Union Budget 2012-13 to dictate the trend

Trading of S&P CNX Nifty futures on the Singapore stock exchange indicates a gain of 16 points at the opening bell. The finance minister Pranab Mukherjee will present the Union Budget 2012-13 in parliament today, 16 March 2012. The annual budget is usually presented on the last working day of February. However, the budget has been delayed this time due to the assembly polls.

Mukherjee might have good news for the salaried class, with indications he might marginally raise the income tax exemption limit by Rs 20,000 to Rs 2 lakh per annum. A question mark looms over whether he will announce reformist measures, including politically sensitive ones like foreign direct investment (FDI) in retail and pensions.



Reports indicate that the finance ministry is considering a proposal to increase excise duty from 10% to 12%, although still lower than the level before the 2008 financial crisis. The move is aimed at helping the government improve its fiscal situation but it is expected to push up the cost of almost all manufactured goods from food products to consumer durables and automobiles.

The parliamentary standing committee on finance on Friday, 9 March 2012, gave its approval to a revised version of the proposed Direct Taxes Code (DTC) Bill, 2010. The committee has recommended a more progressive tax regime, which entails widening of the income-tax slabs, increasing the exemption limit for savings and raising the ceiling for wealth tax. If accepted, these recommendations will increase disposable incomes in the hands of taxpayers, encourage savings and levy a higher tax on the rich, besides reducing compliance costs for the income-tax department.

The DTC Bill, 2010, consolidates and integrates all the direct tax laws and replaces both the Income Tax Act, 1961, and the Wealth Tax Act, 1957. The committee headed by Bharatiya Janata Party leader Yashwant Sinha, which submitted its report to the Lok Sabha speaker on Friday, 9 March 2012, has also recommended abolition of the securities transaction tax (STT). The committee has favoured a corporate tax rate of 30% and also recommended that the government should calibrate the capital gains tax regime for long term and short term.

Securities Transaction Tax (STT) is applicable to the purchase or sale of equity shares, derivatives, units of equity-oriented funds through a recognised stock exchange in India or the sale of a unit of an equity-oriented fund to a mutual fund. STT is payable equally by the purchaser and seller at 0.125% of the transaction value on delivery based transactions. On non-delivery based transactions in equities or units of an equity oriented fund, it is payable by the seller at 0.025%. In case of sale of options in securities, STT is levied at the rate of 0.017% of the option premium to be paid by the seller. In case of sale of options in securities where the option is exercised, STT is levied at 0.125% of the settlement price and is paid by the purchaser. In case of sale of futures in securities, STT at 0.017% is to be paid by the seller.

The initial numbers of the last installment of advance tax collections for the last quarter reportedly showed a tepid growth. While banks and financial institutions led the collections, oil marketing companies paid zero tax. Banks such as State Bank of India (SBI) and HDFC Bank paid higher taxes. SBI's advance tax payment reportedly rose 10% to Rs 1650 crore in Q4 March 2012 over Q4 March 2011. HDFC Bank's advance tax payment rose 9.09% to Rs 600 crore in Q4 March 2012 over Q4 March 2011.. And insurance behemoth Life insurance Corporation (LIC) has paid Rs 970 crore compared to Rs 930 crore. Private sector bank, ICICI, paid marginally lower taxes. It paid Rs 425 crore vis a vis Rs 450 crore last year. Reliance Industries paid Rs 1,130 crore compared to Rs 1,054 crore. India's largest information technology services provider Tata Consultancy Services (TCS), has managed to keep up its consistent growth and paid Rs 550 crore compared to Rs 200 crore last year. Tata Power more than doubled its outgo at Rs 90 crore (Rs 40 crore). Tata Motors maintained it at last year's level of Rs 50 crore, while Tata Steel's was lower at Rs 900 crore (Rs 950 crore).

Meanwhile, the government faced a new crisis Thursday after a rising political star objected to an increase in train fares—sending Parliament into disarray and forcing the prime minister to consider firing his railway chief. Mamata Banerjee, the chief minister of India's West Bengal state, said the fare increase—the first in eight years—would hurt the poor. She wrote Prime Minister Manmohan Singh demanding he reverse it. She also demanded he dismiss Railways Minister Dinesh Trivedi, a member of her own party, who presented the rise as a way to fund the cash-strapped rail agency's safety and maintenance efforts.

Key benchmark indices snapped four day winning streak on profit booking on Thursday, 15 March 2012 after the Reserve Bank of India (RBI) after a mid-quarter policy review said risks to inflation have increased due to higher crude prices, the large fiscal deficit and a weakening currency. The BSE Sensex shed 243.45 points or 1.36% to settle at 17,675.85, its lowest level since 12 March 2012.

Foreign institutional investors (FIIs) have made substantial purchases of Indian stocks recently. FIIs bought shares worth a net Rs 156.02 crore on Thursday, 15 March 2012, as per provisional data from the stock exchanges. Their inflow totaled Rs 5271.28 crore in five trading sessions from 9 to 15 March 2012, as per provisional data from the stock exchanges.

The Reserve Bank of India (RBI) kept its policy rate viz. the repo rate steady at 8.50% after a mid-quarter policy review, saying that the risks to inflation have increased due to higher crude prices, the large fiscal deficit and a weakening local currency. RBI said recent growth-inflation dynamics prompted the central bank to indicate that no further tightening is required and that future actions will be towards lowering the rates. However, notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions, RBI said in its mid-quarter monetary policy review announced Thursday, 15 March 2012. RBI said there continues to be significant suppressed inflation in fuel, fertilizer and power as administered prices do not fully reflect the costs of production.

The Centre's fiscal conditions deteriorated during 2011-12 (April-January) with key deficit indicators already crossing the budget estimates for the full year. Apart from sluggishness in tax revenues, Government's non-plan expenditure, particularly subsidies, increased sharply. RBI said slippage in the fiscal deficit has been adding to inflationary pressures. Credible fiscal consolidation, therefore, will be an important factor in shaping the inflation outlook, RBI said.

On the liquidity front, RBI said that the liquidity situation is expected to ease further in the weeks ahead. The central bank said that while most indicators suggest that the economy is slowing down, the performance in Q4 of 2011-12 is expected to be better than that in Q3. The financing of the current account deficit (CAD) will continue to pose a challenge so long as the global situation remains uncertain, RBI said.

Meanwhile, the government said in Economic Survey 2011-12, presented by Finance Minister, Pranab Mukherjee in the Lok Sabha, on Thursday, 15 March 2012, that the economy is estimated to grow by 6.9% in 2011-12. The slowdown is mainly due to weakening industrial growth. The survey predicts 7.6% GDP growth in 2012-13 and 8.6% in 2013-14. These projections are based on assumptions regarding factors like normal monsoons, reasonably stable international prices, particularly oil prices, and global growth somewhere between where it now stands and 0.5% higher.

As fiscal consolidation gets back to track, savings and capital formation should begin to rise, it said. Moreover, with the easing of inflationary pressures in the months to come, there could be a reduction in policy rates by RBI, which should encourage investment activity and have a positive impact on growth, it said.

The survey said that the services sector continues to be a star performer as its share in GDP has climbed from 58% in 2010-11 to 59% in 2011-12, with a growth rate of 9.4%. The agriculture and allied sectors are estimated to achieve a growth rate of 2.5% in 2011-12 with foodgrain production likely to cross 250.42 million tonnes owing to increase in the production of rice in some states.

A slippage is likely in the revenue and fiscal deficit budgeted this year, notwithstanding the efforts to minimize it, the survey said. The Survey recommends that Government's primary concern now has to be to advance the economy's productivity and improve income distribution. The Survey also says that land acquisition issues are vital for India's manufacturing and industrial sector.

The government's fiscal deficit for FY 2011-12 is projected at 5.8% as per the median estimate of a poll of economists carried out by Capital Market. This is much higher than 4.6% fiscal deficit target set by the government in Union Budget 2011-12 announced in February 2011. The fiscal deficit for FY 2012-13 is projected at 5.2% as per the median estimate of a poll of economists carried out by Capital Market. As per the Medium Term Fiscal Policy Statement which was presented along with the Union Budget 2011-12, the government had planned to cut the fiscal deficit to 4.1% for 2012-13 and further down to 3.5% in 2013-14.

Finance Minister Pranab Mukherjee said on Tuesday the government plans to raise Rs 30000 crore by selling stakes in state-run firms in the fiscal year that begins on 1 April 2012. The government has also set a target of Rs 25000 crore from asset sales for the 2013/14 fiscal year, Mukherjee told lawmakers in a written reply. Mukherjee said the projections are based on the medium-term fiscal policy laid out last year.

The government is working with state governments for early implementation of a goods and services tax (GST), Finance Minister Pranab Mukherjee said on 22 February 2012.

Asian stocks were mixed on Friday. Key benchmark indices in Indonesia, China, Indonesia and Singapore rose by between 0.01% to 0.75%. Key benchmark indices in Hong Kong, Japan, South Korea and Taiwan fell by between 0.02% to 0.18%.

US stocks rose on Thursday, with the S&P 500 topping the 1400-mark for the first time since the financial crisis on a strong run of economic data. On Thursday, US Labor Department data showed new claims for unemployment benefits fell back to a four-year low last week, and producer prices, excluding food and energy, were contained. Manufacturing data in New York and the US mid-Atlantic region also improved, according to regional Federal Reserve surveys.