This budget has been presented when rising inflation worries are overshadowing Indian growth story. Inflation rate of more than 8% and food inflation in double digits has already brought the SENSEX to its 6 months low. Finance Minister had the daunting task of checking the inflation while also maintaining the growth momentum of the Indian economy. Since the budget announcement, BSE index has risen by more than 700 points. Is this the short term rhetoric of budget or indication of some fundamental changes? Here, we will discuss main highlights of the budget and their possible effects on future prospects of the Indian Industry.
Fiscal Deficit:
For FY12, the Government estimates the fiscal deficit to fall to 4.6% of GDP from 5.1% in FY11 (estimated) primarily, on account of increase in both direct and indirect taxes and moderate growth of 3.5% in Govt. expenditure due to reduction in subsidies and reining in of unplanned expenditure. This will be a very difficult task to accomplish considering the fact that fiscal deficit for FY11 would have been 6.3% of the GDP without the spectrum auction.
Reduction in Subsidies:
The Govt. estimates to reduce subsidy bill by 12.5% this fiscal year to tame the rising fiscal deficit. But, the budget has remained silent on the issue of how to reduce subsidies in the backdrop of record high prices of oil, food and fertilizers thus raising speculations of increase in fuel prices after the budget or after state assembly elections in May. With already soaring inflation of more than 8%, it will be a hard task to achieve both the targets of reduction in subsidy and bringing inflation low.
A new system has been proposed to be implemented, under which direct cash subsidy will be given to the BPL (Below Poverty Line) families to buy fertilizers and cooking fuel. This will help in checking the alleged diversion of the kerosene for adulteration and LPG for commercial purposes. A committee headed by Nandan Nilekani has been formed to work out the modalities for this system. This step has been taken very positively by the market.
Direct Tax:
a.) Exemption limit for the general category individual taxpayers has been enhanced from Rs. 160000 to Rs. 180000 giving tax relief of Rs. 2000 to all tax payers whose taxable income is more than Rs. 180000.
b.) Reduced the qualifying age for senior citizens from 65 years to 60 years along with enhanced exemption limit from Rs. 240000 to Rs. 250000.
c.) Created a new category of Very Senior Citizens (80 years and above), who are eligible for a higher exemption limit of Rs. 500000.
d.) Rate of Minimum Alternative Tax (MAT) proposed to increase from 18% to 18.5% of book profits.
e.) Proposed a lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary.
f.) Proposed extension of Rs. 20000 exemption for investment in long-term infrastructure bonds by one more year.
Infrastructure Sector:
Growth of Infrastructure Sector is vital for the consistent growth of the Indian economy. And the budget has taken many steps, like 27% increase in the budget for infrastructure expenditure, extension of exemption for investment in Infrastructure bonds and increase in long term infrastructure bond limit for FIIs to encourage investments in Indian Infrastructure sector. But the implementation part of the infrastructure projects was neglected. There have been huge delays in awarding the infrastructure projects and later in land acquisition processes. The government needs to consider the implementation part as well to bring major turnaround in this sector.
Agriculture:
Agriculture has been given adequate importance and loans at concessional interest rate of four per cent have been announced for farmers who pay their dues in time and the credit target for farm sector has been increased.
Liberalization of FDI:
Allowing the foreign money through Mutual Funds is a major step taken by Govt. and the market has whole heartedly welcomed it, as it will help in routing foreign money into Indian markets. However, the budget has been silent on the issue of liberalization of FDI in the retail and insurance sectors.By:
Amit Tayal (pgp01009.iimrohtak@iiml.ac.in)
