Union Budget 2011: 'Right intents but lacks hard decisions'
The thrust on infrastructure sector can be seen in the budget but is not strong enough to really accelerate the growth in manufacturing as envisaged.
March 01, 2011 / 13:30 IST
By Abhijit Gulanikar, CIO, SBI Life Insurance Bond
The budget speech by Finance Minister was as per the script without any significant change in tax law or in the pattern of expenditure. Some of the important steps announced, that are positive for the markets are
(1) Resolve to introduce various long pending finance sector bills in the current session of parliament primarily the Insurance Laws; Banking Laws; revised Pension Fund Regulatory and Development Authority.
(2) Introduction of The Companies Bill in the current session.
(3) Permission for Mutual Funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes.
(4) Enrollment of more than 10 lakhs persons under UID from October 2011 The budget speech also disclosed some medium term reforms, that if implemented, would also be huge positives for the equity market. These key initiatives are implementation of DTC in 2012-13, implementation of nutrient based subsidy for Urea and provision direct cash subsidy for food and kerosene to the end-users. Lack of expenditure reform is a major disappointment. The budgeted fiscal deficit for FY 2011-12 seems under-stated. The Government surprised the market lower than forecast fiscal deficit at 4.6% of GDP in FY 2011-12 (lower than 4.8% as per the Medium Term Fiscal Policy Statement). This resulted in immediate rally in bond prices and equity markets The deficit is proposed to be achieved by increasing the total revenues by just 3.6%. the non-tax revenue is decreasing due absence of the 3G and wireless spectrum auction. The tax revenues are budgeted to grow at 18%. The estimates on the revenue front look achievable given expectation of 9% real GDP growth and 14% nominal GDP growth. No major changes proposed in direct or indirect taxes. The market was surprised by lack of increase in service tax rate and increase in excise in a few items like cigarette, SUV.The budgeted expenditure for 2011-12 is just 3.4% increase over revised estimate for 2010-11. The low growth in expenditure has been achieved through lower or flat subsidy for fertilizer, fuels and food. To meet the fuel subsidy budget Diesel, LPG prices need to be hiked substantially or the crude oil price needs to fall to USD 70 per barrel. At current price of USD 100 per barrel and the current diesel, kerosene and LPG prices, the Government share of oil pool deficit shall exceed Rs. 60,000 crores (budgeted estimate is only Rs.23,640 crores). At current fertilizer prices, fertilizer ubsidy is also likely to exceed the government budget. The aforementioned increase in expenditure will result in fiscal deficit exceeding 5% of GDP. The thrust on infrastructure sector can be seen in the budget but is not strong enough to really accelerate the growth in manufacturing as envisaged. The intention of increasing share of manufacturing to 25% of GDP over next 10 years would face significant implementation challenges.During the current (2010-11) fiscal year India is facing high inflation problem especially in food prices. The food inflation has been primarily caused by lack of adequate increase in agricultural productivity and inefficient distribution system. The budget has multiple proposals to address the problem, but lacks bold measures that would have made a real impact on the root cause of food inflation.Overall the budget has all the right intents but lacks hard decisions that need to be taken to achieve those results. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
