Extraordinary times, ordinary measures

It was Colin Firth who walked away with the best actor’s trophy at the Oscars this year and not James Franco.

Big deal, I assured myself. For millions of Franco’s fans, me included, his extraordinary performance in 127 Hours, arguably one of the best Hollywood movies in recent times, brilliantly put across the message that there is no force on earth greater than the will to live; and to live, very often, we need to take a giant leap of faith, even at the cost of chopping off one’s own arm, as Franco did.

Well, the budget proposals certainly showcased finance minister Pranab Mukherjee’s will to have the UPA live and survive through the remaining three years of its tenure, not surprising given the impending state elections in West Bengal, Assam, Uttar Pradesh and Kerala. But alas!! The budget was neither a leap of faith nor a vision statement of sorts. Give a little, take a little and keep a little up your sleeve seems to have been the FM’s policy intent.

Let me start with the tax proposals. With direct tax collections all set to exceed the budgeted target of Rs7.45 lakh crore for the current fiscal, surely there was room for bringing down the effective corporate tax rate (including education cess) from 33.23% to 30.9% for financial year 2012 rather than just marginally reducing it to 32.45%.

This could have been done by
either reducing the corporate tax rate from 30% to 25% or doing away with the surcharge altogether, instead of merely tweaking it down to 5%.

Again, as a rule of thumb, the minimum alternate tax (MAT) rate should ideally be capped at one third of the corporate tax rate but by increasing the MAT rate to 18.5% from 18%, the MAT rate now effectively stands at almost two thirds of the corporate tax rate.

Again, for all those who seem to have missed the fine print, please remember that what might take away the “zing and the zest” from certain infrastructure projects is again the fact that a very high MAT adversely affects the profitability of PPP (public private partnership projects) as these are mostly implemented through special purpose vehicles relying on MAT.

Of course, the fact that 48.5% of the plan spending has been allocated to infrastructure deserves a thumbs up. The proposal to attract foreign funds through special vehicles inform of notified infra debt funds that will enjoy host of tax exemptions, is something which will need more homework and groundwork from the government though it’s a step well taken. The MAT credit period should have been raised from 10 years to 15 years in line with the pending Direct Taxes Code (DTC) norms.

Had the FM been a tad more imaginative, he could have explored the re-introduction of inheritance tax, death duty and a marginal long term capital gains tax while reducing the short term capital gains tax from 15% to 10%.

The single-biggest positive amidst all the brouhaha, for foreigners, is not the enhancement of of investment limit in corporate bonds from $5 billion to $25 billion but, more importantly, the fact that dividend income from overseas investments will now be taxed @15% and not at the prevailing 33.22%.

I can’t help thinking that on many fronts the FM did a hasty job, falling short of what could have been pathbreaking stuff.

For instance, from a capital market’s perspective, a long-cherished hope of seeing the dividend distribution tax at 10% rather than 15%, remained just that — a hope.

Also, it would have helped had the securities transaction tax (STT) been abolished on at least one leg (either buy or sell) of derivatives transactions. While it is nice to have foreign participation in the Indian mutual fund industry, I wonder what stopped the FM from undertaking a basic measure like removing the dual levy of STT on Indian mutual funds, paid once when a person buys the units and then again when the fund invests in shares!

 

Speaking of goods and services tax (GST), the FM did the right thing by not raising the excise and service tax rates as these are already aligned with the proposed GST rates. Half-baked attempts to bring cement under the aegis of an ad-valorem tax, albeit in a limited sense, at least reflects the government’s seriousness about implementing GST by June 2012, though I believe even June is an ambitious target. For GST to be implemented, the Centre should have sweeping powers to tax goods right up to the retail stage and for the states to tax services, as is globally prevalent.

What this means is the UPA will have to find a political consensus with the BJP-led opposition so that GST is more than just a paper tiger! In a country targeting a 9% GDP growth rate next year and the ambitious target of raising the share of manufacturing from 16% to 25% of GDP over the next ten years, amid the backdrop of twin deficits, a measly tax to GDP ratio of 11%, scam-ridden coalition partners, a virulent opposition and a ‘lameduck’ Prime Minister, the one area where perhaps the FM showed some bravado was, bringing services like hotels, hospitals and air-travel under the service tax net.

There was also a feeble attempt at pruning the Central Excise exemption list from 370 to 240. However, as a step towards GST, the exemption list should have been drastically reduced to just 99 items. Also, the threshold limit for excise should have been reduced from 1.5 crore to `10 lakh, thereby widening the excise tax net.

Last but not the least, this budget failed to deliver on agricultural reforms. True, the target for bank credit to agriculture has been raised from Rs375,000 crores in the current fiscal to Rs475,000 crores in the next, as also the continuance of interest subvention and crop loan schemes, setting up of mega food parks, investments in supply chains and cold storage facilities, infusion of Rs3000 crores to Nabard and recapitalisation of regional rural banks, et al. But the basic problem remains.

The average Indian farmer is left with precious little and the intermediaries make hay, given the plethora of price points that exist — minimum support prices, procurement prices, PDS prices and, of course, eventually the market prices. This problem of multiple pricing should have been addressed as also some basic measures like extending the nutrient-based subsidy regime to urea as well.

The Jasmine Revolution which has spilled over from Egypt to Libya, threatening to sweep the likes of Algeria, Yemen, Bahrain, Saudi Arabia and closer home has found echoes in North Korea and China, which has incidentally banned the word Jasmine from being Googled, is not about oil or anti-incumbency or even one party rule. It is about food security.

Most of Middle East and large parts of Africa have seen food prices up more than 20% over the last year, what with droughts in Russia and China and floods in America and Brazil. Finally the food riots led to riots on the streets and oil came to boil, threatening to cross $120 a barrel in the immediate term.

The budget has to my mind been a non event. How the Indian markets behave in the near term will have less to do with valuations and earnings. It will have to do with how quickly the G-20 nations come together and prevent geo-political tensions from becoming a food crisis led tsunami, which could be worse than the financial tsunami we witnessed, post the Lehman collapse in 2008.

On the flip side, for the first time since 2004, General Motors posted a $4.7 billion profit last year, indicating a sustainable global recovery led by the US may well be underway.

Let me end by saying this: we all have our heroes. Steve Jobs, the man who gave us the I-pod, the iPhone and the iPad is a hero to many. However, my hero is Tim Cook, the unsung hero and No 2 man at Apple Inc, a man who left a cushy job in 1998 at the then mighty Compaq to join an almost bankrupt Apple, then 13 years later, Cook is being touted as a visionary in hindsight by the very peers who mocked at him 13 years back for what seemed a fatal decision then.

As I said at the start, it’s all about taking that ‘leap of faith’. I sincerely hope, three years from now once the country goes into the next general elections, Pranab Mukherjee is remembered by posterity for all the right reasons.

He did not announce a spectacular budget but if he executes even a part of what has been enlisted on the banking reforms, insurance reforms and pension reforms bills in this budget, it would mark the beginning of an even stronger beginning from hereon. Till then, ahem…