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Financial year 2011-12 was proved to be ordeal for the Indian economy on several fronts. A series of global shocks coupled with internal problems such as high food and fuel inflation and a political deadlock put tremendous pressure on the domestic economy. These factors not only slowed down economic growth, but also led the government into a fiscal mess. With this in mind, we hoped that the Government would wake up from it deep slumber and initiate some tough reforms in budget to curb the aggravating fiscal crisis. But the budget presented by a coalition Government is more political than economic. Set against a weak political backdrop, the FY12-13 budget posted no major surprises. While this was always going to be a difficult budget, given fiscal and political constraints, the Finance Minister chose to play safe keeping in sight 2014 general election after facing rejection in recent assembly elections.

Review of Union Budget 2012-13

In this issue Review of Union Budget P.1-P.2

2012-13

Know Your Budget P.3

Key Global Indicators P.4

Market Round Up Mar 2012 P.4

Financial Jargons P.4

I S S U E

M A R C H 2 0 1 2

03

This year budget was the penultimate budget for the UPA and next year's budget would just precede general elections and would thus need to be a populist one for political reasons. So, this was the time to take some firm steps, but the FM played it safe, keeping away from any radical reforms that could take the economy in a new direction. In other words, the game of politics won over economics and reason. At one point during the budget speech, FM Pranab Mukherjee borrowed a Shakespearean line before presenting some of his proposals: "I must be cruel to be kind." But the budget he presented was just too meek to wheedle any kind of change. The budget is insipid with no concrete steps towards economic reforms, which is the need of the hour. We will see how the Indian Govt. has forayed on various fronts in this budget. Fiscal Deficit The Indian Govt. failed terribly on the fiscal deficit front for the FY 2011-12. Against a projected deficit of 4.6% of GDP, the year ended at about 5.9%. The deficit target for the next fiscal has been pegged at 5.1%. After the budget, there’s been a lot of discussion about the fiscal deficit and whether the figure of 5.1 per cent projected by the FM is achievable or credible or whatever. Subsidy What was even worse was the fact that the budget showed no inclination towards bringing down expenditure in the form of subsidies. They have been surviving by doling out subsidies to the vote banks to remain in power, but the snow ball effect of this policy has been and would be dangerous in years to come. Rising prices of petroleum products was the biggest culprit for the massive jump in subsidy. In the last year's Budget, the government had assumed an average crude price of USD 90 per barrel, whereas in actuality, the price averaged much higher at around USD 115.

The recent Budget seems to be assuming a price of USD 100, whereas crude prices are already hovering around USD 125 per barrel. With tensions escalating in the Middle East, it is highly unlikely that crude prices would match with government's assumptions. And that's not all. The Food Security Act will also lead to a high subsidy burden. Anyone who knows simple arithmetic would point out that the subsidy target is highly ambitious. The FM promised to cap subsidy payments under 2% of GDP, further promising to bring them down to 1.7% over 3 years. He did not say how. The only, feeble, attempt in this direction is the hike in excise duty on large cars. The simplest, and most obvious, way to reduce petroleum usage and subsidy would be (a) to hike diesel prices and (b) mandate fuel efficiency norms. Capital Market The Budget certainly lacked any big bang wealth creating opportunity as far as the stock markets are concerned. But FM did try to do his bit to enhance the depth of the market and pump in more liquidity into the same. He said, “To encourage �ow of savings in financial instruments and improve the depth of domestic capital market, it is proposed to introduce a new scheme called Rajiv Gandhi Equity Savings Scheme. The scheme would allow for income tax deduction of 50 per cent to new retail investors, who invest up to 50,000 directly in equities and whose annual income is below Rs. 10 lakh. The scheme will have a lock-in period of 3 years.” Why has the FM suddenly tried to bring small investors back into the market? The overwhelming emphasis on the equity markets is a policy volte face, most likely a result of no organized thinking but a knee jerk reaction to the declining interest of savers in the equity markets. After years of thoughtless policies, cumbersome regulations, poor grievance redressal and no course correction, India's investor population has declined from 20 Mn

in the 1990s to just over 8 million by 2009 (as per the D Swarup Committee report). Suddenly, the drought of new issues and the government's failure to disinvest easily has woken up policy makers to the sad state of equity markets. The tax incentive for equity investment is another thoughtless policy in the series. We already have 100% exemption on long-term capital gains from equity investment (over one year) for years now then what is the point of having a three-year lock-in period. Merely locking in investors with the scheme, for Rs 50,000 tax benefit, is convoluted and has no logic. The government seems to have missed the point. There are other minor measures, like the Securities Transaction Tax (STT) being reduced by 20%, from 0.125% to 0.1%, in order to reduce transaction costs in the capital markets for delivery-based trades. Additionally, the FM has modified IPO guidelines to broaden investor reach. To achieve this, it has been mandated for companies to issue IPOs of Rs. 10 crore and above in electronic form through nationwide broker network of stock exchanges. The FM has also proposed the establishment of a central Know Your Customer (KYC) depository in FY 2012-13 to avoid multiplicity of registration and data upkeep. FDI in multi-brand retail upto 51% and aviation upto 49% has remained under active consideration of Government. Tax Reforms The implementation of key measures such as the Direct Tax Code (DTC) has been left to a later stage. Unfortunately, the FM didn’t actually give a timeframe for its

implementation, even though he has brought the tax rates and slabs to the level recommended by the DTC. The introduction of GST (Goods and Services Tax) was also postponed. This, too, will depend on agreement with different State Govts. Also, there were no concrete steps to expand the direct tax net. Even the disinvestment target of Rs. 300 billion was quite disappointing. How the government will achieve this remains obscure. But unfortunately, the proceeds from divestments still remain critical for capital expenditures. Direct Tax In a mix of sops and imposts, the General Budget proposed a marginal raise in income tax exemption limit of Rs. 20,000, now keeping income upto Rs. 2 lakh non-taxable. The tax amendment proposals made by the FM on the Direct Tax side have been on expected lines – fairly predictable! To garner the 'aam admi' sympathy – the individual tax slabs have been marginally reduced whereas no major relief has been provided either to individual or corporate sector. No major policy or proposal to spur or rejuvenate capital investment in India was heard. Even the segregation in tax slabs of Male/Female has been done away with. TDS on the sale of property would create more inconvenience to prospective property buyers. This new rule, which will be applicable from 1 October 2012, requires an individual to pay service tax before the property is registered. Indirect Tax The final rollback of stimulus doled out to the economy in 2008-09 was announced in the Union Budget 2012. The FM has stated that excise duty would be increased from 10% to

12%. This increase in excise duty would just lead to higher costs and further burden onto customers. But the buck does not end here. Citing heavy gold imports as a major reason for the high current account deficit, the FM decided to double the import duty on gold from 2% to 4%. Increase in levy is likely to discourage imports and impact the jewellery demand in domestic markets. It may be noted that recently government had changed the duty structure on gold imports which was linked to the value though. Considering that India is the biggest importer of gold this would significantly impact the demand and may also give rise to illegal trafficking. Gold jewellery, cars, diamonds, pan masala, cigarettes, cement, air travel, phone bills, refrigerators, air conditioners, courier services set to become costlier while LED-LCD TVs, mobiles, solar lamps, natural gas, LNG, tyres, cycle, salt, match box and cinema tickets are going to cost less from April 2012. Small Savers The government has planned to increase the interest rates on these instruments like National Savings Certificate, Post Office Deposits as well as Public Provident Funds (PPF) by 20 to 50 basis points (0.2%–0.5%). Thus, the total return on the instruments, interest rate plus tax savings, will be higher than that on fixed deposits. By this move Govt. is expected to increase investor interest towards these small savings scheme. The move to exempt savings bank interest of up to Rs. 10,000 from income tax is also important

Last year, the government had exempted those who had no income except a salary of up to Rs. 5 lakh from filing tax returns. Unfortunately, few people were able to use it since everyone has at least some interest income from a savings bank account. The new measure will fix this. Proposal to allow deduction of upto Rs. 5,000 for preventive health check up has also been provided. Measures Out-of-the-Way The Government is also relying on higher tax revenues from the growing services sector, and has expanded the base of people from which service tax is to be collected. India boasted of two success stories; IT and telecom. The telecom story has been badly dented, seriously so, by the 2G scam. The Government is asking the Supreme Court if it can retrospectively hike charges from spectrum sale! Whether dual licensing for both GSM and CDMA should be cancelled! And whether recently allocated 3G spectrum should revert to the Government! All these propositions are ridiculous, only sought with a view to raise revenue, never mind the impact on the industry. Govt. shielded away from announcing any strong reforms after its poor show in the state elections and its inability to carry its allies on board. The FM did mention all the pending bills and reforms needed without any promise on implementation. Politically sensitive reforms like fuel price deregulation were not mentioned.

Know Your Budget The Union Budget of India, referred to as the annual Financial Statement in Article 112 of the Indian Constitution, is the annual budget of the Republic of India, presented each year on the last working day of February by the Finance Minister in Parliament. The budget has to be passed by the House before it can come into effect on April 1, the start of India's financial year. Budget is the most important information document of the government. One part of the government's budget is similar to company's annual report. This part presents the overall picture of the financial performance of the government. The second part of the budget presents government's financial plans for the period upto its next budget. So, every citizen of a nation from the common man to the politician is eager to know about the budget as they would like to get an idea of the: � financial performance of the

government over the past one year.

� to know about the financial programmes & policies of the government for the next one year.

� to know how their standard of living will be affected by the financial policies of the government in the next one year.

Budget (from French word bougette for leather bag or purse) is an estimation of the revenue and expenses over a specified future period of time. It is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. It can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A surplus budget means profits are anticipated, while a balanced budget means that revenues are

expected equal to expenses. A deficit budget means expenses will exceed revenues. In summary, the purpose of budgeting is to: � provide a forecast of revenues

and expenditures, that is, construct a model of how our business might perform financially if certain strategies, events and plans are carried out.

� enable the actual financial operation of the business to be measured against the forecast.

Public debt (also National Debt) is the money borrowed by a nation's Government to meet the fiscal deficit. Every year, the Government puts out a plan for its income and expenditure for the coming year. This is, of course, the annual Union Budget. A budget is said to have a fiscal deficit when the Government's expenditure exceeds its income. When this happens, the Government needs additional funds. To arrange these funds the Government can borrow either from the citizens themselves or from other countries or organizations like the World Bank or the IMF. In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks). Revenue deficit is an economic phenomenon, where the net amount received (revenues less expenditures) falls short of the projected net amount to be received. This occurs when the actual amount of revenue received and/or the actual amount of expenditures do not correspond with predicted revenue and expenditure figures. A large fiscal deficit significantly increases the chances of inflation in the economy which is an invisible tax on every citizen. In extreme conditions, inflation can give way to hyperinflation that can completely destroy a country. In milder forms, high inflation and a large fiscal deficit lead to a weaker national currency (imports become expensive) and reduce the creditworthiness of the country. As citizens, therefore, we must not only pay attention to the fiscal deficit, we must also try and understand the different areas of Government spending. Is the Government borrowing money to spend on programmes that lead to increased economic productivity or is it spending on unproductive programmes.

Revenue Receipt is the part of the revenue budget that contains statements of receipts by way of taxes etc. Revenue receipts do not create any liability for the Govt. and further classified as tax and non-tax revenues. Non-Tax revenue comes from the non-tax sources such as fees, fines & penalties, profit from PSU companies etc. Tax revenues are collected in form of direct taxes such as income tax, property tax, corporate tax etc. & indirect taxes are sales tax, services tax, custom duties etc. Revenue Expenditure is incurred for the day to day routine running of the government and includes development & non-development expenditure of the government. Capital Receipt is the part of the capital budget that creates liabilities for government. It includes loans taken by sale of bonds & securities, receipts from small saving schemes, borrowings, aids received by government etc. Capital Expenditure is the expenditure incurred for creating asset with a long life and includes expenditure on lands, machines, irrigation projects, oil exploration, mines, road infrastructure etc. Mentioned are the few intriguing key terms that are always heard by common man in parlance of nation’s budget;

Budget Deficit is a financial situation that occurs when an entity has more money going out than coming in. When the expenditure becomes more than revenues, then the budgetary exercise is considered a failure as there is shortage of funds. Such a situation is said to be a 'Budget Deficit'. In other words excess of spending over income either for a government, corporation or individual, over a particular period of time. Government budget deficits can be cured by cutting spending, raising taxes or a combination of the two. Deficits must be financed by borrow-

ing money. Interest must

paid on borrowed funds, which worsens the deficit. Fiscal deficit is an

economic phenomenon, where the Government's total expenditure surpasses the revenue generated. It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources. Deficit differs from debt, which is an accumulation of yearly deficits. In other words Fiscal Deficit is: a) the difference between total

expenditure and total revenue receipts and capital receipts but excluding borrowings and other liabilities, or

b) it is the Sum of Budget deficit plus Borrowings and other Liabilities.

Budget deficit is the difference between total receipts and total expenditure. If borrowings and other liabilities are added to budget deficit, we get Fiscal deficits. Since budget does not show the true pictures of government liabilities and hence a true picture of the financial health of the economy, the practice of showing budget deficit is not in use. Budgets now show fiscal deficits to show the overall shortfalls in the public revenues.

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Market Round Up Mar 2012 Equity Market Round-up For the month of March 2012, Indian stock markets remained very volatile given the happening events ranging from election results for 5 State Assemblies to Union Budget with global events in place. Nifty ended the month on 5295.55 in red zone registering the month on month thrashing of -1.66%. Nifty touched the intra-day high of 5499.40 on March 14th anticipating budgetary reforms; but stumbled upon following meek budget measures and settlement pressure by recording intra-day low of 5135.95 on March 29th. In coming days, RBI’s stance on rate cuts and policies will pave the way for Nifty further direction. Rising crude oil prices will be once again the deciding factor for global as well as Indian markets. In the month of March, FIIs made investment of 8381.10 crores in the Indian equity market but sold worth Rs. 6588.60 crores debt instruments thus making net investment of 1792.50 crores. Forex Market Round-up In forex news this month, INR lost its ground after experiencing some good times since last 4 months because of the pressure of rising crude oil prices. With financial year-end approaching, demand for dollars increased from the corporates. Rising oil prices continued to put pressure on the rupee as oil companies increased their purchase of dollars. As per USDINR April futures contract settlement prices INR depreciated -2.97% against USD month on month and closed on 51.2225 on March 30th. Rising crude oil prices widen the current account deficit for Indian Government and this in turn put pressure on Indian Rupee. Lacking any reformative step in Union Budget last month, traders are now counting on RBI to intervene in the forex market to support Rupee in case of any sharp fall. Bullion Market Round-up Precious metals have been under immense pressure during this month, with extreme volatility witnessed across the global futures markets. Upside in gold prices for the near term is restricted due to a stronger US dollar. Resurgence in US dollar has been aided by persistent flow of positive macroeconomic numbers on US front, with the labour markets observing steady decline in the unemployment rate. Of late, greenback has witnessed immense strength, garnering support from the persistent rising crude oil prices. In Indian markets, later half of the month saw no significant trading as the bullion traders and their associations boycott the Indian Govt. decision to double the custom duty on import of all type of gold.

InteliGen Issue 03 Mar 2012

Financial Jargons Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account. This means that changes in the patterns of trade are key drivers in the current accounts of most of the world's economies. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. Positive net sales to abroad generally contribute to a current account surplus; whereas negative net sales to abroad generally contribute to a current account deficit. Monetised Deficit is the help extended to the Central government's borrowing programme by the Reserve Bank of India. It is the part of fiscal deficit that is financed by the RBI. In other words, the increase in net RBI credit to the Government is called Monetized deficit. It is amount by which fiscal deficit is going to be financed by printing of currency. Inflation rate is the measure of the rate of change of price and not the absolute change in price. Which means till inflation rate comes down to zero prices will continue to rise. It is inflation rate goes negative will prices fall. The comment about inflation rate going down only implies that the prices of food will not increase as fast as it was in the last few months, which does not imply that the prices are not increasing. A progressive increase in prices of goods and services leads to rising inflation. It is the percentage rate of change in the price level. In inflation, everything tends to appear more valuable except money.

Key Global Indicators Construction PMI (GBP): is a leading indicator of economic health and measures the level of a diffusion index based on survey of 170 purchasing managers in the construction industry. It is released monthly, on the second business day after the month ends and if Actual > Forecast = Good for Currency. Index above 50.0 indicates expansion and below indicates contraction. As per the release on March 2, 2012, the actual data is 54.3 against 51.3 forecasted. Next release is due on April 3, 2012. Building permits (USD): is an annualized number of new residential building permits issued during the previous month and also known as ‘Residential Building Permits ’. It’s an excellent gauge of future construction activity because obtaining a permit is among the first steps in constructing a new building. While this is released monthly, about 17 days after the month ends; it’s rep orted in an annualized format (monthly figure x 12) and if Actual > Forecast = Good for Currency. As per the latest release on March 20, 2012, the actual data is 0.72M against 0.69 M forecasted. Next release is due on April 17, 2012. KOF Economic Barometer (Swiss Franc): Also called ‘KOF Leadi ng Indicators’ and derived by way of combined reading of 12 economic indicators related to banking confidence, production, new orders, consumer confidence and housing. This index is designed to predict the direction of the economy over the following 6 months. The impact tends to be significant but varies from month to month. It is released monthly, around the end of the current month and if Actual > Forecast = Good for Currency. As per the latest release on March 30, 2012, the actual data is at 0.08 against 0.06 forecasted. Next release is due on April 27, 2012.