Populist Budget But Live in Dark!

Whatever may it be? The fifth and the last budget of Pakistan Peoples’ Party-led coalition government is a populace one.

Pakistan’s apex court disqualifies the premier Syed Yousef Raza Gillani. The two-member court’s verdict was short and precise. It plucked all feathers attached on the shoulder of the chief executive of Pakistan from April 26. Supreme Court of Pakistan strips off Gillani from high office and his membership of the National Assembly. The historical judgment of June 19 not only stirs up the political system but also rescinds all decisions, actions and announcements made by the disgraced prime minister and his cabinet from April 26 to June 19.

Who is sacred cow? Who is scapegoat? Who is the great martyr? The debate is on. On the contrary, all masters of opinion, prolific writers and the loud thinkers, in common, ignore to raise the million-dollar question: ‘Has the apex court verdict shoved the fiscal year 2012-13 budget into limbo? And the Finance Bill for new fiscal year is no exception too.’

In the eyes of law experts who have dealt issues relating to legislative for decades place a clue to this riddle: all eyes must be riveted to Supreme Court of Pakistan. The short order, in fact, also disqualifies the budget. Detailed judgment is yet to come. The legal wizards expect Supreme Court, however, will declare the new budget pristine only. All other moves by the premier and his cabinet will stand null and void. But the Budget 2012-13 and the cabinet decision as well as all moves of the Prime Minister can be given a blanket cover through presidential ordinance in days to come.

Whatever may it be? The fifth and the last budget of Pakistan Peoples’ Party-led coalition government is a populace one. The expected electoral tinge is visible in light of an election year. While numbers are likely to be viewed with skepticism yet again, government has made its intentions clear. The whopping outlay of Rs. 3.2 trillion appears fairly optimistic. On the other hand, recent history of underperformance in terms of meeting revenue and expenditure targets has only added to the skepticism.

In the backdrop of worsening load-shedding in an election year, power sector was once again a major issue in both the budget speech and post-speech press conference. However, measures appear to be falling short of apparent commitment.
The government has expectedly outlined an upward sloping curve of GDP growth for next three years. For fiscal year 2012-13 its target is 4.8 per cent. Hence, the GDP growth is projected at 4.8 and 5.3 per cent respectively. However, the follow-up to the same is likely to face challenges.

Agriculture: There has been limited space in the budget in terms of meaningful stimulus for growth of this major sector. Allocation of two billion rupees for extension of Benazir tractor scheme though not implemented in fiscal year 2011-12; and support to livestock via federal excise duty exemption on insurance stand out.

In addition, tax credit on investment in corporate farming has also been proposed. The weather pattern will remain a caveat for agri-growth. Moreover, measures such as construction of dams ‘Rs. 47 billion, up 30 per cent a year ago needs determination for implementation.

Imposition of the cess on gas used by the fertilizer industry can also be inflationary leading to potential decline in nutrient application to farms, which will eventually lead to decline in crop yields.
Manufacturing: Another key area is likely to continue to face headwinds from the energy crisis. No quick fixes are possible. Manufacturing grew by 3.6 per cent in fiscal year 2011-12 supported by agro-based industries on better cotton and sugarcane yields. However, power and gas shortages remained a key constraint, which could mitigate some of the expected benefits from reiteration of tax credit for equity financed projects.

An investment of Rs. 192 billion, higher by 28 percent when compared with a year ago period, directed to wards increasing power generation. The budget targets addition of 1,104 mega watts of electricity.

Subsidies: The real facilitators to common man on the other hand, are targeted to be reduced by 60 per cent to Rs. 208.6 billion. Of power tariff differential subsidy amounts to Rs. 120 billion assuming plan to increase power tariff goes through. Again it appears difficult in the run-up to election.

In the backdrop of worsening load-shedding in an election year, power sector was once again a major issue in both the budget speech and post-speech press conference. However, measures appear to be falling short of apparent commitment. Unless the government backs up its plans of reduction in power subsidy with future actions, status quo on power sector issues is likely to persist.

In line with past budgets, the allocated subsidy for power sector of Rs. 120 billion should be seen with skepticism. Targeting 71 per cent reduction over outgoing fiscal year’s actual subsidy, the plans face challenges from election considerations, future mix of power generation and legal action against tariff hike.

The budget plans incorporate subsidy of Rs. 1.6 per kilowatt compared to average subsidy of Rs. 4.2 per kilowatt a year earlier. Government estimate of outgoing fiscal year’s budget subsidy fell woefully short of actual ‘Rs. 50 billion budgeted versus Rs. 412 billion actual or Rs. 24 billion per month.

Inflation: The demon of hike in prices of commodities and edibles is likely to remain stubborn due to supply bottlenecks. Election year is not going to help the cause with expansionary policies being met by currency printing, if the budgeted external flows do not materialise.

Revenues ‘taxes difficult to ramp up in election year

Pakistan’s Achilles heel has been the lack of home-grown resources. Hence, the target to raise tax-to-GDP ratio by 0.6 per cent or Rs. 142 billion to 10.1 per cent does not come as a surprise.
The person who put forth all five budgets of PPP-led coalition government is no more in the office. The finance ministers were not fortunate as such. During all five years, we see a new face announcing the federal budget.
The plan primarily hinges on admin measures and some redistribution of tax burden across sectors. The impact has been estimated at Rs. 65 billion from administrative measures and budgetary measures yielding a positive impact of Rs. 31.8 billion.

Some of the planned measures include

Imposition of 0.01% CVT on purchase of shares instead of WHT on sale.
Increase in tax rate paid by banks on dividends received from income and money market mutual funds has been raised to 25% for tax year 2013.
A 35% tax year 2014 onwards from the current rate of 10%.
Gain on property sold within a year will attract 10% rate and sold between one
to two years will draw 5% tax. Holding over two years will be tax exempt.
The rate of initial allowance for buildings has been lowered to 25%.
Advance tax on purchase of locally assembled cars for 1301cc-1600cc has been increased from Rs. 16,875 to Rs. 25,000.
FED on tobacco has been increased.

Election Year Reliefs Include

Higher GST of 19.5% and 22.5% reduced to 16%.
GST on tea has been lowered from 16% to 5% to curb smuggling.
Reduction in turnover tax by from 1% to 0.5%.
Exempting income tax up to Rs. 400,000.
Incidence of higher tax slabs on incremental rather than full amount.
Lowering or abolishing of FED on various items including cement and lubes.
Zero FED on skin care products.
Customs duty on used tyres is reduced from 20% to 10%.
CGT rates for insurance companies have also been lowered.
Customs duty on 88 pharma inputs reduced from 10% to 5%.
FED on Asset Management Companies has been abolished.
Tax holiday for venture capital firms has been extended to 2024.
The daily limit for tax free withdrawals from banks has been raised to Rs. 50,000 from Rs. 25,000.

Non-tax revenues a touch optimistic?

3G auction target rolls over new fiscal year with the budgeted figure of Rs. 79 billion.
Coalition Support Funds from United States expected at US dollars half billion to $1.6 billion. This could be a swing factor.
Dividends from state-owned entities have been set at Rs. 65 billion, up 10 per cent a year ago.
Gas Infrastructure Development Surcharge levied on gas has been increased by up to Rs. 221 per mmBTU. This levy is expected to generate Rs. 30 billion against Rs. eight billion only a year earlier.

The person who put forth all five budgets of PPP-led coalition government is no more in the office. The finance ministers were not fortunate as such. During all five years, we see a new face announcing the federal budget.

The PPP-led coalition government’s first budget was widely anticipated as a populist budget. Government gave priority to the agricultural sector in order to improve production, reduce inflation and curtail imports to reduce the external deficit. It taxed the services sector. The aim of the budget was to enhance production while curtailing consumption.

Its second budget gave birth to carbon tax. The government tried to address the prevailing economic slowdown through improving productivity of the real sector’ agriculture and industrial. The problem of IDPs accrued additional resources.

PPP-led coalition government’s third and fourth budgets were no difference. The government could not find its way out but to go for populism by trying to provide higher-than-expected relief to lower strata of the society. The economy struggled to revive, the government continued to face innumerable challenges on the political and economic front.

Presently, the axis of inflation (whatever the digit government claims), unemployment and mounting debt burdens has been placing considerable pressure on economic growth. In addition, the notorious energy crisis is playing its part in limiting industrial potential to drive growth.

The power crisis is adding fuel to the fire. Rental power projects are a scam. The economic wizards have failed to understand the importance of electricity in modern day’s life: this is what all the five budgets say to the masses. There is no quick fix. And they are not serious to the quick fix as well. Thar coal project has not been given due respect. So live in dark but don’t forget to say. Long live Pakistan!

By: Asad Kaleem

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