The budget and your wallet: A look at how this year’s annual budget could affect your personal finances
Amar Pandit
This year’s budget comes against a difficult economic environment of high fiscal deficit (could come in anywhere between 5.6-6 per cent for FY12); high inflation for the past two years, which has shown signs of softening in 2012 but could spike again if crude oil prices remain high; slowing economic growth (third quarter GDP growth came in at a low 6.1 per cent); and problems in Europe that have been eased temporarily due to injection of liquidity by the European Central Bank (ECB) but have by no means been resolved. Let us turn to what is expected from the Finance Minister (FM) on March 16 and what impact his measures could have on your personal finances. In some cases, the impact of his actions will be direct, and in others, indirect.
Lowering of fiscal deficit
It is expected that this budget’s primary focus will be on reining in the runaway fiscal deficit. A high fiscal deficit is inflationary because it implies that the government is spending a lot of money. (This government has spent enormous sums on social welfare programmes targeting rural areas.) When a lot of money chases a limited quantity of goods, inflation rises. If in this budget the government decides to reduce its expenditure, or at least not raise it further, it could help ease inflationary pressures.
When a government runs up a high deficit, it also borrows more from the markets. This prevents interest rates from softening. Borrowings by private corporates get crowded out of the market. If corporates can’t borrow adequately, then private investment will not revive. Today economists are unanimous in their view that reviving private investment is a sine qua non for raising the economic growth. If the private sector does not undertake infrastructure projects and develop new manufacturing capacity, there will be an adverse impact on employment, wages and even prices (due to supply bottlenecks).
The government’s zeal to curb its fiscal deficit could also have another, more negative impact on your wallet. If it decides to reduce its subsidy bill on petroleum products, it will hike the prices of products such as petrol, diesel, and liquefied petroleum gas (LPG). This will drive your monthly household expenditure up. The only way out will be to adopt stringent conservation practices.
By increasing the cost of transportation, higher fuel prices could also have a cascading effect on the prices of a wide range of goods.
On the positive side, if in this budget the government makes a serious and credible effort to keep its deficit in check, it would help rein in inflation (be warned: rising oil prices could play spoilsport). The central bank would then feel more comfortable about the inflation threat and would begin to cut rates. Rate cuts have an invigorating effect on both the economy and the markets. Not only will they boost investment and consumption, they will also give a fillip to equity and bond valuations (hence your investment portfolio will register gains).
Relief on the direct tax front
Every year the part of the budget that is most eagerly anticipated is whether the FM will provide relief on individual income tax. And normally FMs don’t like to disappoint. This year too you may have some tinkering of tax slabs and increase in the tax exemption limit in order to leave more disposable income in peoples’ hands. Media speculation has it that the minimum threshold for imposing income tax could be raised from Rs 1.8 lakh currently to Rs 3 lakh. The limit on deduction via investment in tax-saving instruments could also be raised from Rs 1.2 lakh to Rs 2.5 lakh.
To encourage the raising of long-term funds for infrastructure projects, the government had in the last budget announced tax exemption of Rs 20,000 under Section 80CCF on investment in infrastructure bonds. Subsequently, institutions such as NHAI and REC were able to raise large sums from the public. It is being hoped that in this budget the limit may be raised to Rs 50,000.
In reality, all these reports are entirely speculative. More than in any other year, this year (owing to the poor state of government finances) the finance minister will be loath to forgo any revenue. Therefore, temper your expectations regarding tax concessions.
Excise duty and service tax may be raised
Both the service tax rate and the excise duty had been cut to 10 per cent in the wake of the global financial crisis as part of the government’s stimulus package. It is being speculated that the government may raise both from 10 per cent to 12 per cent.
Hiking of excise duty will make manufactured goods more expensive.
In case of the service tax, the government may also widen the tax net. From a positive list, wherein only the services mentioned in the list are taxed, it may move to a negative list. It implies that only the services specifically mentioned in the negative list will not be taxed. This would lead to a wider range of services falling within the tax net.
Since the producers of these services will inevitably pass on this burden to customers, a range of services may get costlier after the budget.
Diesel cars may turn costlier
Due to the disparity between the prices of petrol and diesel, a lot of people opt for diesel cars. With crude oil prices rising, under-recoveries from diesel have ballooned. There is a possibility that the government may impose a stiff duty on diesel cars.
A regulator for the real estate sector
One sector that every urban dweller will have to deal with at least once in his lifetime is real estate, which is also perhaps the most poorly governed. There is speculation that in this budget the FM may announce the setting up of a regulator for this sector. This is a much-awaited development. It will translate into tighter regulation of entities such as developers and real estate agents. Customers will have recourse to an authority that will focus entirely on the grievances of real estate buyers (unlike, say, consumer courts, which have to deal with a wide variety of cases).
Again, because of the government’s straitened finances, it may not raise the tax deduction limit either on principal or interest repaid on home loan. But one cannot rule out some concessions to the budget housing segment, say, in the form of extension of the interest subvention scheme.
So keep your fingers crossed and hope that the FM gives you a good deal on budget day.