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India 2012 Budget Seeks To Limit Subsidy, Curb Deficit

India 2012 Budget Seeks To Limit Subsidy, Curb Deficit
3/16/2012 6:32 AM ET

India's government is set to miss the fiscal target in the current financial year ending 2012 as the economic recovery is being threatened by the Eurozone debt crisis and rising crude prices. The government also decided to limit subsidy and raise service tax to curb the fiscal deficit.

The budgetary document tabled by Finance Minister Pranab Mukherjee estimates a fiscal deficit of 5.9 percent of GDP for the financial year 2011-12 compared to the previous target of 4.6 percent. It is then expected to narrow to 5.1 percent of GDP in fiscal 2012-13.

As mentioned in the Economic Survey released yesterday, economic growth for the financial year 2012-13 is forecast to rise to 7.6 percent from an estimated 6.9 percent this fiscal year. Headline inflation is forecast to moderate further in the months ahead and remain stable thereafter.

Mukherjee forecasts a current account deficit of 3.6 percent of GDP in 2011-12 and expects it to fall in the coming financial year.

The government raised the defense budget to INR 1.94 trillion.

The central government debt is seen at 45.5 percent of GDP compared with the Thirteenth Finance Commission target of 50.5 percent.

He targets to keep subsidies at below 2 percent of GDP during fiscal year 2012-13 and plans to bring these down further to 1.75 percent of GDP over the next 3 years. Nonetheless, he emphasized the commitment of the government to provide for subsidies relating to the Food Security Act.

He plans to infuse INR158.9 billion into state banks in the fiscal 2012-13. The announcement triggered buying interest in shares of state-run banks.

At the same time, the government targets to raise INR 300 billion from disinvestment of its stake in state companies in the next fiscal. It estimates to receive around INR 140 billion in the current fiscal year from disinvestment, which is notably below the INR 400 billion target.

The minister raised income tax exemption for individuals to INR 200,000 from INR 180,000. He also raised income tax slabs. Meanwhile, there will be no change in corporate tax.

The government raised the service tax rate and the excise duty to 12 percent from 10 percent. The finance minister proposed to tax all services except the 17 items on the negative list.

In order to lower transaction costs in the capital markets, the government reduced the securities transaction tax on cash delivery transactions by 20 percent to 0.1 percent from 0.125 percent.

He proposed to allow qualified foreign investors in Indian corporate debt markets.

The minister proposed a new Rajiv Gandhi Equity Savings scheme to divert investment into capital market. According to the scheme, an investment of INR 50,000 directly in equities by individuals, whose annual income is below INR 1,000,000, will be eligible for income tax deduction.

Mukherjee expressed firm commitment to enact the Direct Taxes Code bill at the earliest. The proposals mark progress in the direction of movement towards DTC and GST. The GST will become operational in August 2012, he said.

The minister also proposed to lift the duty on large cars to 24 percent from 22 percent. He raised excise duty on 'demerit' goods such as certain cigarettes and tobacco. Further, he proposed to enhance cess on crude petroleum oil produced in India.

To address the financial concerns of the civil aviation sector, he proposed permission for External Commercial Borrowings for working capital requirement of the airline industry for one year with a maximum limit of $1 billion.

To track the menace of unaccounted money, he proposed to lay a white paper on black money in the current session of Parliament.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

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