India Inc, don't expect any market-friendly goodies in Budget 2012

Don’t get too excited about Union Budget 2012 because it won’t contain too many goodies for businesses, warns Credit Suisse in a recent note on India’s fiscal position and expectations from the Budget.

Finance Minister Pranab Mukherjee will present the Union Budget on 16 March.

Credit Suisse economist Robert Prior-Wandesforde believes Mukherjee will announce several tightening measures in an attempt to narrow the fiscal deficit, which Prior-Wandersforde predicts will reach 5.8 percent of GDP for the financial year ending March 2012 against the budgeted estimate of 4.6 percent.

“In our view, these will include an increase in the breadth of the service tax as well as a rise in the excise and service tax rate from 10 percent to 11 percent (it was lowered from 12 percent in response to the global financial crisis),” the brokerage said.

Credit Suisse said the finance minister is also likely to set out some sort of medium-term fiscal consolidation program, although the risk is that it will lack credibility. “Hopefully, it will at least encompass more details concerning the introduction of the Direct Tax Code (DTC) as well as the Goods and Service Tax,” it adds.

More significantly, the brokerage deflates the idea that the Budget will contain big-bang reform measures. “We would be surprised if any ’market-friendly’ structural economic reforms were to be announced in the budget. Although notionally the government has only ‘postponed’ the plan to allow single-brand foreign retailers entry to the domestic market, our guess is that it will prove a long delay,” it notes.

In a bid to contain the oil subsidy bill, a hike in fuel prices of controlled petroleum products is also likely.“Given the recent spike in the oil price and the implications this will have for the government’s subsidy bill (we estimate that a 10 percent oil price increase typically adds 0.2 percent of GDP to the fiscal deficit), then a further increase in subsidised fuel prices, including diesel, kerosene and LPG, is probable,” the brokerage said.

The only positive to look forward to, Prior-Wandesforde says, is that there could be a small boost to consumption: the Finance minister could raise the income tax exemption limit to Rs 2,00,000.  Well, the government might actually do even better on that: on Friday, a Parliamentary panel scrutinising DTC approved hiking the limit to Rs 3,00,000 from Rs 1,80,000 currently.