In the Union Budget 2011-12, the Finance Minister articulated its commitment to fiscal consolidation, infrastructure development, agriculture growth and enhancing governance standards.
By Vikram Kotak, Chief Investment Officer, Birla Sun Life Insurance Company
In the Union Budget 2011-12, the Finance Minister articulated its commitment to fiscal consolidation, infrastructure development, agriculture growth and enhancing governance standards. The Finance Minister has done a credible job in not just over-delivering on fiscal deficit target in FY11, but also clearing demonstrating his commitment towards fiscal prudence by laying down the fiscal deficit target of 4.6%, which is even lower than FRBM mandate of 4.8%. The Budget is also very aggressive in its 9% economic growth target for FY12, given that the economic growth momentum is gradually moderating. Further, despite the fact that the GoI has delivered on its targets in the past, the under-budgeting of subsidies and added strain on finances from elevated commodity price may pose an upside risk to fiscal deficit.
Fiscal consolidation was a must for complementing monetary policy efforts to tame inflation. It will also help India to manage global shocks and foster sustainability of economic growth. With limited scope to curtail spending, the Budget has focused on enhancing revenue receipts by widening the tax base by bringing more services under the ambit of service tax, etc. and ensuring higher compliance.
Given that infrastructure development is one of the clearly stated economic imperatives, the Budget has rightly laid utmost thrust on augmenting sources of funding for the sector with measures like 23% hike in government allocation, issue of tax-free infrastructure bonds worth Rs. 30000 cr, increase in the ceiling of FII investment in infrastructure bond and creation of Infrastructure Debt Funds with reduced FII withholding tax rate of 5% from 20%. Reduction is withholding tax is a very smart move to spur FII investments.
Overall, the budget has laid down a constructive road map for Economic growth and has taken steps to align the existing tax structure with the proposed GST & DTC framework. It is heartening to see that the increase in allocation to infrastructure and education sector has been higher than that in social sector spending. The move to cash subsidy for petrol & kerosene to BPL families is a bold move. Amidst these positives, the key disappointment from the Budget has been very nominal hike in IIFCL
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