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Budget 2012 promises failed to impress, with most reforms doing little to cheer sentiments

Every budget is like a New Year resolution. Both remind you of self-discipline and, if not executed as planned, it is sheer waste of time. In case of budget, it is an additional waste of hard earned taxpayers’ money as well.

Budget 2012, presented by Pranab Mukherjee, offered enough on platter for corporate India, with emphasis on reforms and plans to promote the big engine sectors long stuck due to policy paralysis. However, a quick perusal through the measures almost a year after they were announced has exposed that the government only managed to succeed partially in achieving what it set out for.

Some of the reformist measures announced for India Inc with an eye on growth included doubling the infrastructure debt fund to Rs 60,000 crore, removal of customs duty on coal import for thermal power companies to tide the high import price of coal, reduction of the withholding tax to 5 per cent from 20 per cent for the infrastructure companies. Proposal to remove subsidy on diesel to reduce fuel subsidy burden and foreign direct investment (FDI) in multibrand retail; and passage of insurance, pension funds and companies bills.

A year later, imported coal continues to be a problem for plants fed on them, and not many companies, barring the big groups with higher export income, could use the ECB route to refinance their rupee debt. Also, there is nothing much to show in the manufacturing and capital goods sector, barring the levy of customs duty on imported thermal power equipment. The other sister organisations in renewable sector continue to suffer due to cheap imports.

R Shankar Raman, CFO of L&T, told Financial Chronicle that the budget did make some attempts to attend the fuel supply issues and ease the capital flows during the later part of the year. However, “We did not really make any great progress. Land acquisition bill needs to become an act, besides the banks continue to have the burden of the non-performing infrastructure assets on their books. Also, the revenue generation potential dropped last year. It was an extremely bad year with even the GDP growth dropping to 5.5 per cent from the expect 7.6 per cent level estimated. Besides, government continues to borrow and fiscal deficit is very high.”

“The urgency was required on clearing the policy logjam much earlier than what happened. May be the momemtum created in the later part of the year can help tide the situation in the coming 12 months,” Raman added.

Anil Sardana, MD of Tata Power, said for the economy to grow at 7-8 per cent, it is pertinent that power sector is allowed to grow at around 12 per cent every year. “To achieve that, policies pertaining to imported fuel based mega projects need to be suitably modified given the unprecedented rise in imported coal prices and the shortage of domestic coal,” said Sardana.

Besides, given the long gestation period and life cycle of around 25 years of the power projects, they require long tenure debts, most often on non-recourse project finance basis. “Hence, it is pertinent that we not only continue, but also increase the existing provision of giving tax holiday of 10 years to at least 15 years under section 80IA, so as to augment large capacity additions. Exempting power projects from the levy of service tax would definitely reduce the project cost and be a step towards affordable power for all,” added Sardana.

A senior Adani Group official told Financial Chronicle, without wanting to be named, there has not been any measurable impact of the last years’ budget, especially in the power and the infrastructure sectors, with major projects still in limbo for want of funds, issues of land acquisition and environmental clearances. “This year, the budget is going to be populist in nature with 2014 elections in mind,” he said.

Sectors like auto and real estate too have had a fair share of disappointment from budget 2012.

P Balendran, vice-president, General Motors India, told FC that higher taxes on all vehicles severely impacted the automobile industry during the year. The sale of all categories of vehicles got impacted. Against expectations of some tax reprieve for all categories of vehicles, the restrictive policies adopted by the government combined with the economic slowdown forced the passenger car industry to stare at negative growth for the first time in a decade. “Entry-level small cars have been hit the hardest with consumers postponing and even cancelling purchase decisions,” Balendran said.

He added that the domestic auto industry expected Budget 2013 to have clarity on fuel pricing, which will help OEMs to plan future investments in diesel technology. Moreover, import duties levied on CBUs (completely built units) for cars should be retained at the same level to encourage local manufacturing by local players.

Sandeep Singh, GM’s deputy managing director and chief operating officer, marketing and commercial, said the increase in import and excise duty was a real dampener. It created an additional burden on the auto industry, which finally affected consumers and slowed down the sales. Manufacturers were forced to pass on the hike in taxes to customers.

He added the coming budget should promote infrastructure development through clear policy statements, backed with incentives for speedy implementation. Besides, interest rates should be lowered further to get a faster positive impact and further boost consumer sentiments. “Excise duty too should be reduced, especially on MUVs. The current level of 27 per cent is way too high,” he said.

Even the real estate sector, that has been contributing almost 11 per cent to the GDP, suffered last year due to higher costs, slow pace of growth, declining sales, difficulty in raising funds and stalled project approvals. This happened despite the government’s approval to secure external commercial borrowings in the last budget.

Arvind Pradhan, director general of Indian Merchants Chamber, said companies in the real estate sector were still facing difficulties in raising money from domestic financial institutions; the relaxation of ECB norms would facilitate business growth in the sector only in the long run. “It is mainly the bigger players who have benefited the most from allowing ECBs. However, even smaller players are gradually getting on the bandwagon,” said Pradhan.

Khushru Jijina, managing director, Indiareit Fund Advisors says any budgetary measure should also be mirrored by RBI in terms of easing repo rates and relaxing other policy instruments such as CRR and SLR to improve liquidity.

Hemant Kanoria, chairman and MD of Srei Infrastructure Finance said the sentiment was gradually changing with few reform measures being taken by the finance minister ever since he took the reins. “We are expecting a reform-oriented budget and I am sure that it would provide a fillip to infrastructure creation and set the stage for India to return to the high growth trajectory in the near future.”

(With inputs from G Balachandar in Chennai)


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