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Costlier fuel, lower taxes? - Views on News from Equitymaster
 
 
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  • May 21, 2009

    Costlier fuel, lower taxes?

    The hottest topic in the media these days is the key steps the new government will take.

    As reported in a leading business daily, fuel prices will be freed from government control and will instead be linked to international prices if the draft cabinet note of the oil ministry is implemented. The immediate effect will be that petrol prices will be raised by Rs 2, while diesel prices will go down by Rs 0.3. However, the note mentions that the government will reserve its right of stepping in if crude oil prices breach the US$ 75 per barrel mark. In our opinion, it makes sense to decontrol prices now at a time when input costs i.e. crude oil prices can be passed on. However, we do not expect the government to let end user prices go up beyond a point, given the resentment it causes in the general public.

    As per another leading daily, the new government is likely to raise the tax exemption limit from the current Rs 1,50,000 to Rs 2,00,000 in the forthcoming union budget. Fringe benefit tax might also be withdrawn. Both these measures might cost the exchequer Rs 100 bn. These changes will have an impact on the middle class because government is likely to disburse the remaining 60% salary arrears of the 6th Pay Commission. Taken together, these steps will leave more disposable income with the middle class and is likely to act as a stimulus package.

    It may be noted that some political commentators believe that investors will be disappointed if they believe that the government is going to usher in a capitalist era. While it is probably going to push ahead will economic reforms such as raising the limits on foreign investment and removing layers of bureaucratic red-tape; it will remain suspicious of the ability of the markets to distribute prosperity equitably. We agree.

    Indian companies able to raise money again
    As we know, Indian companies went on an expansion/acquisition spree during the last boom. It was a combination of ambition and easy money. However, the sources of money dried up once the credit crisis truly kicked in. It seems like the money is slowly flowing in again even as there are early signs of a recovery.

    As per a leading business daily, large projects have attracted funds to the tune of Rs 580 bn in the last one and half month. Indian Oil, NTPC, Krishnapattnam Port, Vodafone, the Sasan Ultra Mega Power project and Delhi Metro Express have received finance, although the cost of funds is said to be high. In fact, more than Rs 400 bn is likely to be raised in the immediate future in the form of rights, QIP and debenture issues. It may be noted that the fund raising is limited to domestic sources as conditions overseas continue to be tough.

     

     

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