Wednesday, March 3, 2010

Union Budget 2010-11: Upbeat on Indian Growth Prospects

The stock market witnessed a rare budget rally this time-at least after four years; fiscal policy shaped with the recommendations of the Thirteenth Finance Commission {TFC}that strives for a gradual exit strategy from the expansionary fiscal measures including those of stimulus packages given suing in the mood of market. Next on fiscal reform-government would target an explicit reduction in its domestic public debt-GDP ratio, that’s next big booster by the government at macroeconomic level to cut the fiscal deficit.
Indeed this year’s budget resembles the gentle temperament of Finance Minister Pranab Mukherjee who in reality neither falls under the category of populist nor in radical, so he avoided the any major reform and chosen the mid path to strengthen the rudimentary determinants of Indian economy with keeping the pressing challenges of upcoming time in mind.

On fiscal consolidation, Thirteenth Finance Commission {under the chairmanship of Vijay Kelkar} recommendations were taken into account while proceeding for the budgetary nuances.Zero revenue deficit and emergence of a revenue surplus by 2014, along with a progressive debt-GDP ratio of 68% for the Centre and States combined; hike in the share of states {taxes} in the net proceeds of central taxes to 32% from 30.5%, recommended by the previous commissions.Now the Centre and State should look forward for an ideal tax regime with no inconsistency on amounts released to states and the percentage share in net central taxes suggested by the commission is a long overdue. Except the contentious provisions of on Goods and Services Taxes {GST}, recommendations of the Finance commission were in proper direction with a lucid vision about the next phases of development.
Most TFC’c contentions, finally placed in this year’s economic survey besides practical maneuverings like-Public Private Partnership {PPP} to attain 4% growth in farm sector, policy boosters for progressive growth in farm sector, targeted subsidy {Including energy} to the poors through Universal Identification Card {UID} based smart card, focus on secondary education, use of vouchers and coupons to deliver the food and fertilizer subsidies etc.

The findings of economic survey” Improvements in urban and rural infrastructure with good governance could reform the existing developmental order and help India to attain double-digit growth in near future if executed in true spirit than it would deserve a huge applauds from all the corner albeit it would need government as an enabler and little bit of interventionist in specific matters.
Since the core aim of rapid growth to eradication of poverty and raising the standard of living could be met only by the targeted interventions with appropriate inclusion of the marginalized in development spectrum.So, for now, Pranab Da couldn’t be completely withheld from the interventionist measures. As prospects seems brighter now after confronting the world-wide financial crisis for two long year; Indian economy looks more resolute, so raising inevitable resources from domestic and external sources would not be a major problem, hence along with the inherent strength of the corporate sector may brighten the industrial outlook in medium term and overall GDP growth will certainly generate the demand from every level of social hierarchy. What drives the Indian economy is domestic demand and domestic savings-so, it’s quite critical for the health of economy albeit last two years statistics remains very adverse from such point of view.

The percentage growth in per capita consumption, after touching a high of 8.3% in 2007-08, declined to 5.4% in 2008-09 and further fall to the level of 2.7% in the current year-Gross domestic savings have declined from 36.4% in 2007-08 to 32.5% in 2008-09, a massive drop of nearly 400 basis point in a year. To check out these developments were a primary concern before the government; the announcement of Financial Stability and Development Council(FSDC)and Financial Sector Legislative Reform Commission(FSLRC) is a prudent move in this regard that signals more direct role of government in financial stability and macro-prudential decision making process. Pranab Da, an old world purist but have great vision for young generation has elegantly fetched some key initiatives out of his Pandora box-more transparent accounts, widening of personnel income tax slabs, setting of a more ambitious target for disinvestment, holding out the prospect of additional banking licenses to private players and making a beginning in the direction of legal reform; these all announcement makes the cheering inclusive and logical. More focus have been given on spending with curbs on non plan expenditure rather than stiff taxation; total government expenditures was stood {during budget} at Rs 11,08,749 crore {up 8.5% over last year} albeit borrowings came down to Rs3,81,408 crore besides exceeding the target of fiscal reform suggested by the Finance commission-the government plans to bring the fiscal deficit down to 5.5%, 4.8% and 4.1% of GDP over the span of 2001-13.

Indeed such broad scale plan towards the fiscal consolidation will be a very positive structural development for the country; moreover move to rolling back the fiscal stimulus in phased manners must impart some more goodness in longer terms albeit inflation remains a major concern-hike in Cenvat from 8% to10%, despite well short of the pre stimulus 14% and 2% increase in service tax now both stands unified at 10%; these are corrective measures preparing for the transition to a single rate and GST next by next year nevertheless its going to partially tease the spiraling inflation for a short period.Some more pressing challenges have imposed on petroleum products with following the Kirit Parikh committee’s recommendations to treat oil prices as par market realities-similar checks on fertilizer subsidies and cuts have been reversed from imports and excise duty on crude and petroleum products is indeed an unfortunate proposition for the time being as common mans are already facing too much ire from spiraling prices and atrocities of middlemanship.

Disinvestment target now set to achieve Rs40,000 crore for the coming fiscal-unlike the China or any other major economies of the world, Indian budget has its unique characteristics to pronounce the tone of major changes besides the usual description of accounts-let us see for its outcome. Fundamentals of Indian economy have displayed improvements since the opening of economy in 1991-ascent of money on Dalal Street witnessed 16% average annual returns on stocks since 1991; sensex rose from about 1,000 points in January’1991 to 17,478 points {Bombay Stock Exchange}by 2009 end. So, with these strong fundamentals and prefaced social commitments-the flagship rural job guarantee scheme, the NREGA gets a Rs1,000 crore hike from previous fiscal allotment{Rs39,000 crore to Rs40,000crore}, subsidy for the Rajiv Gandhi Gramin Vidyutikaran Yojna-aimed at electrifying villages was increased by Rs4,00 crore while the road building PMGSY got around Rs600 crore. Other programmes fare marginally better, Indira Awas Yojna funds hiked from Rs7,918 crore to Rs8,996 crore; the programme for National Rural Drinking Water Supply goes up from Rs7,200 crore to Rs8,100 crore-Bharat Nirman mission received a substantial Rs45,000 crore through Integrated Child Development Scheme {ICDS}.

Overall, social and rural infrastructure sectors to make up 62% of plan outlay-its among most remarkable budgetary allocation of Rs1,000 for every New Pension Scheme {NPS} account under the National Social Security Fund for Unorganized Sector besides plan for Urban Development Funds to go up 75% as a huge booster for Rajiv Awas Yojna was a long overdue, for a huge number of marginalized and persons from unorganized sector. Education have given its due with 15% increase in allocation, total gross expenditure on literacy and school education is stated to rise from Rs39,553 crore to Rs47,713 crore and on higher education-from Rs14,376 crore to Rs16,690 crore-Health sector marks the budget although even increased allocation is too little to build the required health services in the country, anyway funds have been raised from Rs12,289 crore to Rs22,300 crore.
An increased allocation of defense at Rs1,40,000 crore is justifiable in present circumstances-in another significant move, expenditure growth curbed to 8.5% by reducing non-plan expenditure and taking austerity measures, higher divestment proceeds and receipts from the auction of 3G Spectrum, these factors will bring down the fiscal deficit to 5.5% of the total GDP. Builders &utilities to benefit as infrastructure get 46% of the total plan allocation-for sure Rs66,100 crore rural development allocation will raise incomes in hinterland besides India Infrastructure Finance Company Limited {IIFCL}given a complete makeover to tap the opportunities of housing finance with a huge Rs20,000 crore of support.

Impact on new economy would be slightly disturbing as Software Technology Park of India {STPI}tax holiday not extended beyond March 2011 though the plan for expenditure on technology to push e-governance and plan to set a National Clean Energy Fund is very encouraging to cope with the multi dimensional approaching challenges. Tax slabs broadened to give substantial relief to individual taxpayers-this is a handsome gift for the great India middle class as new slabs going to infuse lot of money in their hand-proposed IT slabs are: Rs3lakh to 5lakh {10%}, Rs5lakh to8lakh {20%} and on more than Rs8 lakh stands at 30%-exemption level is remain intact at Rs1, 60,000 except the women’s and senior citizens besides an additional deduction of Rs20,000 allowed for investment in infrastructure bonds going to increase the disposable income for investment albeit it would have more progressive if it might be also chosen to increase the lower slabs to Rs 2lakh to boost the spending and saving capacity among the low and medium end service dwellers. In indirect tax-like of Minimum Alternative Tax {MAT} from 15% to 18%was surprising though cutting of surcharge on Corporate tax from 10%to 7.5% is a leveling exercise, hike in deduction for in-house research& development to foster innovation, Real estate companies get more time to claim tax deduction on profits, 2%hike on Cenvat is indeed an jolt on companies but unlikely to derail recovery that aligns on way to GST-Cenvat is the medium excise duty rate applicable on nearly 90%of the goods made locally, peak custom duty unchanged but crude gets a 5% duty shock –these are the mix rulings for indirect taxes.

This year’s budget marks a trend with shift in alignment from indirect taxes to direct taxes-an explicit pastime of a service dominated economy-some of the positive stances like, for the first time, government has decided to target an explicit reduction in domestic public debt-GDP ratio, it will bring out a status paper giving a detailed analysis of the situation and a road map for curtailing the overall public debt. In a rare step towards the fiscal reform, this budget brought fertilizer and fuel subsidies under its purview -by taking this decision, the Finance Minister showed that his commitment for fiscal consolidation is not merely in lip service.

In another very important move on financial sector reform-RBI has asked to prepare for next inclusion of some more private players to foray in banking services besides capitalization programmes for Public Sector Banks including some of Regional Rural Banks {RRB’s} with an allocation of Rs16,500 crore, that would give new pace in modernization of these banks…especially RRB’s would be benefited most because of its ongoing Core Banking Solution {CBS}adaptation which creates some outside assistance imperative. Mutual Funds would relieve as Dividend Distribution Tax {DDT}remains unchanged beside positively changing investment scenario is going to immensely help their business; unrealized gains of non Life Insurance companies will not be taxed-Health Insurance sector also got some new induces.In2003, the government made a law , the Fiscal Responsibility and Budget Management {FRBM}Act with an ambition to eliminate the revenue deficit by 2008-09 and limit fiscal deficit to 3% of GDP, the economy was on fine track to met the FRBM target-having already cut deficit to 2.74% of GDP in 2007-08 and further brought down the revenue deficit to 1.1% before global financial crisis has entirely curtailed those pace albeit after this budget some hope could be conceived to retrieve the FRBM targets in next two fiscals.

Pranab Da, with his great caliber and intentions succeeded to push the Indian economy towards new and vibrant directions nonetheless tackling the all nuances of developmental challenges would be required a transparent execution mechanism at every step of legislative and bureaucratic order, until that wouldn’t ensure, it would be hard to imagine about the tectonic shift in conditions. Inflation and mad rush of Price rise is a matter of grave concern since despite not being sure about the actual poverty level in country, it should be foremost aim of any policy maneuvering to be sensitive on the haunting plights of poors at large. At the end of the day, execution-the only word should be recalled to step up for heading on with the challenges…as a democratic nation, we always have to think in terms of our valuable constitutional order which always gives enough space to formulate a just and equitable socio-economic order for all components of India. Drive for financial inclusion {with the delivery of UID based smart cards}and prospective activism to eliminate the hunger and raising the level of entitlement to the resources of nation for all would be great step before crossing the threshold of crest in economic terms. I always think a good mix of politics and economics could be the finest way out for an economy to proceed on the level of excellence-neither of one is worth of missing.
Atul Kumar Thakur
March2, 2010, New Delhi


  1. Good work.........have not got time to read it fully......but what i read is good

    Keep it up!

    Ashutosh M. Wakhare
    Money Bee Institute

  2. Very well,keep it up,what an analysys.
    Sudhir Zutshi,FICCI

  3. Very insightful observation which catch almost every nuances of budget very well..lot of thanks.
    Pragyan Arora

  4. Earlier in the morning,I read your article on budget..even with my little interest in finance,I can say its a superb analysis.With finest wishes...
    Uma Jha,New Jersy

  5. have succeeded in judicious dealing with all the facades of Union Budget 2010-11-thanks for evaluting Pranab Da in good flavour..
    Sumit Ganguly,Kolkata

  6. What a superb analysis,Pranab Da would give you warm accoloades if he get a copy of your obervation on budget.Very pragmatic and sensible take on different aspects...

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