April 2013 Issue Final

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InFINee | April 2013InFINee | THE FINANCE MAGAZINE OF IIFT APRIL 2013 ISSUE

Inside InFINeeBudget Special: Informaon | Analysis | InsightsInfrastructure sector: Will Budget 2013 be able to revive the ailing sector?War in the air: What lies in the bag for the Indian Airline Industry?Women Bank: Do we really need one?

APRIL 2013 ISSUE [email protected]

What

needs &

from the

deserves

Budget


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InFINee | April 2013


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W elcome to the April edition of InFINeeti. As always, financialmarkets have been turbulent, though there have been some

glimpses of recovery. With the Government committed to roll out the cash transfer

scheme, parliament paving the way to issue new banking licenses, RBI going for rate

cuts and stock markets bound to see the pre-January 2008 levels, India economy is

seen to be coming back on track.

The major highlight of the last quarter has been the Union Budget 2013. There has been a lot of speculations

on whether it will be a growth-oriented budget or a populist one. While chasing the elusive high growth targets

in the face of populist pressures, Mr. P. Chidambaram did a fine balancing act and made sincere efforts to

please both the clusters. With his Responsible and Bold budget, he has deftly mooted good economics as a

tool of good politics. In this Budget special edition, we have a bunch of excellent articles with in-depth analysis

of some of the major provisions of Finance Bill 2013.

The Highlight of the issue is the Dream Budget, where the IIFTians have stepped into the shoes of the Finance

minister and came out with an alternate budget. In their Dream budget, the authors have made an in-depth

analysis and came out with some concrete suggestions that will provide a boost to the Indian economy.

Whether the new bank for women will serve the intended purpose? Is it right to impose additional Taxes on

the super-rich? These are some questions posed by Budget 2013. All the answers lie at a distance of few pages.

UPA governments last-hour effort to reduce the Current Account Deficit and revive the Infrastructure and

Power sector have also been analyzed and debated. A detailed account of the measures taken in the budget

should make a good read.

This issue also throws some light on the aggressive strategies adopted by the cash-strapped airline companies

in the recent past. A fact based analysis of long-run sustainability of such strategies and the future prospects of

the sector.

The issue features FIN Trivia column containing some mind-boggling facts & figures. We also take extreme

pride and pleasure in announcing that IIFT has completed its 50 years of excellence in leadership in Internation-

al Business and this year marks a special mention.

Happy Reading!!

FROM THE EDITORS DESK 1


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CONTENTS2

>>> Page 3 >>> Page 5 >>> Page 19

WHERE THINGS

BREWED

A pre- budget analysisevent in co-ordinaon

with NDTV

3

BUDGET PLUS 2.0

A post-budget analysis

event @IIFT Kolkata

5

THE CAD PARADOX

Will curbing gold

import work for India?

7

TAXING THE SUPER

RICH

Will it help the UPA

government achieve

the fiscal targets?

13

LETS BANK ON

WOMEN

India's first women-

only bank proposed:

Do we really need

one?

15

FINANCIAL INCLU-

SION

An Indian perspecve

17

COVER

STORY

DREAM

BUDGET

W hat I ndia needs& deservesfromthe

budget!!

1 9

WAR IN THE SKIES

What lies in the bag

for the Indian AirlineIndustry!

34

INFRASTRUCTURE

SECTOR

Will budget 2013 be

able to revive the ail-

ing sector?

36

UNDERSTANDING

THE FINANCIAL CRISIS

A simplified version of

reasons that caused

one of the biggest

financial crisis of the

century

38

MARKET PULSE41

FIN-TRIVIA43

NEWS CHRONICLE44

REGULARS


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On the 15th of February, The Finance and Investments Clubof IIFT, Delhi hosted a pre-budget ses-

sion at the Delhi campus to allow stu-

dents to understand beer the intrica-

cies and implicaons of the upcoming

budget as well as interact with an ex-

tremely esteemed and disnguished

panel.

The panel consisted of Gurcharan Das,

author of the bestseller India Unbound

and former CEO of Proctor and Gamble,

India, Arvind Virman , Former Chief Economic Adviser to the Govt.of

India and Non-resident Fellow, Brooking Instute, Washington DC and

Vikram Singh Mehta , Ex- Chairman of the Shell Group of Compa-

nies ,currently on the Board of direc-

tors at Mahindra & Mahindra.

Conducted by NDTV, the session pro-

vided an opportunity to the manage-

ment students of IIFT, Delhi to pose

quesons to the panelists as well as air

their views and opinions on the up-

coming budget. The session provided a

unique plaorm for the students to ask

quesons ranging from oil subsidies to

FDI in retail to the measures that should be taken to control the fiscal

deficit.

WHERE TH I NGS BREWED

A pr e- bu d get a n a l ysi s even t i n co -

or d i n a t i o n w i t h N DTV

PRE-BUDGET ANALYSIS 3


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The students were teeming with quesons and the discussion went

live with the first queson asked on reforms in the energy sector tak-

ing into consideraon the fact that 70 % of Indias imports consist of

oil imports. The queson was addressed to Mr. Vikram Singh Mehta

who was the former Chairman of Shell, India. Mr. Mehta explained

that exploraon of oil and gas has three uncertaines associated with

it.

Firstly the geological structure has to be conducive to the formaon

of hydrocarbons. Secondly these hydrocarbons should be accurately

located and thirdly the deposit should allow for a commercially viable

way to produce oil. All these three steps involve huge expenditure

and hence subsidies should be such that they do not affect the oil

companies ability to invest in research and exploraon. Also he was

of the view that liberalizaon of diesel prices should connue and oil

subsidies should be reduced as they account for nearly 75,000 Crore

Rupees and are thus crical to the fiscal deficit.

Being students of internaonal business the students were keen to

know the steps that would be taken in the budget to increase GDP,

rein in the fiscal deficit and improve investor confidence. Mr Gur-

charan Das who has a finger on the pulse of the naon was of the

opinion that domesc growth has to be spurred, along with that

transparency in procedures should be brought about and steps

should be taken to move away from seconal growth to public

growth. Mr Das felt that the government should invest in improving

the infrastructure of India rather than providing subsidies and loan

waivers.

Moreover, ideas were exchanged on the incenves of the gold linked

financial instruments whether it would reduce gold imports. With a

healthy discussion ensuing between the panelists and the bright

minds of IIFT, Delhi the session concluded on a very high note with all

the parcipants having taken away some important insights from the

session.

The students were also inquisive to know if the current tax structure

would be changed so as to impose higher tax rates on the super rich.

The students were parcularly interested in this since most of the

developed countries as well as the BRICS had a higher tax to GDP

rao than India. This queson was taken by Mr Virmani who ex-

plained that the priority of the government should not be tax reforms

in terms of revenue but more in terms of rules and procedures, so as

to make India more investor friendly. He also pointed out that most

of the countries with higher tax to GDP rao than India had a higher

per capita income and India when compared to countries with similar

levels of per capita income had a higher tax to GDP rao.

The session moved towards conclusion as the students discussed with

the panelists the effecveness of the Aadhar Scheme and the Na-

onal populaon register

PRE-BUDGET ANALYSIS4


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He pointed out that a major part of the budgets every year focus is

on meeng the 5 year plan targets.

Then, Mr. Nandwani asked the esteemed panel members to offer

their opening remarks. Prof. Ranajoy analyzed the budget from an

economic perspecve. He observed that contrary to the belief that

there would be a growth oriented approach by inclusion of econo-

mists such as Dr. Raghuram Rajan and the Finance Minister Mr.

Chidambram would bring to the table has not occurred and the

budget is oxymoronic to the approach paper of the 5 year plan. He

deemed the budget to be neither pro-growth nor pro-social reform.

Dr. Ajitava, in his analysis, divided the budget into 4 segments. The

first, he said, was that the budget has been a connuaon of old

stories, but cited that there has been a 46 percent increase in the

budgetary allocaon to the Ministry of Rural Development. Another

important point he touched upon was regarding the women banks.

The Indian Instute of Foreign Trade, Kolkata orga-

nized the second edion of Post-Budget Analysis -

Budget Plus 2.0. The panelists of the discussion were Mr. Rajib

Basu, Associate Director- PricewaterhouseCoopers, Prof. Ranajoy

Bhaacharya, Professor of economics at IIFT, Dr. Ajitava Ray

Chaudhuri, Professor of Economics at Jadavpur University, Mr. An-

jan Kumar Roy, Member ICSI, Anjan Kumar Roy & Co. Company

Secretaries, Mr. Basant Kumar Maheshwari, Founder-

TheEquityDesk Dot com. The discussion was presided over by Mr.

Sanjeev Nandwani, Development Commissioner, FALTA SEZ.

Mr. Nandwani threw the discussion open emphasizing that budgets

are a connuous process and who the Finance Minister is, plays a

very lile role on what the governments policies are going to be.

POST-BUDGET ANALYSIS 5


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In his opinion, empowering the women by leveraging on the exisng sys-

tems would have been beer rather than the new provision for women

banks. In his words, the govt. is for the people, by the people and whoev-

er for and this budget has proved to be a signaling mechanism to the

masses. Mr. Rajib Basu took a different stance from the two economists

and praised the Finance Minister for the work he has done given the con-

straints of the upcoming elecons. In his words, the budget is a statement

and the money is being put into the right sectors but raised quesons on

the amount of money allocated to these sectors. He also quesoned the

implementaon of the policies which are announced in the budget and

called for seng up of instuons for efficient implementaon. Mr. Anjan

Kumar Roy said that the budget has something for everyone and was a

balance of reform and social sector measures. He said that the problem lay

in implementaon of such policies and has been so for the past 30 years.

Mr. Maheshwari argued that budgets have a shelf life of 72 hours. He

said that the investors in the stock market pay very lile heed to the provi-

sions in the Budget and exclaimed good companies get around bad budg-

ets and make money for their shareholders, while bad companies do not

make money even in good budgets poinng out that the stock market

runs its course irrespecve of the budget.

Aer the opening remarks, the floor was thrown open for discussion and

Mr. Nandwani asked the panelists for their remarks on whether the budget

was a populist measure or a policy measure and enquired their views re-

garding parcular sectors. The issue of the declining savings rate in India

from 36 percent to 30 percent was discussed at length and Mr. Ajitava

remarked that the rent-seekers needed to have a leash and India cannot

depend on foreign investors all the me. Various other issues such as the

Domesc Instuonal Investors (DIIs) following the FIIs in the primary mar-

kets and the buoyancy of the capital markets were pondered upon. When

it came to the issue of disinvestment, Mr. Basant proposed the idea of

giving away 200 stocks to every PAN card holder at a discount rather than

to LIC as a measure of keeping the investors money with them only.

The audience constung the students of IIFT, Kolkata campus asked per-

nent quesons regarding liquidity issues arising out of disinvestment, the

overshoong of the target of 10000 crores due to the Food Subsidy Bill and

the introducon of CTT to discourage people for invesng in gold and sil-

ver.

The Panel concluded the discussion cing that although the budget

touched everybody, it did not focus on any parcular sector.

POST-BUDGET ANALYSIS6

Mr. Rajib Basu, Associate Director- PricewaterhouseCoopers

speaking out his views

Mr. Basant Kumar Maheshwari, (Founder-TheEquityDesk Dot

com) analyzing the budget from the Equity Markets viewpoint

A student pung across his queson in Q&A session


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THECADPARADOXWillcurbingGoldImportworkforIndia?

A persistently negave current account deficit is acause of concern for any economy. When a countryruns CAD, it builds up liabilies to the rest of the world that are fi-

nanced by flows in the financial account. Large deficits and rising

indebtedness could also leave countries more vulnerable to adverse

external shocks.

Since India has a long history of sizeable current account deficits, it

makes for an interesng case study. A closer look at figure one clear

ly reveals Indias inability to maintain a posive current account

balance. We can see that in only four years from the past two dec-

ades India has been able to claim a current account surplus.

In his latest Budget Speech , Finance Minister P Chidambaram ex-

pressed concern over Indias Current Account Deficit (CAD) and ris-

ing Indian gold Import .To curb imports of the Gold with a view to

check the widening CAD, the government recently took a step of

hiking the import duty on gold and planum from 4% to 6% . Lets

try to analyze the CAD of India and effecveness of the hike on gold.

Rising Current Account Deficit

Current Account Balance can be defined as the net of export and

import and if the import is in excess to the export it is called a defi-

cit. Although CAD constute of other factors like factor income and

transfer payment but major constuent of Current account balance

is the trade balance (i.e. Export- Import). High current account defi-

cit is major concern because it cannot be sustained for long as the

countries that lend money (through the capital account surplus)

will expect to get back their money with interest at some point.

As can be seen from the below data, Indias current Account Deficit

has been widening along with the increase in gold import as per-

centage of GDP.

Current Account Deficit of India

VikasGoyal-IIFTDeependraKumar&AshishKhare-MDI

UNION BUDGET 2013 7


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Comparing India with other BRICS naons, its evident that India is

showing worst CAD trend.

Major Implicaons of High Current Account Deficit

High current account deficit is major concern because it cannot be

sustained for long as the countries that 'lend' money (through the

capital account surplus) will expect to get back their money with

interest at some point. If the money is not seemed to be present

in future, the lending country may demand higher returns or may

take back their money. With no one to lend, the country cant

import capital goods to make own good or even import consumer

goods .

Reasons for high current account deficit (CAD)

To put some numbers into perspecve, current account deficit

widened to 5.4 % of GDP in the Q2 2013. The current account

deficit was $22.3 billion in the three months through September,

or 5.4 percent of GDP, compared with $16.6 billion in the June

quarter and $18.9 billion in the September quarter of 2011. The

widening gap has been caused mainly by the increasing trade defi-

cit. The trade deficit widened to 12.2% of GDP in Q3 from 9.7% in

Q2. While oil prices have risen, most of this worsening is in the

non-oil segment (Nomura Report). Gold imports were the major

cause of the widening current account deficit. India saw $60 billion

worth of gold imports in fiscal 2011-12 which contributed to high

CAD levels. Gold imports in the 2010-11 were $40 billion. The in-

crease of $20 billion can be aributed to high level of inflaon.

Though Nomura said the recent fa l l in gold and oil pr ic-

es can help improve India's elevated current account

deficit (CAD) by one percentage point to 4.3 per cent

during 2013.

While the imports were dominated by higher demand for gold, the

exports contracted. In the April-November period, India's total

exports contracted by nearly 6 percent from a year earlier, leaving

a trade deficit of nearly $130 billion.

Another possible cause has been the higher demand or a supply

shocks in the Indian Economy. In 2011-12 the growth in aggregate

demand categories like consumpon and fixed investment fell

from about 8% to 5%. It has been observed that the Indian CAD is

countercyclical, rising when output falls and not when demand is

rising. This suggests the dominance of external supply shocks ra-

ther than the demand factor. Current account deficit is going to be

as strained in Q3 2012-13 as it was in the second quarter because

of the lower GDP growth.

The depreciang INR also contributed to for the past one year and

was the third worst performer in Asia in 2012. The rupee closed

2012 at 55.00 inflang the import bill and the current account

deficit

Implicaons of the High Current Account Deficit for the Indian

Economy

The recent level of the Current account deficit at 5.4 % of the

GDP is above the sustainable level. According to research report

from RBI, India can sustain a current account deficit of 2.5 % of

GDP with a lower GDP growth. This clearly is an alarming situaon

for the Indian economy and has the capacity to impair Indias fi-

nancial stability.

This deficit will also cause the foreign exchange reserves to dry up

if the inflows to make the deficit do not materialize. It will have

direct bearing on the strength of INR. The depreciang INR has

come under a lot of pressure with the increasing current account

deficit. The Indian rupee has dropped more than 20% from its

August 2011 peak against the dollar. This sharp depreciaon is

mainly due to Indias large current account deficit .

UNION BUDGET 20138


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Acon Taken by Indian Government and RBI

Government of India is considering steps to make gold imports costlier

in order to reduce the huge foreign exchange outgo on the yellow met-

al, which has pushed the current account deficit to a record high. (India

Today)

Government is also trying to create an investor friendly environment to

increase investment from foreign investment in the form of FDI and FII,

the income from these foreign investments posively contributes to

current account.

Indian Gold Imports

India is known to be among the largest importers of gold in the world. A

look at the Indian import figures for gold over the period 2001-02 to

2010-11 suggests that golds share in total import bill of the country has

gone up from 8.1 per cent in 2001-02 to 9.6 percent in 2010-11 even

when gold prices have increased markedly over the period April 2008 to

March 2012.

India's love affair with Gold

Indian demand for gold is influenced by many socio, economic and cul-

tural factors. Some major driving factors for gold demand in India are

following.

The first category of the demand for gold consists of the consumpon

demand for making jewellery, medals, electrical components, etc. There

is the tradional obsession with the yellow metal as an adornment and

an item of personal display.

The second category is the asset demand for gold as an investment.

Gold is perceived as safe haven asset, especially, during periods of finan-

cial and economic stress. More recently, aer the 2008-09 financial

crisis, the demand for gold as collateral has also increased as it does not

involve credit risk and its price generally exhibits counter-cyclical behav-

ior.

Gold is viewed as a liquid asset and one of the most efficient store of

value and hence widely recognized in India as a tool for inter-

generaonal wealth transfer. Investors have reaped the benefit of

aracve returns as the gold prices were increasing, that led to further

investment in gold, giving impetus to further rise in gold prices.

According to a recent Morgan Stanley report, over the past five years,

gold has outperformed all other asset classes

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Gold hurng Indian Economy

India does not produce much of the gold consumed. That

means, we need to buy gold from other countries and pay in

foreign currency. This directly affects the value of rupee nega-

vely and thus creang further prices raises especially petrol

and diesel.

Gold may not be great to the economy due to its unproduc-

ve nature. The private purchase and hoarding of gold results

in the diversion of surplus away from producve investment

like fixed deposits, investment policies, shares, bonds etc.

Bulk of the gold transacons is generally on cash basis and

without much of documentaon. There are no tax hassles on

gold transacons in the informal market. This feature too

might be incenvising diversion of domesc savings towards

non-financial products like gold. Such de-financialisaon is

undesirable to the financial system.

Import duty hike wont work

Encourage smuggling

The higher the difference between internaonal prices and official

prices, higher the profit margin for illegal imports. As the difference

increased in Indian and internaonal gold prices, smuggling of goldtoo is making a comeback. A similar hike last year had failed to curb

the demand for the yellow metal.

No reducon in trade Deficit

Is this increase in Customs likely to reduce Indias trade deficit? Un-

likely! It will increase capital-flight to offshore financial centers from

where foreign-exchange earnings will get higher returns than in India.

Higher customs or other barriers will mean more (and more) policy

intervenons that will increase compliance overload and reduce poli-

cy-impact.

Retail Investors interests

Gold is a protector of assets an important reserve in mes of eco-

nomic uncertainty and plays a crucial role in hedging currency and

inflaon risks. The demand for gold in India is price inelasc, i.e. Indi-

an customers are not 'duty-conscious' when they buy gold

Alternave ways to reduce dependence on Gold

Increase the reach of Banks Indias saving rate is esmated at

around 30 percent of total income, of which 10 percent is invested in

gold. Therefore it is important that the financial sector taps into this

huge saving reserve.

Liquidity quoent-The real aracons for gold are high returns, high

liquidity and no tax and documentaons. If interest earned on various

financial savings instruments is aracve, a part of the demand for

gold will be automacally diverted to the financial instruments.

UNION BUDGET 201310


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Massive educaon campaign

Create awareness amongst the public at large as to how unnecessary

piling of gold stocks with households is not only adversely impacng the

current account posion of the economy but also increasing the level of

black money circulaon in the economy.

Current Account Deficit: Story of other Developing Naons

While focusing on the current account deficit problem of Indian econo-

my it makes sense to have a look at similar developing naons to under-

stand current account situaon in these countries.

Brazil

Brazil is currently facing a big current account deficit which is 2.11% of

GDP at the end of financial year 2011-12. Brazil has a current account

deficit despite

having a posive

trade balance on

account of large

service deficit.

The reason be-

hind the posive

trade balance is

the export-oriented Brazil

economy heavily dependent upon soybean, orange juice and iron.

Russia

Russias current account surplus is fuelled primarily by high oil exports.

Oil prices have risen steadily over the past few years which have in-

creased their export prices. From 2000 onward, the country started to

record posive trade surplus, taking advantage of the devalued curren-

cy. Russias current surplus decreased sharply in 08-09 due to the glob-

al recession and decrease in demand for commodies. Increase in Rus-

sians income is set to fuel demand for imports; this would lead to nar-

rowing of the current surplus.

China

China has had a consistent Current Account Surplus which today is ap-

proximately $ 300 billion. The major reason for this surplus is the com-

peveness of Chinese products which have gained a reputaon in

manufacturing sector and thus China has become the supplier of goods

for the whole world.

South Afr ica

The current account of South Africa's has been in the red lately. The

weaker outlook for the global economy in response to the internaonal

financial crisis has already resulted in a large-scale withdrawal of capital

from South Africa. The Rand has depreciated by approximately 30%

against the American dollar during this period. Trade balance is only

quarter of the current account deficit which makes it difficult to reduce

the laer simply by reducing imports.

Current Account Deficit of developed naons: a case study on USA

1991-2006: The phase of rising Current Account Deficit

The U.S. current account deficit grew steadily aer 1991, hing levels of

4.4% in 2000 and steadily rose to a record high of 6.1% in 2005 and

2006. Much of the

rise in the current

account deficit over

the period can be

aributed to two

factors: accelerang

U.S. producvity and

a surge in household

wealth driven by the

stock market.

Due to the consumpon boom, U.S. consumers sasfied part of the

increased demand for goods and services with imports, purchasing more

and more goods from foreign sources and increased current account

deficit.

2007- Present: The decline of current account deficit (CAD)

CAD began falling in 2007, and reached 3% of GDP in 2012. The decline

may be aributed to cyclical causes. As a result of the recession and

financial crisis, domesc savings became higher, domesc private in-

vestment became lower and so the need to borrow from abroad dimin-

ished .

UNION BUDGET 2013 11


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Conclusion

The need to contain current account deficit as evident above is extreme-

ly urgent. Unfortunately there is no magic wand that can bring down

Current Account (CAD) deficit in a go. It needs to be achieved through

the synergy of a number of measures each aiming to strike at the very

root of reigning current account deficit. The widening deficit is aributa-

ble to expensive oil, high gold imports and a sharp drop in exports.

There is thus a need to reduce imports and boost merchandise exports

to bring the CAD to sustainable levels. On the exports front a lot de-

pends on the global economic situaon. Our major markets are the US,

Euro zone and China. If these markets recover and do well we can im-

prove on the exports front, provided we maintain our compeveness.

With the worst of recession already behind us and United States

averng the fiscal cliff, the prospects do look beer.

The more dominant cause of worry is the import bill. Internaonal com-

modity prices and rupee exchange rate should be the focus areas as the

country imports many commodies it needs. An important step would

be to make the gold imports expensive. The Indian government has

taken right steps in this direcon by imposing tax on gold jewellery and

increasing the import duty for gold.

However, it will not be easy for Indian economy to correct current ac-

count in 2013, precisely because of strong domesc demand and a weak

external demand. Already environment sensive policies, land acquisi-

on issues and availability of quality infrastructure have contributed to

moderaon in FDI inflows which are extremely important to finance the

current account deficit. While the subdued growth of receipts is cyclical

in nature and can be expected to improve with the recovery in world

economy, the rise in crude oil.

prices and reasons for moderaon in FDI are more structural in nature.

It is thus important for the policymakers to make Indian economy more

investor friendly in 2013 and eliminate bolenecks arising due to policy

paralysis at the centre.

What is the ideal way out for Indian government then? Since Indias

linkage with the world economy, in terms of trade and finance, is likely

to grow, it is important that resilience in its trade account is built up

mainly by promong producvity-based export compeveness and

improving the domesc fundamentals. The persistent global uncertainty

and capital flow volality demands increase in FDI to make the capital

account more resilient. India should learn from other countries around

the world. The compeveness of products of China is something to

look upon as India doesnt have resources like Russia or Brazil. India

should try to bring quality to its products similar to its services.

One key thing to learn from USA is that India cannot sustain its current

account deficit as can US because capital account in India is highly de-

pendent upon the condions of rest of the world. Adjusng government

spending to favor domesc suppliers is another important step that

needs consideraon. Another important measure would be increasing

the remiances through lucrave savings offer for Indian Diasporas all

around the world by offering higher interest rates and lesser transacon

charges. It is with the cumulave effects of the above outlined measures

and a strong resolve to bring down the current account deficit that we

can expect India to tame this monster and safeguard the countrys fi-

nancial health.

UNION BUDGET 201312


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TAXING THE SUPER RICTAXING THE SUPER RICTAXING THE SUPER RICHHH

Wi l l i t h e l p t h e U PA g o ver n m en t Wi l l i t h e l p t h e U PA g o ver n m en t Wi l l i t h e l p t h e U PA g o ver n m en t

a c h i ev e t h e f i sc a l a c h i ev e t h e f i sc a l a c h i ev e t h e f i sc a l t a r g e t s? t a r g e t s? t a r g e t s?

Yogendra Chaudhary & Vivek Patel

K J Somaiya Instute of Management Studies & Research

V ery recently, aer long hours of debate US has imple-mented the proposals to tax rich at the higher rate. Thenew provisions puts addional tax burden on people

with income over $4, 00,000.

Meanwhile in India, Mr. K. Rangarajan, the chairman of the prime

ministers economic advisory council, has also suggested that there

is a need to increase the tax on HNIs. However, his suggesons have

met protests from the super-

rich in the pre-budget meeng.

The so called super-rich people

have been finally imposed with

addional tax of 3% on their

income. But here we need to

analyse, whether it is an eco-

nomic decision or a polical

one?

Whether it will really affect these HNIs? Whether the decision taken

by the government is raonal? Having known that the market sen-

ments are very low, whether it will help reduce the fiscal deficit?

These are some of the quesons that need to be answered.

Now let us take these issues one by one:

Polical movaon or Economic prudence

As agreed by many, this years budget is more of a populist budget,

this being an elecon year. So, it is argued to be the reason why the

government has spared the low to medium income groups and tar-

geted the HNIs.

Will it accomplish the intended objecve

The biggest concern of UPA government is to reduce the fiscal deficit

to an acceptable level. The number of HNIs in India is a very minus-

cule poron of the total populaon. How much revenue can the

government generate by taxing these few HNIs, is something which

is very difficult to assess accurately.

Consideraon for the market senment

We also have to consider that the market senment is not quite

good and in such a situaon, if HNIs are heavily

taxed, they are less likely to invest in the market

which again hampers the growth prospects. Mr.

P.Chidambaram, The present FM, had taken a

decision of lowering the tax rates in 1997-98 so as

to induce more and more people to pay taxes and

comply with the regulaons. So, the present day

decision of taxing the super-rich is somewhat in

contradicon with his own decision in the past.

Possible Consequences

The high tax on the super-rich will not only adversely hit the market

senment but this will also force the high tax payers to find new

ways to evade the tax. Currently, around 42800 people are catego-

rized as HNIs (Disclosing taxable income exceeding Rupees 1Crore

per year), although the actual number is bigger than this, which is

evident from the sales figure of high end luxury cars in India.

Why should HNIs be taxed at higher rate?

It is the me when the finance minister acknowledges the need of

reducing the fiscal deficit which is currently record high at 5.4 per-

cent. Now the queson is how much each secon of the society will

contribute to achieve the fiscal deficit at the desired level.

When the fiscal policy adopted by government is such that there is



16/50


queson is how much each secon of the society will contribute to

achieve the fiscal deficit at the desired level.

When the fiscal policy adopted by government is such that there is

an increase in tax rates, there is a decrease in the disposable income

of people which leads to lower demand and thus lower growthrates. But when it comes to HNIs, increasing the tax rates will hardly

impact their consumpon habits and thus this seems to be a good

move by the government wherein it can generate revenues through

tax without hampering the consumpon behaviour and growth pro-

spects.

The efforts by the government in targeng the subsidies make it

very clear that it is serious on

the issue of reducing the fiscal

deficit. And when the poorestof the middle-class are con-

tribung then, it is difficult to

not to ask from the super rich.

When some of them will not

even noce the burden of the

increase in the tax rate then

there is no reason for not

imposing the addional tax on

the super rich. But the prac-

cal concern is that the super rich people will actually evade the tax

totally so there can be some adverse effects of taxing the super rich.

The higher rates could then be more than offset by the increased

evasion, leading to lower collecons. While there may be an ele-

ment of truth to this, it is important not to overstate this factor.

Here we also need to note that modest tax rate in the last decade

did not aract people much, to pay the taxes. And if lower income

tax does not work to increase the tax payers then why should we

assume that higher tax rates would drive the exisng revenues

away? It may well be argued that those who pay taxes today have

no way of evading it, and a surcharge on the super-rich is not going

to change that.

Why shouldnt they be taxed?

The Chairman of the Prime Ministers Economic Advisory Council, C.

Rangarajans suggeson of imposing a surcharge on the super rich

seems to have been intended to test the waters more than anything

else.

But the present Finance minister himself has the target to achieve

the stable and moderate income tax rates. And it is also successful

to some extent. In 1997-98, Mr. Chidambaram himself reduced the

tax rates from 40 percent to 30 percent and gave what we all know

as Dream Budget.

Here we need to increase the revenues and that could be achieved

by making and implemenng certain policies like the goods and

services tax which would directly contribute 2 percent to the GDP.

Alternaves:

The problem with the finance minister is high fiscal deficit and weak

market senments. So the finance minister

instead of increasing the tax on the super rich

(which constutes only a small proporon of

the tax payer community), should target the

mass populaon which is not giving any taxes at

all. So, here there is a need is to increase the

number of tax-payers so that government could

get the substanal revenue which will finally

reduce the current account deficit. Other im-

portant factor is to make an efficient tax collec-

on system which is not at place right now.

The aim of reducing the fiscal deficit can be achieved through reduc-

on in planned and non planned expenditure. A 5% stake in Coal

India will fetch the government above Rs. 10000 crores or a one

rupee increase in heavily subsidised urea and kerosene can help the

government save above Rs. 3000 crores. Furthermore all ministries

can be asked to implement some austerity measures. A 2% reduc-

on in this will save Rs. 10000 crores.

The government can also adopt disinvestment policy by selling off

stakes in PSUs which are running in losses.

In short, reducing the expenditure and cung down on subsidies

can serve as a feasible alternave to higher taxes. However, as long

as the government is not able to achieve this, it has to devise some

ways to increase the revenues which again paves the way for higher

taxes and need for bringing more people under the tax net.

UNION BUDGET 201314


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LETS BANK ON WOMENLETS BANK ON WOMENLETS BANK ON WOMENI n d i a 's f i r st w om en I n d i a 's f i r st w om en I n d i a 's f i r st w om en ---o n l y b a n k p r o p o sed o n l y b a n k pr o p o sed o n l y b a n k pr o po sed

D o w e r e a l l y n eed o n e? D o w e r e a l l y n eed o n e? D o w e r e a l l y n eed o n e?

Rohit Ranjan

SIIB, Pune

I was eagerly waing for this years union budget aerdismal performance of UPA 2, all encapsulated withscams and scandals. But a women centric budget is really an Out of

the box idea and it completely took me with surprise. Will it just be a

dice thrown by FM before the upcoming general elecons or will it

the long-way to generate more women entrepreneurs in future? Let

us analyze in detail.

There are posives as well as

negaves of opening a women-

oriented public sector bank (PSB)

with an inial capital infusion of

Rs 1,000 crores. How much such a

move will create an impact is sll

to be seen, but one thing that is

clear is that it is surely going to

add the oomph to the otherwise

staid terms like women empow-

erment and financial inclusion.

Women customers will certainly

feel comfortable on being ser-

viced by women bankers. Pene-

traon of such banks in rural

areas will encourage more of

women parcipaon and Self

Help Groups (SHGs) in availing

microfinance. There will be a

sense of freedom among the

women in starng their own ventures. But the queson arises here

are hard to deal with like Will this bank for women serve the enre

country? If yes, how long will it take to roll out across the length and

breadth of India? Will it go to the hinterlands, where bulk of our dis-

empowered and un-creditworthy women live? What is that extra

which will make it work even when naonalized banks and micro -

credit instuons are struggling to include people at scale in rural

areas?

In the era of online and mobile banking, people hardly bother to visit

banks in metro cies. Such banks will be more profitable and will be

able to generate more business in rural areas. Many microfinance

instuons have opposed this move but I think its a posive move

for poor women secons of society which borrow money from pri-

vate money lenders at exorbitant rates to run their business. Compe-

on will definitely get sffer but opportunies will emerge too.

Addressing the gender related

aspects of empowerment; it will

certainly fulfill a social goal. A

women run banks are likely to

aract women clients, promong

inclusive financing and other

women livelihood schemes.

But did we need to start some-

thing new like this in a country

where there are 26 naonalized

banks, 21 private sector banks, 34

foreign banks and numerous co-

operave and local banks. Such

moves create a serious doubt on

our own available resources.

A similar banking model was start-

ed in Pakistan 14 years back in the

name of First Women Bank but

hasnt been able to make a signifi-

cant mark yet. It has currently only 38 branches all over and the work

culture is Corporash.

Let us witness the success story of India Post which, through its infra-

structure and network, has implemented the plan into acon. It has

more than 1.54 lakhs post office branches out of which around 90%

are in rural areas. Each post office has been providing banking ser-



18/50


vices, like Post Office Savings Bank, to people for decades.

People who grew up in rural areas without banks, or in places where

pey bankers were too domineering to entertain the illiterate villag-

ers, know where to go for the safe-keep of their precious money:

that lile window at their neighborhood post office.

Its not a

long trek to

the post

office.

There is a

post office

for every

7176 peo-

ple in the

country. In

rural areas,

the coverage is even beer one for every 5682 people. When the

UPA government was struggling to find a way to transfer the wages

for NREGA beneficiaries, it was this network that came to its rescue.

About 2.2 crores people get their NREGA payments through the post

offices.

People in rural and semi-

urban areas who are famil-

iar with the post office

savings banks also know

that it is the most women-

friendly and inclusive bank-

ing system where agents

even come home to take

your money, update your

passbooks and even return

the money on maturaon.

In rural areas, there are about 2.69 lakh agents who come home to

help people, mostly women, with banking. Almost all these agents

are also people from the neighborhood and are familiar with the

beneficiaries. It is a unique banking eco-system that only Indian Post

can claim credit for. It is a model that has evolved over me and is

very hard to replicate because it is driven by the sheer needs of peo-

ple, and nourished by trust and relaonships.

It will be difficult to establish another system like India Post with

such network and coverage anywhere in the world. Currently post

offices provide only savings facilies. It has decided to set up Post

Bank of India and is all ready to apply for banking license by July

under new RBI guidelines to operate as complete banking system.

P. Chidambaram would have been more prudent in ulizing this

network to provide financial services to women at minimal cost. It

will take around decades to establish numerous women banks all

over India. Will it

employ women

agents to provide

door to door

service to wom-

en? What kind of

banking guide-

lines will it fol-

low?

There are many

quesons which

have been le unanswered. Last me they lured farmers by an-

nouncing a relief package for farmers which included the complete

waiver of loans given to small and marginal farmers. Called the Agri-

cultural Debt Waiver and Debt Relief Scheme, the 600 billion rupee

package included the total value of the loans to be waived for 30

million small and marginal farmers

(esmated at 500 billion rupees) and a One

Time Selement scheme (OTS) for another

10 million farmers (esmated at 100 billion

rupees). This me, the UPA government

has tried to woo the Indian women and

capitalize on the inability of the current

banking system to cater to the so called

Disempowered secon of the society.

With a deep regard for poor women and a

belief that they are Bankable, I would be curiously looking ahead for

the implementaon of the noble move.

UNION BUDGET 201316


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FINANCIAL INCLUSIONFINANCIAL INCLUSIONFINANCIAL INCLUSION

---A n I n d i a n Per spec t i v e A n I n d i a n Per spec t i v e A n I n d i a n Per spec t i v e Sinjana Ghosh

VGSOM, IIT Kharagpur

What is Financial Inclusion?

A report of the World Bank states financial inclusion, or broad access

to financial services, is defined as an absence of price or non-price barri-

ers in the use of financial services.While in developed countries, finan-

cial inclusion is more about the knowledge of fair and transparent fi-

nancial products and financial literacy, in emerging economies like In-

dia it is a queson of both access

to financial services as well as

financial literacy.

Why is it a naonal concern?

In a naon where almost half of

the populaon does not have a

bank account, a major part of

money in the system is com-

pletely unaccounted for. This is

a major contributor to the major

problems like corrupon, ine-

quality, poverty, illiteracy and all

other issues that India is

plagued with. Empirical evi-

dence shows that economic

growth follows financial inclu-

sion. Thus, boosng business

opportunies will definitely

increase the GDP, which will be

reflected in our naonal income

growth.

Serving the disadvantaged sec-

on is not very difficult as these

people just expect security and

safety of deposits, low transac-

on costs, minimum paper workand easy access to low value credit which should not be a difficult task.

Low-income Indian households oen have to borrow from friends,

family or moneylenders who lend at excessive rates. They have neither

the necessary awareness nor easy access to insurance products that

could protect their financial resources in unexpected circumstances

such as illness, damage of property or death of the bread-earner of the

family.

Policy makers in most countries of the world have now recognized fi-

nancial inclusion as the way to achieve comprehensive growth, such

that every cizen of the country is able to use earnings as a resource

that can be invested for future returns, thus contribung to the na-

ons progress.

Implementaon of Financial Inclusion in India

From seng up of the State Bank of India, naonalizaon of banks, the

great Indian Cooperave movement and the lead bank scheme finan-

cial inclusion has always been at the core of the decisions of policy

makers. Despite these prolonged efforts it was esmated that about

40% of Indians lacked access to simplest forms of financial services. The

reasons include factors like

absence of banking technol-

ogy, dearth of viable deliv-

ery mechanism, and, mostimportantly, absence of a

sustainable business model.

The issue was officially ad-

dressed in the monetary

policy in 2005, when RBI

directed the banks to make

available no-frills accounts

to certain growth sectors

idenfied by the govern-

ment and issue general

credit cards (GCC) to the

agricultural workers. Other

recommendaons of RBI

included, making available

overdra accounts, small

scale loans (micro financial

acvies) and relaxaon of

KYC norms for opening of

accounts.

In January 2006, a new

model was proposed by

RBI, the very promising

Business Correspondent orBC model. Research and improvement upon this model connues ll

today to facilitate financial inclusion.

In 2010, the Reserve Bank advised all scheduled commercial banks to

submit their financial inclusion plans (FIPs) supposedly containing self-

set targets pertaining to opening of new branches in unbanked areas,

employment of business correspondents (BCs), provision of financial

services like no-frills accounts, issue of Kisan Credit Cards (KCCs) and

General Credit Cards (GCCs) etc. Figure 1 provides details the several

other measures taken by the government and RBI.

Business Correspondent Model- the future of Indian Banking

Though banks are meant for public welfare, there is no argument on

the fact that they are business organizaons which work for profit.

Figure1: Several measures taken since 2010 to ensure financial inclusion

Source: RBI and news repor ts



20/50


Therefore, a well-planned business model is essenal to convince the

banks that business with the poor is profitable, provided there is acces-

sibility, so that the banks willingly parcipate in this endeavor and not

just do it as a legal obligaon but as an aracve business proposion.

Table 1: Progress of Scheduled Commercial Banks from 2010

Source: RBI

Instuons or individuals, who interface between the excluded poor

and banks, are leveraged to provide support services under well-

defined terms and condions by way of contractual arrangements. In

BC model, these agencies provide basic support services such as cus-

tomer idenficaon, collecon of informaon/applicaons, credit ap-

praisal, markeng etc. Under the BC model, specific agencies e.g. MFIs,

NBFCs etc. also provide disbursal of small value credit as pass through

agents for the parent bank. The BCs are allowed to conduct banking

business as agents of the banks at places other than the bank premises.

The idea that new banking licenses should be given out to increase

compeon, which will automacally create inclusion, may not be prac-

cal as new banks are less likely to make financial inclusion their top

priority unless mandated to do so. Saurabh Tripathi, partner and direc-

tor of the Boston Consulng group suggested a new win-win model.

According to him the same corporate houses that are requesng for

banking licenses can be given BC licenses instead. That way, the clients

money will stay with the bank at the back-end thus ensuring safety

while the BCs will have the right to price the customers appropriately,

offer services without unnecessary interference, market themselves

and geographically expand freely while being able to e up with many

banks at the back end.

Budget 2013- a step forward

With focus on Financial inclusion in the budget 2013, the government

declared an investment of INR 49 billion, of which INR 5.3 billion has

been allocated in 2013-2014, to modernize the postal network, thus

making post offices a part of the core banking system and facilitate

their contribuon to financial inclusion. In order to improve insurance

penetraon, banks have been allowed to sell mulple insurance prod-

ucts of different companies. In response to the persistent problems that

keep women, especially from the backward society, away from the

mainstream banking system, the minister proposed establishment of a

naonalized womens bank. This is not the first me though, as a similar

bank, SEWA, was started by a womens self help group in Ahmedabad.

Apart from these iniaves, PSU banks have been instructed to have

ATMs at all branches by 31 March, 2013.

Challenges and the way ahead

One of the biggest controversies that plagued the financial inclusion

services of India is the over-indebtedness of farmers due to aggressive

micro-credit policies by the then unregulated microfinance instuons

(MFI). A rash of suicides by some micro-credit clients in Andhra Pra-

desh, one of the largest markets tapped by MFIs, took the naon by

storm and led some states to halt repayment of such loans.

One of the major reasons of this kind of incidents is the lack of aware-

ness on behalf of villagers which make them fall prey to the fake prom-

ises of corrupt agencies. Financial inclusion should be complemented

with financial educaon. While inclusion acts from the supply side

providing financial services that people demand, financial literacysm-

ulates the demand side- making people aware of what they demand.

Besides educaon, presence of proper infrastructure like connecvity,

access to internet, availability of cellular network etc. is needed in the

nooks and corners of India. Benefits of mobile banking should be ex-

ploited to a large extent, as it is a powerful tool for financial inclusion.

Though the cost of

performing low-value

personal transacons

is high, this can be

decreased by effecve

use of ICT soluons.

Banks can also form

systems of reward and

recognion for per-

sonnel iniang, idea-

ng, innovang and

successfully execung

new products andservices in the rural

areas.

All said and done, what needs to be reformed is the mindset, cultural

and atudinal changes at grass roots which will impart organizaonal

resilience and flexibility. Indias dream of becoming a developed naon

cant be achieved with stellar growth of a microscopic minority secon

of the super-rich; it can only be achieved through an inclusive growth.

Financial inclusion is the path that India needs to tread toward for be-

coming a global player. It will help aract FIIs to the country which will

result in increased employment and business opportunies. Inclusive

growth will act as a source of empowerment and allow more people to

contribute to the economic and social progress of India.

Figure3: Twin pillars of inclusive growth

UNION BUDGET 201318


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DREAM BUDGET

D o n t b e a fr a i d o f t h e spa c e b et w een y ou r d r e a m a n d r ea l i t y ..

I f yo u ca n d r ea m i t .. Yo u ca n m a k e i t so ..! !

Bhushan

Kanathe

(IIFT)

Avneet

Bhulania

(IIFT)

COVER STORY 19


22/50


During the past few years, Indias growth story has been sluggish owing to decreased industrial producon, poor investor sen-

ment, high inflaon (dragging the interest rates upwards), and weak rupee elevang import costs adding to the burgeoning

trade deficit. We need to consider these things in backdrop before designing the budget for FY13-14. Rather than looking this

budget as a single event, it should be looked forth as an aempt to achieve the targets set forward by The Twelh Five Year Plan

(2012-17) draed by Planning Commission of India (to be achieved over a set of 5 budgets). The Economic Survey also presents

insights on the important areas of the economy which needs aenon. Overall, a budget needs to have a focus and clear guide-

lines to catapult Indias growth story to the golden era that would enable us to achieve growth across all sectors uniformly and at

fast pace. The purpose of this budget is to create economic space and find resources to achieve the objecve of inclusive

growth and development.

The Gross Domesc Product (GDP) expanded 4.5% in the fourth quarter of 2012 over the same quarter of the previous year. The

growth has decreased considerably from average of 6% over 2011-12, and 5.4% in 2012-13. The following areas need to be looked

at with high priority in this budget to be able to redefine our growth story :

Source : www.tradingeconomics.com

SOCIAL PROGRAMMES

INDUSTRIAL PRODUCTION &

INFRASTRUCTURE

AGRICULTURE

EDUCATION GOVERNANCE

ENERGY & POWER

OVERVIEW OF BUDGET


23/50


INDIA ECONOMY AND THE CHALLENGES

BUDGETARY ALLOCATION OVERVIEWTWELFTH FIVE YEAR PLAN

Source: www.voiceee.com


24/50


Fiscal Deficit | Current Account Deficit | Inflaon

The fiscal deficit for FY 12-13 stands at 5.2%, within the expected levels. Considering the recommendaons given by KelkarCommiee, the deficit can be contained well inside 5%, and the target for the next year is 4.8%. We are well aware of the co nse-

quences of high fiscal deficit - heightened inflaon, reducing room for monetary policy smulus and dampening of private invest-

ment, growth and employment. The following steps would be taken to achieve fiscal consolidaon:

A) Direct Taxes

Comprehensively Reviewing of the DTC

Bill, 2010

Improving IT infrastructure with the

help of IT companies for Income Tax

Department to enhance their capability

of data mining to check for tax evasion

and black money

Charging 22-24% interest rate on tax

defaulters

B) Indirect Taxes

Pruning the negave list and taking

more services inside the service tax re-

gime. NGOs, railways no longer be ex-

empted from paying service tax

Fast-tracking the process to implement

the GST by passing the Constuonal

Amendment relang to introducon of

GST

Implemenng 6% Excise duty on merit

goods

Improving E-Governance in Central Board

of Excise and Customs (CBEC) to help

check tax evasion

C) Stake sell in PSUs

Divesng from PSUs by selling minority

stakes to the public (to amount of ~50%

ll 2018) and money collected be de-

ployed in infrastructure projects

D) Sale of unproducve land at market price

through fair aucon process

Implemenng progressive subsidies

(not for public BPL) rather than having

uniform subsidies across all the secons,

depending on the income level

Selling of LPG, kerosene at market price,

and reimbursement of subsidy for the

respecve income groups aer they pay

Income Tax

Changing the focus of schemes such as

MGNREGA towards employment gener-

aon rather than aiming for populistschemes

1) Reducing the Gold Rush

Tax incenves on gold linked financial

instruments (ETF etc) . Introducing more

financial instruments available to the

average cizen, and encouraging by tak-

ing iniave to increase financial aware-

ness and financial inclusion

Introducon of inflaon indexed bonds,and taking hard steps to curb the infla-

on, as inflaon is posively correlated

with buying of gold

2) Increasing Capital Account Surplus

FII, FDI and ECB three main source of CAD

Financing. FDI policy to be reviewed and

policy bolenecks will be removed . Re-

laxaon in ECB limit in some sectors, and

implementaon of GAAR and DAA in

phased manner

3) Export oriented schemes

Incenves for export-oriented SMEs, and

seng up of 6 new Export Oriented Units

to boost exports

Minimizing the constraints on the supply

side would make monetary policy more

potent

Improving the infrastructure

(transportaon, cold storage systems)

and increase in the number of the ware-

houses in every region of the country

Strict acon against hoarding of food

grains by traders by the local govern-

ment

Current Account Deficit

Inflaon (Controlling food inflaon)

Increasing Incoming money

Decreasing Outgoing Money

Fiscal Deficit as percentage of GDPSource:www.indiabudget.nic.in


25/50


Interest subvenon scheme for short-term crop loans to be

connued, scheme extended for crop loans borrowed from pri-

vate sector scheduled commercial banks

Ferlizer subsidy to be removed parally and diverted to pro-

mote use of organic ferlizer

Promong the Land reforms, land consolidaon, cooperave

farming to reduce the small sized farms

Inclusion of Quality based differenal pricing for agriculture

products to promote healthy nutrient

Seng up funds to promote KCC loans

Bringing green revoluon 2.0 to improve the crop yields

Starng a programme of crop diversificaon that would pro-

mote technological innovaon and encourage farmers to choose

crop alternaves

Credit Guarantee Fund to be created in the Small Farmers Agri-

culture Business

Widening the MSP to other crops as well on cash crops

Implemenng the Family Drip System (FPS) for main-

stream farming in India which is being followed in Jhar-

khand

Connuing the AIBP scheme to implement the ongoing

irrigaon projects

The Eleventh Five Year Plan (2007-12) witnessed an average annual growth of 3.6 per cent in the gross domesc product(GDP) from agriculture and allied sector against a target of 4% .India is the first in the world in the producon of milk, p ulses,

jute and jute-like fibers, second in rice, wheat, sugarcane, groundnut, vegetables, fruits and coon producon, and is a leading

producer of spices and plantaon crops as well as livestock, fisheries and poultry.

AGRICULTURE

Green Revoluon

Source: www.forbesindia.com

Source:SynopsisofGroundwater

Resourcesin


26/50


Matching equity grants to registered Farmer Producer Organi-

zaon (FPO) upto a maximum of 10 lakhs per FPO to enable

them to leverage working capital from financial instuons

Built to operate warehouses for 10 years to be developed under

PPP

Shiing current APMC model to profit sharing basis under mini-mum MSP, so that farmers get a share of revenue

Sugar subsidy to be removed completely

Free to trade with any mill, jute packaging disconnued, no

minimum distance clause removed

Monthly quota export mechanism to be followed.

Promong the use of side products like molasses

Expanding definion of term "infrastructure" to include compa-

nies that develop affordable housing

Exempng SEZ and Infrastructure companies from payment of

Minimum Alternate Tax (MAT) as suggested by CII

(Confederaon of Indian Industry) and according infrastructurestatus to integrated township development

Hence infrastructure debt funds be encouraged. Increase in

limit infra tax-free bonds to Rs 50000 cr and IIFCL to provide a

credit enhancement to boost investment (35% contribuon is

likely to come through debt contribuon)

A centralized clearance and administrave system be made

efficientNaonal Investment Board (NIB) to fast-track the

execuon of mega-projects ( above 1000cr). This step will fur-

ther reduce the gestaon period in infrastructure projects

Perming insurance companies, pension and provident fundsto trade directly in infra and energy sector debt funds , to meet

these companies extensive capital requirements

These funds have less than 1% of exposure to infrastructure

Long term base rate to be introduced for infrastructure

projects which should be delinked from bank base rates

in order to provide stable interest charges for projects

Rural areas be given prime importance with increase in

corpus to RIDF (proposed Rs 20000cr) and tax sops being

given to private players for rural investment to boost in-

frastructure development in remote areas

Rs 5,000cr proposed to NABARD to finance construcon

for warehousing. Window to Panchayats to finance con-

strucon of godowns

As of now about 24 per cent of the total length of Naonal

Highways (NHs) is single lane/intermediate lane, about 51

per cent is two-lane standard, and the balance 25 per cent

Sugar Subsidy

Farmer Producer Organizaons

INFRASTRUCTURE

The Twelh Five Year Plan (2012-2017) lays special emphasis on de-velopment of the Infrastructure sector including energy which are the

primary sources of growth drivers of an economy. The total investment

in the infrastructure sector during the Twelh Five Year Plan, esmated

at 56.3 lakh crore , will be nearly double that made during the Eleventh

Five Year Plan. Sll, more than half of the resources required for infra-

structure would need to come from the public sector (~50%), from the

government, and the parastatals. Hence, scaling up private-sector parc-

ipaon on a sustainable basis will require redefining PPP boundaries for

the development of infrastructure sector in a transparent and objecve

manner with a comprehensive regulatory mechanism in place. Delays in

land acquision, municipal permission, supply of materials, allocaon of

work, operaonal issues, etc. connued to drag down implementaon of

these projects.

Source : Economic Survey Report (2012-13) | Twelh Five Year Plan (2012-17)

Roads

General


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is four-lane standard or more

A regulatory authority for road sector is proposed to ad-

dress the problems in the sector like delay in pre-

construcon acvies and law and order problems

Partly meeng funding requirements of NHDP via loans

from World Bank, Asian Development Bank etc which are

passed onto NHAI in form of grants and loans

In addion to 3000 kms of road projects in Gujarat, MP,

Maharashtra, Rajasthan and UP to be awarded in the first

six months of 2013-14, emphasis must be given for devel-

opment of roads in North-Eastern and Maoist affected

areas

Major emphasis be given to increase the capacity of non-major ports , as this would help in reducing the container

traffic at major ports

Development of two major ports, one each at east and

west coast as suggested by Ministry of Shipping, in the

Marime Agenda 2010-20 to handle heavy cargo traffic

Development of exisng ports by raising money via tax-

free bonds (as currently done by JNPT)

Granng infrastructure status to

aviaon sector and addional benefits under secon

80IA, and seng up of a separate SPV for handling avia-

on finance at lower interest and longer maturies and

also airport operators be allowed to raise funds through

tax-free infrastructure

Encouraging PPP in Airport Infrastructure projects, and

fast tracking the clearance procedures

Ports

Airports

The Twelh Five Year Plan es-

mates 2012-17 at Indian airport

Target Investment

(Rs) :65000 cr

Private contribuon

(Rs)50,000 cr

Source: Planning Commission Document

(2012-17)

ENERGY & POWER

A total domesc energy producon of 669.6 million tons of oilequivalent (MTOE) in 2016-17 and 844 MTOE in 2021-2 has been

projected by the Twelh Five Year Plan This will meet around 71%

and 69% of expected energy consumpon. The balance would metfrom imports, projected to be about 267.8 MTOE in 2016-17 and

375.6 MTOE in 2021-2. Import dependence in case of crude oil and

coal is projected to be about 78% and 22.4% respecvely by 2016 -17.

Energy exploraon and exploitaon, capacity addions, clean energy

alternaves, conservaon, and energy sector reforms will, therefore,

be crical for energy security.

Source : Economy Survey Report 2012-13

General

The capacity addion target for the year 2012-13 was set

at 17,956 MW. As against it, capacity of only 9,854 MW

has been added ll 31 December 2012

Eliminaon of the 1% import duty on thermal coal, which

will help reduce the cost of generaon for the power

plants based on imported coal, and seng up PPP frame-

work with CIL as partner to reduce dependence on im-

ported coal in medium-to-long term

Extension of 80-IA benefit.Under this secon, a 10-year

tax holiday is given to the power plants if they start power

generaon by March 31, 2017Creaon of Naonal Power

Grid by Jan, 2014 operang in synchronous mode as a


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single system by connecng the only unconnected South

Grid to the system

Relaxaon of the lending limits to the power sector

which will help fund new projects.

Relaxaon of dividend distribuon tax if the same is in-

vested in the new capacies

Restructuring the debt of State Distribuon Companies

DISCOMs with support through a Transional Financial

Mechanism by the Central Government

Extension of service tax exempon to all power projects,

including power generaon, transmission and distribuon

projects, in line with other infrastructure projects as sug-

gested by IEEMA

Implemenng Perform, Achieve and Trade (PAT) mecha-

nism (a market-based mechanism) to incenvize improve-

ments in energy efficiency in 8 energy-intensive industries

(including TPS) by seng up standards and cerficaon of

energy saving achieved which can be traded

Fast-tracking the project via single window clearance and

increase emphasis on hydroelectric sector (Installed ca-

pacity 25 MW vs Available capacity of 1,45,320 MW)

Reducon of high interest rates for financing renewable

SectorGrowth in

2011-12(%)

Growth in

2012-13(Dec12

(%)

Electricity 8.2 5

Source: Economic Survey Report (2012-13) | Twelh Five Year Plan

energy projectsby creang a low-cost fund and providing

interest subsidy through Naonal Clean Energy Fund

(NCEF) as suggested by FICCI

Creaon of hedging mechanism for ECBs and creang a

separate lending category for renewable energy projects

to avoid these being crowded put by convenonal power

projects

Reintroducon of generaon-based incenve schemes

for wind and solar sectors with allocaon of about Rs 1500

cr for this purpose

A policy to encourage exploraon and producon of shale

gas to be announced soon

Provisioning the petroleum subsidy of Rs 65,000 cr for

2013-14,with the fuel price reforms being connued

Removal of subsidy on diesel on monthly basis, LPG &

Kerosene now stands deregulated.

Subsidy of 9 cylinder per year for BPL sector through di-

rect cash transfer scheme and subsidy of 6 cylinder per

year for people under 2 lakh income tax bracket throughincome tax refund

Renewable Energy

Oil & Gas


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SectorGrowth in

2011-12(%)

Growth in

2012-13 (ll Dec12) (%)

Manufacturing 2.7 1.9

Mining -0.63 0.4

Manufacturing and Associated

Industries(Mining & Construcon)

The industrial sector comprising of manufacturing, mining,electricity and construcon sectors has slowed down substan-

ally to record subdued performance of 3.5% in 2011-12 and

3.1% in 2012-13 from the high-growth of around 9% recorded

in 2009-10 and 2010-11. The moderaon in industrial growth,

parcularly in the manufacturing sector, is largely aributed to

sluggish growth of investment, squeezed margins of the corpo-

rate sector, deceleraon in the rate of growth of credit flows

and the fragile global economic recovery.

Source: Economic Survey Report(2012-13)

Manufacturing Sector to be turned into a priority sector as

a whole

Granng industry status to Retail and consumer goodscompanies and an independent ministry set up for retail

Clustering and aggregaon of Naonal Investment and

Manufacturing Zones (NIMZ), and introducon of tax in-

cenves that support revival of the manufacturing and

capital goods sectors as per the Dra Manufacturing poli-

cy tabled last year

Allowance of FDI in engineering and hi-tech goods manu-

facturing as dependence on high-tech goods import is

much more as suggested by EXIM Bank

Import duty hike of 5-10% on power equipment and re-

moval of customs duty exempons on imported capital

goods required for certain industries will help protect the

domesc equipment manufacturers against cheap imports

Reducon in VAT on energy efficient products to make

them cheaper and encourage the manufacturers

Allocang adequate funds for the Technology Up grada-

on Fund Scheme (TUFS) and lowering of customs and

excise dues on all machinery for texle and clothing in-

Manufacturing

dustry

Export incenves like duty drawback, focus product and

focus markeng rates to be increased to boost exports

for texle industry

Reducon of export Duty on Iron Ore from the current

30% to 15-20% to make products more compeve and

eliminaon in import duty on iron ore to overcome the

shortage of iron ore supply

Removal of steel products from the ambit of Free Trade

Agreement (FTA)

Increase in Import duty on manganese ore from the cur-

rent 2% to 5% and sponge iron (to 5-10%) , and increase

in customs duty on copper and aluminum products (Coal

covered under Power Sector above)

Fast-tracking the clearance procedures by forming a cen-

tralized commiee to minimize the connued delays in

project approvals

Providing Real Estate with industry (infrastructure) statusto overcome lack of regulaons and effecve policies, as

the sector is experiencing many challenges on its growth

path

Enacng provisions for Special Residenal Zones (SRZs)

to incenvize the growth of housing stock at targeted lo-

caons

Enacng the Real Estate Regulatory Bill and creang a

regulatory authority for the realty sector and ensuring

sale of immovable properes in an efficient and transpar-

Mining

Source: Economic Survey Report(2012-13)

Affordable Housing and Urban Development


30/50


ent manner

Provisions for subsidized construcon materials for low-to

-mid-income housing, and raonalized license fees and

other government levies

First-me home loan takers to be given an addional de-

ducon of interest to the tune of Rs 1 lakh for loan for

amounts not exceeding Rs 25 lakh, with spill over allowed

Fast-tracking the process of finalizing The Right to Fair

Compensaon, Reselement, Rehabilitaon and Transpar-

ency in Land Acquision Bill to remove the hurdles while

acquiring of land

Subsuming Road Tax, R&D Cess & Octroi in the proposed

GST and construcng framework on applicability of GSTon used-vehicles market

Reducon in Excise Duty rate on chassis from 14% to 10%

and allowable Increase in depreciaon rate to 60% from

40%

Purchase of Ambulances through Naonal Rural Health

Mission and extending the credit scheme to larger NBFCs/

Co-Op Banks

Supporng the Naonal Electric Mobility Mission Plan

(NEMMP) to promote the range of Electric Vehicles which

will result in the savings of 2.2 2.5 million tones

(esmated) of liquefied fuel by 2020 and concessions to be

provided & extended to at least 5 yrs

Increase in Custom Duty on passenger cars/MUVs to

100% and on CV to 40%(from 10%) to benefit domesc

manufacturers

Automobiles

SERVICES SECTOR

The growth story of services of world and India in the 2000s

began from almost the same level of around 4-5 per cent in

2000. But over the years, Indias overall and services growth

rates have outpaced those of the world. Thus, for more than a

decade, this sector has been pulling up the growth of the Indi-

an economy with a great amount of stability .With an 18.0 per

cent share, trade, hotels, and restaurants as a group is the larg-

est contributor to GDP among the various services sub-sectors,

followed by financing, insurance, real estate, and business ser-

vices with a 16.6 per cent share. Indias services sector has

emerged as a prominent sector in terms of its contribuon to

naonal and states incomes, trade flows, FDI inflows, and em-

ployment.

Indias share of services exports in the world exports of services,

which increased from 0.6 per cent in 1990 to 1.0 in 2000 and

further to 3.3 per cent in 2011.

The share of services in Indias GDP at factor cost (at current

prices) increased from 33.3 per cent in 1950-1 to 56.5 per cent

in 2012-13 as per Advance Esmates (AE).

Indias IT and ITeS services with exponenal growth are a unique ex-

port-led success story which has put India on the global map

TDS for technical services provided in domesc market reduced

from 10% to 2%

Soware would now be treated as service (and not goods), to

avoid double taxaon

Seng up a commiee to clear backlog and provide certainty

for future 'Transfer pricing' issues

IT and ITeS


31/50


Seng up a commiee for implementaon of pooled

spectrum and tax breaks for 10 years towards 3G and 4G

services for long-term viability

Focusing on Naonal Telecom Policy (NTP) 2012 ,aimed

at maximizing public good by making affordable, reliable,

and secure telecommunicaon and broadband services

available across the country

Providing affordable and reliable broadband-on-demand

and to achieve 175 million broadband connecons by the

year 2017 and 600 million by the year 2020 at minimum 2

Mbps download speed

Approved a project at a cost of 20,000 crore for creang a

Naonal Opcal Fiber Network (NOFN) which will provide

broadband connecvity to 2.5 lakh gram panchayats for

various applicaons

Development of 35 selected non-metro airports has been

undertaken by the AAI which have been idenfied based

on regional connecvity.

Reducing duty on import of spares & test equipment for

MRO (Maintenance, Repair and Overhaul) to zero ( duty

free )

Aviaon Turbine Fuel (ATF) aracts sales tax across differ-

ent states raging from 4-25% . Including the ATF under the

declared category of goods under Central Sales Tax Act to

achieve uniform levy of 5 per cent.

Diluon of stake in Air India in this fiscal year, for healthy

compeon in the sector

Foreign tourist arrivals in India grew by 9.2% in 2011

Removal oflevying service tax on air condioned restau-

rants

Seng up of investment funds in tourism infrastructure

through PPP mode, to change image of Indian tourism

Investment-linked deducon under Secon 35 AD of the

Income Tax Act extendedto new hotels of 2 star category

and above anywhere in India

Inclusion of 3star or higher category classified hotels lo-

cated outside cies with populaon of more than 10 lakh

Banking

Compliance of public sector banks with Basel III regula-

ons to be ensured, 18,000 crore provided in BE 2013-14

for infusing capital.

Agricultural loan of Rs 5.75 lakh crore to be unchanged as

in previous budget

Private banks will now be able to meet their lending tar-

get to the priority sector, by offering the concessional

rates of interest to agriculture as well

Insurance

Seng up a commiee to increase the penetraon of in-

surance, both life and general, in the country

Capital Market

Proposal to amend the current SEBI Act , to strengthen

the regulator.

FIIs to be permied to parcipate in the exchange traded

currency derivave segment, by the extent of their Indian

rupee exposure in India

Small and medium enterprises (SMEs) are to be per-

mied to list on the SME exchange without filing for an

inial public offer (IPO)

Removal of STT completely and inclusion of CTT to 0.01

% on metal commodies is beneficial against speculang

gold prices

Rajiv Gandhi Equity Savings Scheme (RGESS), exclusively

for first-me retail investors in the securies market. This

scheme provides 50 per cent deducon of the amount

invested from taxable income for that year to new inves-

tors who invest up to 100,000 and whose annual income

is below 15 lakh with a lock in period of 1 year

Aviaon

Tourism ( 6.8 % of GDP )

FINANCIAL SECTORTelecom


32/50


EDUCATION

The 12th Five-Year Plan states that Educaon is the most important lever for social, economic and polical trans-formaon. A well-educated populaon, equipped with relevant knowledge, atudes and skills, is essenal for eco-

nomic and social development in the 21st century. According to the survey conducted by One Globe 2013 report, by

2020, 220 million will finish school and around 150 million people will opt for a profession and not higher educaon.

There are 135 million students in primary schools, which makes India the largest primary school educaon system in

the world. Despite the significant progress in the enrollment of students in the last decade, Indias educaon sector

sll faces a lot of challenges that are low Gross Enrollment Rao (GER), gender disparity and lack of quality educaon-

al instuons.

Encouraging allocaon for PPP model

Providing land at concessional rate to the schools, and

giving an accelerated tax break of 150% of their in-vestment in educaon infrastructure leading to capac-

ity creaon for educaon. In return, some percent of

the seats would be filled by the government

Seng up a regulatory body for conformance to

quality and compliance

Fund Sharing paern of Sarva Shiksha Abhiyan

(SSA) to be revised to 50:50 (Centre:State Govts),

which is now fixed at 65:35 for efficient funding

Partnering with (Encouraging) IT companies todevelop IT infrastructure at government schools

as a part of key CSR acvity to these companies

Effecve implementaon of Mid-day Meal

Schemes by encouraging parcipaon from pri-

vate players (floang tenders) and NGOs, and

repeatedly performing qualitave checks

Creaon of Finance Development Bank for the

purpose where loans given to the students will

be backed by the government and repayable by

the students when they get a job

Relaxaon of provisions in Foreign Contribuon

and Regulaon Act to allow NRIs to invest in not-

for-profit educaon

Allowing Foreign universies to start their full-

me program by reviewing Foreign Educaonal

Instuons Bill, 2010

Literacy Rate 74%

Male Literacy Rate 82.14%

Female Literacy Rate 65.46%

Department of School and Secondary Educaon Total = 343028

Sarva Shiksha Abhiyan 192726

Rashtriya Madhyamik Shiksha

Abhiyan

27466

MDMS (Mid-day meal scheme) 90155

Others 32681

Department of Higher Educaon Total =110700

Grand Total = 453728

Gross Budgetary support for the Twelh Plan (In Rs crores)

Source : Planning Commission

Source: Census 2011


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Economic growth though important cannot be an end in itself. Higher standards of living as well as of developmentopportunies for all, stemming from the greater resources generated by economic growth, are the ulmate aim of de-

velopment policy. This implies the need to bridge regional, social and economic disparies, as well as the empower-

ment of th

April 2013 Issue Final

Documents

Transcript of April 2013 Issue Final