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What Pharma Has In Store in Finance Minister’s Mind?

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As Finance Minister P Chidambaram gives the finishing touches to the Union Budget for 2013-14, the Indian industry is holding its breath anxious whether it will face any new taxes at a time when the economy instead needs a booster dose for growth, an ASSOCHAM quick poll indicated.

It would be unrealistic to expect a ”big bang” Budget from the FM as he does not have much an elbow room, given the precarious state of fiscal, not supported by growth, it said.

”Tax revenues are not likely to show big rise in the wake of modest economic expansion. The only option before the government is to cut expenditures to get back to the fiscal discipline over which there are no choices available,” said the poll report.

It said amidst debate on the so-called super-rich tax and inheritance tax, India Inc faced a lot more uncertainty about the Budget this year than in the last few years.

”It looked as if the idea of super- rich tax or inheritance tax could have been floated as a trial balloon in some quarters to gauge some reaction. However, it has ended up creating uncertainty and anxiety,” ASSOCHAM poll report said.

It is not as if those at the top end of earnings do not want to part with some resources for the national good, the trouble is that there are collateral issues like cost of compliance.

Besides, it should be carefully studied whether the new taxes are worth the administrative efforts in terms of its potential for revenue generation.

Instead, the pollsters suggested that a great push is required to move towards implementation of the Goods and Services Tax without further loss of time. Whatever differences are there with the state governments and opposition parties, must be resolved so that the economy gets a much more efficient tax administration and the consumer is left with more resources to spend.

At the pure expectation level, surprisingly ”there are not huge expectations unlike in the past when the scope for tinkering was possible.”

At some level, there is also this anxiety whether Chidambaram will be able to stand up to a huge political pressure from the Congress Party and other UPA allies to go in for big time social schemes in the run- up to the 2014 general elections.

It was in this context that the stock market reaction was taken yesterday. The recent stock market rally, as is well-analysed, did not come on the back of great economic fundamentals but thanks to greater liquidity coming from the global sources, mostly the US.

”It cannot go on forever and, therefore, we need to get our own house in order,” said president Rajkumar N Dhoot.

He said the trouble is that the entire economy is faced with a situation where the costs are rising in most of the areas where they are bound to face consumer resistance which will in turn lead to further slowing of the demand.

”That situation has to be avoided in any case,” Dhoot said. He also said that the government must cut wasteful expenditure and instead restore investor confidence by clearing some of the long-pending infrastructure projects so that the economy gets pump-primed again.

At the sectoral level, exports need the most urgent help since they are facing a peculiar situation. Ordinarily, currency depreciation should help exports. However, ”we are not able to reverse the export deceleration in spite of rupee depreciation,” the report noted.

Then, there are several other sectors which are under heavy debts and are over-leveraged. These include real estate, telecom and infrastructure. ”A few years ago, telecom was flouted as a success story. Today, it is in the middle of uncertainty. Power sector continues to be in bad shape and there are several companies in the infrastructure space which have bleeding balance-sheets,”

The big question is whether the Budget will be able to address their concerns and turn the tide, the respondents wondered.Finance minister Chidambaram presents his annual Budget on Thursday that is expected to see him opt for austerity over free-spending populism despite elections due early next year and a sharply slowing economy.

Finance minister Chidambaram, presenting the eighth Budget of his career, has pledged a “responsible” Budget and voiced eagerness to restore confidence in India’s public finances and economic management by tightening spending.

The Harvard-educated lawyer, who has a reputation as a committed pro-market reformer, will present “an austere Budget” in a bid to bring Asia’s third-largest economy back on track, said Nomura economist Sonal Varma.

“We expect the government to announce some populist schemes — but all within the limits of fiscal prudence,” Varma said, predicting lower spending growth and public asset sales.

The veteran minister in the Congress government has been attempting a course correction since being reappointed to the finance portfolio in mid-2012 when his leftist and widely criticized predecessor Pranab Mukherjee was elected president.

He has introduced a string of reforms — opening India to wider foreign investment and cutting deficit-ballooning spending and subsidies — to avert a damaging credit rating downgrade.

He is presenting his Budget amid a gloomy backdrop, with the economy projected to expand by 5% this fiscal year to March — marking a decade low — and far under the 7.6% growth projected in last year’s budget.

Figures for the October-December quarter are also set to be released on Thursday, providing a snapshot into the health of the once-booming economy which has been hit by a dramatic fall in investment and high interest rates.

An official forecast on the Budget’s eve was more upbeat for the 2013/14 fiscal year, saying growth would reach 6.1-6.7% next year.

“The economy is looking up,” concluded the report, while saying the government must keep up reforms to reignite investor confidence.

Investors have given a wide berth to India — deterred by corruption scandals, suffocating red tape, high inflation, sharply slowing growth and the deteriorating government finances.

“The slowdown is a wake-up call for increasing the pace of actions and reforms,” said finance ministry chief economic advisor Raghuram Rajan.

“These are difficult times but India has navigated such times before and with good policies it will come through stronger.”

Chidambaram has called the government’s fiscal deficit targets of 5.3% of gross domestic product for this year and 4.8% next year “red lines” that cannot be breached.

Cuts are expected to hit defence spending as well as the important rural development ministry, which has the second-largest budget after the military.

But economists say the real test will be in the run-up to national elections due in the first half of next year when politicians from the struggling ruling Congress party are likely to clamour for him to open the purse strings.

“Fiscal contraction in the run-up to an election is hardly a recipe for electoral success,” noted CLSA economist Rajeev Malik.

Chidambaram is likely to tap the public finances for one major populist measure — the government’s long-promised food security bill targeting the poor masses that Congress hopes will turn around its sagging electoral fortunes.

The bill says cheaper grain will be supplied to up to 75 per cent of the population in rural areas and up to 50 per cent of the population in urban areas.

The government will showcase the act as one of its “key achievements in a bid to woo the electorate ahead of the election”, said Nomura’s Varma.Budget 2013-14 is highly anticipated event. This is the last budget before the general elections next year. The second inning of the current government has been marred with continued global crisis, very high inflation and growth killing interest rates. Economic growth has come down to its decade low levels. Indian Rupee, as a result, has remained under tremendous pressure. Very high hot money inflow has increased the currency volatility and hence increased the threat to the economic stability. Current account deficit is at its record and is close to the levels seen during 1991 economic crisis that compelled India to change the course of its long term economic policies. In the world of economic crisis that have been triggered due to very high public and government debts, very high fiscal deficit of India is seen unsustainable. Under the circumstances, the budgetary projections for next year have become very crucial. Commodity market in specific is also expected to see some game changing events taking place in this budget, said Kotak Commodity Services.

Kotak’s pre budget expectations from Budget for following commodities:


The government hiked import duty on gold from 4% to 6% on January 21, 2013 Currently 36 Authorized Banks, Bullion traders and Nominated agencies can import bullion SEBI allows gold ETFs to invest in Gold Deposit schemes (GDS) of banks subject to certain conditions including that the total investment in GDS will not exceed 20% of total asset under management of such schemes Currently no tax on jewellery.

”We expect increase in import duty for gold by 1% to 7%. May cap imports or cut number of companies authorized to import gold. Introduction of additional gold deposit schemes with tax breaks. Could launch more financial instruments like Rajiv Gandhi Equity Scheme to curb gold imports. Re-introduce production tax on jewellery.”

Steel & Iron ore

Currently, import duty on iron ore is 2.5% while customs duty on non-alloy, flat-rolled steel is 7.5%. Export duty on iron ore lumps and fines is 30%. ”Remove import duty on iron ore or raise duty on some steel imports to support domestic steel industry. Reduce iron ore export duty on fines to 15%.”


Mills compelled to sell 10% of produce at discount to public distribution system at a discounted rate of Rs 19/kg against the market price of close to 31/kg. Excise Duty is 0.71 per kg. Release Mechanism decides periodically, how much sugar must be sold by which mill. Currently the government has switched to quarterly sales quota for each mill. ”Levy condition could go. Subsidy burden could increase up to Rs 30 billion. To offset above Excise Duty could be increased to 1.50 / kg. This quota could be removed all together or could be kept at a quarter. While industry had demanded 60% import duty on sugar imports, the government has made it amply clear that it is not going to do so. Complete decontrol of the sugar sector is only possible if the control on sugar cane is also removed. This includes minimum distance criterion between mills, the command area and pricing of sugarcane. No action is expected on this front.”

Edible Oil

There is 2.5% import tax on crude edible oils and a 7.5 % on refined varieties. ”Expect further increase in import tax for vegetable oil from Malaysia and Indonesia. Export tax could be introduced in value added oil meal products. Extend tax breaks for new oil refineries and projects. Allocation of incentives for developing better, high-yielding oilseed varieties.”

Commodity Infrastructure

Indian Railway Budget has introduced dynamic fuel adjustment on freight rates from April 1, which will link tariffs with movement of fuel prices. 2012 Budget announced a Rs. 50 billion allocation exclusively for creation of warehousing facilities using RIDF funds. Adhaar based cash transfers have started in few districts. ”This could result in less than 5% increase in rates. Tax incentives to enable capacity creation in warehousing. Agri-industry status for warehousing industry. VAT, service tax incentives Revival of 1.5% interest subvention scheme via NABARD. Hike in capital subsidy. This could be extended to more regions.”


Currently import duty on imported yarn floats between 5 to 16.9%. ”Expect reduction of mandatory excise duties as well as customs duties on man-made fibers and filaments.”


Government estimate of the fertilizer subsidy at Rs 609.7 billion for the current fiscal year, but it is likely to be much higher than the target. ”Cut fertilizer subsidy by at least 15% for the fiscal year 2013/14.”

Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.
Painting a not-so-rosy picture of the economy, the pre-Budget Economic Survey today spoke of the “danger” of missing fiscal targets in the current year which may clock only 5 per cent growth against the projected 7.6 per cent and made a case for widening of tax base and cutting of subsidies.

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Against the backdrop of speculation over proposals for taxing super-rich and on inheritance, the Survey cautioned against raising taxes.

Outlook for 2013-14

The Survey, tabled by Finance Minister P. Chidambaram in Parliament, projected an optimistic growth rate of 6.1-6.7 per cent for 2013-14 claiming that the downturn is more or less over and the economy is looking up.

The economic growth rate in the current financial year is expected to slip to decade’s low of 5 per cent from 6.2 per cent in 2011-12 and 9.3 per cent a year before that.

The Survey last year had projected the growth rate for 2012-13 at 7.6 per cent.

“These are difficult times but India has navigated such times before and with good policies it will come through stronger,” Chief Economic Advisor Raghuram G. Rajan, the lead author of the Survey, told the media later.

To meet the challenges of the economy, he prescribed shifting national spending from consumption to investment, removing the bottlenecks to investment, growth and job creation, besides making efforts to reduce cost of funds.

On the issue of rising subsidy bill, the Survey said, “the danger that fiscal targets would be breached substantially become very real in the current year“.

Fiscal deficit

The Government had pegged the fiscal deficit, an indicator of public finances, at 5.1 per cent for the Gross Domestic Product (GDP) for 2012-13. Chidambaram later revised it to 5.3 per cent in view of rising expenditure and subdued revenue collection.

The Minister had proposed to bring it down to 4.8 per cent for 2013-14. Some announcements in this regard could be made in the Budget to be unveiled in Lok Sabha tomorrow.

While cautioning against raising tax rates, Survey said that in order to augment revenue the government should make efforts to widening tax base and cutting subsidies, particularly on petroleum products, to reduce expenditure.


“It is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly—higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion,” it said.

The remarks assume significance in view of the suggestions from certain quarters including Prime Minister’s Economic Advisory Council (PMEAC) to impose higher taxes on super rich.

Expenses on subsidies

According to the Survey, “controlling the expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG need to be raised in line with their prices prevailing in the international market.”

Referring to the price situation, the Survey said that elevated food inflation would continue to remain an area of concern with inflation rate gradually inching towards double digit in December 2012.

The headline inflation, it said, is expected to decline to 6.2 to 6.6 per cent by next month.

Other concerns

The other concerns highlighted by the Survey include widening Current Account Deficit (CAD) mainly on account of high gold imports, absence of clear signs of revival of economic activities and lack of assured supply of raw material to projects especially in the power sector.

It, however, expressed the hope that measures announced by the Government in the recent months would help in restoring the fiscal health of the government and check widening CAD.

The government has recently partially deregulated diesel prices, allowed FDI in multi-brand retail and liberalised foreign investment norms for various sectors.

“With the global economy also likely to recover somewhat in 2013, these measures should help in improving the Indian economy’s outlook for 2013-14”, the Survey said.


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