India’s newly re-elected government may have disappointed investors by presenting a deficit-laden budget sans many pro-market initiatives but it did reciprocate to its voters by committing lavishly on infrastructure and rural empowerment. Respecting the electoral mandate, the Congress Party has delivered a budget with intense economic populism.

Highlights

Presenting the maiden Budget of the new government, Finance Minister Mr. Pranab Mukherjee said the mandate has been for equitable growth and the government would try to ‘promote growth’. Mukherjee said India’s fiscal deficit is expected to widen to a 16-year high of 6.8 percent of gross domestic product from a revised 6 percent.

For rural development projects, Mukherjee announced a 144 percent jump in the allocation for the flagship job guarantee scheme, NREGA, and 45 percent hike for the Bharat Nirman programme to improve infrastructure in villages. To increase productivity of assets and resources under NREGA, convergence with other schemes relating to agriculture, forests, water resources, land resources, rural roads will be initiated in 115 pilot districts.

Mukherjee aims to collect 11.2 billion rupees (US$232 million) from asset sales by selling stakes in RITES Ltd. and other state-run companies. The government aims to reduce the budget deficit to 5.5 percent of GDP next year. A goods and services tax will be in place from 1 April 2010, which will subsume all indirect taxes and will levy only value-added production so that manufacturers do not have to pay taxes twice.

The infrastructure agenda speaks of government’s direct spending on roads and railways. Take-out finance and refinancing by IIFCL will be the highlight to ensure enough credit for infrastructure projects. Public-private partnership will go on.

Corporates

Despite the need to finance a bulging fiscal deficit, the Finance Minister did not slap any additional taxation on the corporate sector but confined his reform to just raising the Minimum Alternate Tax (MAT). Stocks crashed soon after the budget and corporate associations did not hide their unhappiness is a different matter.

The Finance Minister extended for one more year (until 2010-11) the deduction from taxable income of the export profits of the Software Technology Parks of India (STPI) units, and units in the Special Economic Zones (SEZs), the Export Processing Zones (EPZs) and the Free Trade Zones (FTZs). This tax holiday was originally available until 2008-09 and was then extended to cover 2009-10. The major beneficiaries of this concession are the Software Development Agencies and the IT-Enabled Services Providers/Business Process Outsourcing units, in whose case the effective tax rates are as low as 12 and 15 percent respectively.

Revenue forgone under this head in 2008-09 was Rs.20, 366 crore. Overall corporate tax concessions have meant that the revenue forgone by the government stood at Rs.68,914 crore in 2008-09, which was Rs.6,715 crore higher than in 2007-08. This increase was greater than the Rs.6,375 crore increase in the fiscal deficit between these two years.

Abolition of the Fringe Benefit Tax (FBT) was a major concession to the corporates. In 2008-09, companies paid as much as Rs.6,553 crore as FBT. By abolishing FBT, the Finance Minister was being magnanimous.

Excise Cut Stays

The FM again graced the corporate sector again by continuing with the temporary excise duty cuts granted in the stimulus packages announced in December 2008 and February 2009. The effective excise duty rates were cut across the board by 4 percentage points on December 7, 2008.

On February 24, 2009, the mean excise duty rate of 10 percent was further reduced by 2 percentage points from 10 percent to 8 percent. These changes were responsible for a significant share of the increase in excise revenues forgone from Rs.87, 468 crore in 2007-08 to Rs.1, 28,293 crore in 2008-09.

With the Budget not restoring the excise duties back to the earlier levels, the revenue forgone in 2009-10 could have been much larger. Since the customer seldom benefits from this excise duty reduction as it is not passed on, corporate garner a part of the revenue forgone. And to the extent that it does pass it on, it may spur demand for private sector products.

Measures such as tax concession on investments made by the National Pension Scheme Trust in equity and the abolition of the Commodities Transaction Tax have provided support to financial capital operating in these markets. Thus, from a tax point of view, private capital of all kinds has been treated well in this Budget.