Union Budget 2011-12: Aditya Birla Money
Aditya Birla Money has come out with a report on Union Budget 2011-12.
March 01, 2011 / 16:29 IST
Aditya Birla Money has come out with a report on Union Budget 2011-12.
Budget Highlights: The budget for 2011-12 has been a good balancing act by the FM, as he was facing the daunting task of stimulating the economy, keeping the inflationary expectations under check and at the same time boosting public finances. There were quite a few positive surprises which put some apprehensions at rest - Budget left the central excise duty untouched; moderate growth in government expenditure; allowing foreign money through the MF route; increase in long term infrastructure bonds limit for the FIIs which should boost infrastructure investment and also improve the composition of flows financing the current account deficit; and reduced corporate surcharge in an attempt to further move towards the DTC framework. For FY12, the Government estimates the fiscal deficit to fall to 4.6% of GDP from 5.1% in FY11E primarily on account of (1) buoyancy in both direct and indirect taxes (resulting in net tax revenues rising by 17.9% to `6.64 tn) from increase in nominal GDP by 14% to `89.8 tn, (2) reduction in subsidies by 12.5% to `1.43 tn and reining in other non-planned expenditure related to social services and capital nature (resulting in a 0.7% decline in total non-planned expenditure to `8.16 tn) and (3) moderate growth in planned expenditure by 11.8% to `4.41 tn. However, the budget was relatively silent on the big-bang reform process, especially on FDI in retail and insurance and reduction in government subsidies. The fiscal deficit at 4.6% might look attractive, but getting into the details reveal that the budgeted subsidy amount seems to be abysmally low in light of the fact that fuel, food and fertiliser inflation remains elevated on account of soaring global prices. Perhaps the government intends to increase fuel prices post the budget or state elections due in May. The marginal 3.3% (as compared to 18.7% for FY11) increase in expenditure is likely to slow down GDP growth and therefore we do not agree to the basic arithmetic of revenues and expenditure and the deficit number. However a cut in expenditure, especially subsidies is overall positive if achieved through increase in prices. The expectations from the budget were low. The overall budget is positive from the markets view point and is likely to benefit the overall market. As such markets saw relief reaction post budget announcement. Post the initial euphoria, the market is likely to track broader issues like inflation, global factors and the resolve of the government to take forward the reforms process. Direct Tax:- Exemption limit for the general category of individual taxpayers enhanced from `160000 to `180000 giving uniform tax relief of ~`2000 to all tax payers whose taxable income is more than `180000
- Proposed to reduce the qualifying age for senior citizen, from 65 years to 60 years and enhance the exemption limit from `240000 to `250000
- Proposed to create a new category of Very Senior Citizens (80 years and above), who will be eligible for a higher exemption limit of `500000
- Rate of Minimum Alternative Tax (MAT) proposed to increase from 18% to 18.5% of book profits
- Current surcharge of 7.5% on domestic companies proposed to be reduced to 5%. Effective tax on marginal income to come down by 0.77%
- Proposed extension of `20000 exemption for investment in long-term infrastructure bonds by one more year
- Proposed a lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary
What to look ahead in FY 2011-2012?The budget has been positive in that it aims to cut down on government expenditure significantly. This will be received well by the market. The arithmetic of the budget, though, is a little suspect, as it is tad over optimistic on higher growth in tax revenues and reduction in subsidies in the wake of high imported inflation. What will drive the market going forward is the geo-political situation in the Middle East and the government moving ahead on policy reform in cutting down on subsidies, instituting measures to improve governance, taking concrete steps to improve logistics and distribution in agricultural produce, removing bottlenecks in infrastructure like land acquisition and liberalization of FDI. Geopolitical tension in Middle East: Rising inflation, increase in the unemployment and graft charges has led to rising geopolitical tension in the middle east. Tunisia and Egypt type revolution has spread to Libya, Algeria, Bahrain, Yemen and Oman. There is further fear of contagion effect of the same. Crude has already inched above $ 100 mark, a 2 year highs. OPEC controls nearly 35% of the global crude supplies. Any prolonged unrest in Middle East could possibly lead to further increase in crude prices which is negative for EM and developed economies dependent on energy import. Elevated crude level has the potential to derail the fragile global economic recovery. Reduction in subsidies: Despite high imported inflation from soaring global prices of fuel, food and fertiliser, the government targets a reduction in subsidies by 12.5% to Rs1.43tn. This will require the government to move swiftly to raise fuel prices in the near term. Inflation at stubbornly high level in India: Centre has failed to tame inflation which continues to be at an elevated levels on account of high food prices which is unlikely to come down soon on account of supply side bottlenecks. The problem has now got compounded by the rise in the crude prices thereby keeping the inflation at high level for a prolonged period. Inflation is the single biggest concern for domestic growth, as this will lead to an elevated level of interest rates, slowing investment and consumption.Graft & corruption charges: Centre has been mired with series of corruption charges over last couple of quarters. Any adverse outcome to the forthcoming state elections could make the position of centre further vulnerable. While the graft charges has impacted the country
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