s budget was expected to be populist one as we are going into election before the next budget. And to certain extent the FM Mr. P. Chidambaram has lived up to it. The Highlights of the expenditure planning are as follows.

• National Rural Health Mission 15% increase in allocation

• Outlay of Rs. 16534cr for health care

• Initial allocation of NREGS Rs. 16000cr for all 596 rural districts; may be increased if necessary.

• Bharat Nirman allocation Rs. 31280cr

• LIC to cover woman SHG’s (Self Help Groups) linked to banks.

• Irrigation outlay Rs. 20000cr vs. Rs. 11000cr

• Waiver of debt schemes – for marginal & small farmers: complete waiver of loans – could be reimbursement to PSU banks – it would amount to 4% of all loans of banks: positive for PSU banks as some written of losses due to prudential norms will recover & NPA’s could be reduced by 0.5 – 1% – Amount of Rs. 60000cr total agri-loan waiver – needs to be done by June 08

• Addressing the demands of Anganwadi workers the basic pay to teaching staff increased from Rs. 1000 to Rs. 1500 & cleaning staff from Rs. 500 to Rs. 750

• 5 more UMPP bidding to be opened

• Exchange traded FOREX derivatives to be introduced

• Defence allocation Rs. 1.05 lakh cr up 10% from Rs. 96000cr

• Rs. 55000cr revenue deficit 1.4% vs. 1.5% previous year

• Fiscal deficit 3.1% vs. 3.3% previous year

Lot of emphasise is laid on expenditure to bring social justice just as was expected. But not much is being said about capital expenditure on infrastructure & to improve quality of education. 3 additional IIT’s & few IISc’s are planned but nothing about Management Schools.

The revenue side has been a boost as there was record collection on Direct as well as Indirect tax receipts. So little was done to tamper with the same.

Customs

• No change in peak rate

There was lot of hue & cry about possible custom duty & CVD cut to boost the supply side to reduce the cost push inflationary pressures but the budget has turned out to be total failure from that perspective. Same mistake is being repeated from last year. Also there was expectation that duty on crude would be reduced to cope up with fuel price pressure but that also did not come. So no relief for inflation from fiscal policy point of view. Monetary policy alone would not be enough to curb it, so it’s a failure on control of inflation parameter.

Excise

• Cut in excise for Buses, chassis, small car, 2/3 wheeler to 12% from 16%

• Cut in excise on Pharma products 8% from 16%

• Bulk Cement 400/ton

• CST 2% from 3%

Attempt is made to give a fillip to lagging auto industry. Also to cover the price limits put on pharma products. This move will surely achieve that.

Direct tax

• Slab changed till Rs. 1.50 lakh - nil, Rs. 1.5 – 3 lakh – 10%, Rs. 3 – 5 lakh – 20%, above Rs. 5 lakh – 30% & above 10 lakh add surcharge

• Women Rs. 1.8 lakh threshold

• Senior citizen Rs. 2.25 lakh threshold

• Corp rate surcharge unchanged

• Section 80D applicable for expense on policies of parent/s Rs. 15000

• Section 80IB – construction of Hospitals – 5 years haven, Construction of Hotels in Heritage sites recognised by UNESCO

• Short term capital gains tax increased to 15% from 10%

• Commodities transaction tax introduced

• DDT (Dividend Distribution Tax) 15% unchanged

• DDT waiver for subsidy passing profits to parent co. to avoid double taxation provided the parent is not subsidy to any other co.

• Bank transaction tax withdrawn

• STT (Securities Transaction Tax) unchanged

• STT on options premium only

Direct tax part lives up to populist budget. This would again put a demand pull inflationary pressure on economy as there will be more disposable income in the hands of individual which is boost to consumeristic tendency of the young generation.

There are many negative factors for the capital markets though. STT was expected to be reduced which was not. STT should have been removed from Options & Futures which not exactly materialized. DDT still not removed which still is sort of double taxation. There was expectation that the FM will try to boost the dull capital market condition but there was little he added to it. Few things are good as no DDT chargeable to earnings transferred from subsidy to parent company, with not enough clarity on additional clause. The banking transaction tax is removed, which was not fair in the first place; so correction of mistake. Scrap of TDS on debt instruments: this move is a boost to debt markets in the country.

In all, this budget could be termed as populist neutral budget which is precursor to elections. The FM is living up his wish to keep the budget as a non event. Wait for the year when you are not much concerned of this article.