NEVER BEFORE HAS A finance minister rejected populist giveaways so decisively in an election year. Never before has a finance minister sought to win the next elections not through tax breaks and freebies, but by accelerating GDP growth and taming inflation through fiscal consolidation. Palaniappan Chidambaram has gambled on good economics proving to be good politics too. This is risky, but admirably bold. Stock ma rkets crashed, fearing that fine print in the Finance Bill implied capital gains tax on investors coming through Mauritius and other countries with which India has a Double Taxation Avoidance Agreement. However, finance ministry officials later clarified that capital gains through Mauritius would not be affected. If so, stock markets should rise sharply on Friday. How has Chidambaram delivered on his promise of fiscal prudence (restricting fiscal deficit to 5.2% of GDP this year and 4.8% next year), yet provided for a 29% rise in Plan spending next year? By assuming very high tax buoyancy. Against nominal GDP growth of 13.4%, he hopes tax revenue will rise 19%, a very optimistic estimate. He will fall short on this, and will surely also fall short on the 29% rise in Plan spending. Ministries are simply not geared for such acceleration. So the planned fiscal consolidation can indeed happen. The finance minister will get much additional revenue by accelerating GDP growth from 5% this year to around 6.5% next year. He has proposed no new taxes, only a temporary surcharge of 10% on high-income individuals and corporates for one year. That sits well with his commitment to tax stability. What’s in it for the aam aadmi? Or shall we say the aam voter? Chidambaram’s implicit promise is that he will conquer the high inflation that has dogged the economy for three years. The big electoral danger earlier was a credit downgrade by rating agencies. This would have meant an outflow of billions of dollars, causing the exchange rate to crash to maybe 60 to the dollar and inducing a big jump in prices of imported items. That would have sent inflation soaring to 15%, and doomed the UPA to a massive defeat in the next elections. His Budget now staves off any possibility of a ratings downgrade. Dollars should f low in, not out. That should help strengthen the rupee and put downward pressure on import prices. The consequent fall in inflation should then lead to a cut in interest rates, sparking fresh investment as well as reducing EMIs. A budget is just one element in the broad framework needed to improve the investment climate and rejuvenate growth. Much more is needed outside the budget to cut red tape, expedite clearances and improve governance. This Budget is low on election slogans, but aims to provide concrete outcomes in the form of faster growth and lower inflation. Success on these counts will win votes in the coming elections. It is a less showy approach than a farm loan waiver, but could be as effective. SWAMINATHAN S ANKLESARIA AIYAR IS NITISH SENDING OUT A SIGNAL? In his specially written piece for ET (P 13), Bihar CM Nitish Kumar has set Delhi’s grapevine abuzz by giving a thumbs-up to the Budget. Is a political realignment on the cards? PAGE 20

By Kartikay Mehrotra - Feb 28, 2013

Smartphone sales in India may suffer from a higher tax on handsets costing more than $37 just as Apple Inc. (AAPL) steps up efforts to tap demand for data services in the world’s second-largest mobile-phone market.
Finance Minister Palaniappan Chidambaram yesterday said he would raise the excise tax on high-end phones to 6 percent from 1 percent to help finance welfare programs for the country’s poor and fund the widest budget deficit among the largest emerging economies. Samsung Electronics Co. (005930), which sells the Galaxy range of smartphones, said the move “won’t have a positive impact” on the mobile-phone industry and will force customers to pay more.
India’s government, after attempting to squeeze wireless operators including Vodafone Group Plc (VOD) and Bharti Airtel Ltd. (BHARTI) with higher license fees and airwave tariffs, is now targeting handsets for revenue from an industry that has boomed since Prime Minister Manmohan Singh opened the economy more than two decades ago. Chidambaram also increased tax on high earners, luxury cars and yachts.
“This is a bit over the top,” said Rajan Bharti Mittal, vice chairman and managing director of Bharti Enterprises Ltd. that controls Bharti, which operates the nation’s biggest cellular network. “Mobile handsets and smartphones are hardly luxury items. This should be reviewed.”

Rural Jobs

Chidambaram said he needs to raise 16.7 trillion rupees ($306 billion) in the 12 months starting April 1, 16 percent more than the revised estimates for the current fiscal year, to meet expenditure and rein in the deficit at 4.8 percent of gross domestic product.
He allocated 330 billion rupees for his government’s flagship rural jobs program and 100 billion rupees for a plan to give the poor low-price food grains as the ruling coalition faces nationwide elections by May 2014.
The higher tax will hurt Apple, BlackBerry and Samsung because the top-end models will appear overpriced to buyers, said Mittal.
Apple, which hasn’t treated the Indian market as top priority until recently, is seeing its efforts pay off since introducing its iTunes store in the South Asian country and slashing prices on older models like the iPhone 4. Shipments rose to a record 254,000 in the fourth quarter, from 52,000 in the third quarter, according to data provided by Framingham, Massachusetts-based researcher IDC.

Not Favorable

Apple’s London-based spokesman Alan Hely declined to comment on the increase in excise tax.
Waterloo, Ontario-based BlackBerry (BB), formerly known as Research in Motion Ltd., which introduced its latest Z10 model in the country last month for $800, said the tax measure could deter consumers who aspire to own smartphones.
“India is on its way to becoming the world’s third-largest smartphone market,” said Sunil Dutt, managing director of BlackBerry in India. “This isn’t favorable to the growth of the segment.”
Phones that cost below 2,000 rupees, which Chidambaram has exempted from the excise tax, account for 75 percent of India’s market, according to Gartner Inc. Cheaper phones are popular in the country, where the World Bank estimates more than 800 million people live on less than $2 a day. The Galaxy S3 costs about 29,000 rupees, while the iPhone 5 starts at 45,500 rupees.

Erode Margins

While the higher tax may erode margins for phone makers, it may not dent demand, said T.M. Ramakrishnan, chief executive officer for devices at S Mobility Ltd. (SPCEM), a local company that imports handsets from Asia and sells them under its brand.
“It will surely impact the industry’s focus on making smartphones more affordable,” he said. “Also, it may get that much more difficult for smartphones to penetrate rural areas.”
Apple, Samsung and BlackBerry are counting on the growth of data services in the country after carriers started offering third-generation services in 2011. The market for smartphones in India is set to grow 50 percent in 2013, according to IDC, while in China the rate is set to slow to as low as 40 percent from as high as 150 percent in 2012.
Mobile data traffic surged as much as 300 percent in the last 12 months, while revenue grew 50 percent from the previous year, according to Mohammad Chowdhury, leader of telecommunications practice at PricewaterhouseCoopers in Mumbai.

Damp Sales

“We will see some damping in consumer sales,” Chowdhury said. “In turn this will impact negatively the uptake of data services in India, and in all likelihood slow it down just at a time when it has begun to gain momentum.”
The government’s efforts to raise 400 billion rupees from the sale of airwaves in the year ending March 31 failed after carriers balked at the fees set by the nation’s telecommunications regulator in the first round of auctions in November. Instead, it met only 25 percent of that goal.
“The government has targeted another successful industry to raise revenue,” said Anshul Gupta, a Mumbai-based analyst with Gartner. “This will trigger a price rise, meaning people will have to pay more, especially for mid-tier and high-end phones.”
To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net
To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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