Salar Mohamed Bijili
So, the much awaited yearly exercise is here. All eyes glued to the TV and internet to see what our honorable FM has got for us up his sleeve. Let’s have a look at the buildup to this budget.
2010-2011 – The year that was
- A huge fiscal deficit of 4.8% fueled by a strong currency crunch and slow recovery of global economy after the recession. The unexpected inflow of 3G auctions money helped reduce this deficit. The overall borrowing of the govt was pegged at 3.54 Lac crores
- GDP growth was at 8.6%. After seeing a dip in 2009-10, there was a good rebound in 2010-11
- Average inflation has been hovering around 9% for most part of the year owing to high commodity prices in the international market. Political turmoil’s in the Middle East and North Africa hasn’t made things any better for the commodities space.
- Current tensions in Libya have seen oil hitting the 100$ barrier after a long time and poised to go even further north
- The SENSEX has been relatively flat throughout the year with cautious optimism in the market keeping it in a relatively narrow band.
The monetary stance of the government changed from “Excess liquidity” to “tight liquidity” since March 2010. All the excess money was mopped up by hiking interest rates every now and then. March 2010 was the last time the system was in excess cash. Repo and reverse repo were hiked by 200 and 150 basis points respectively this year. As we speak, the system is in systemic liquidity deficit and borrows close to 70k crore per day through RBI’s repo window. Also inflation remained stubbornly high for most part of the year owing to supply side constraints to start with. This was further fueled by inefficient storage systems and bureaucratic hassles. But later on, the inflation became more broad based and factored demand side pressures too. The average Indian today earns more and is willing to consume, this has also led to hike in inflation.
Mutual funds, that saw a bloodbath in 2009-10 owing to excess redemptions, saw decent returns in last financial year. Particularly ELSS has outdone other MF categories owing to the long tenure and less redemption pressure.
Budget 2011-12 – Highlights
- FII’s can invest directly in Mutual funds – This gains importance as MF industry has been battling volatility and cash crunch.
- The disinvestment target of Rs.40,000 cr is as expected. The previous highest disinvestment done by the govt was Rs.23,550 cr in 2008-09. Doesn’t surprise me much because given the response Coal India Limited (CIL) got last year, the companies that are lined up this year are IOC, MMTC and Rashtriya ISPAT ltd might also get positive response from the market. But FM has assured that the 51% govt holding in all the PSUs would stay. Sudden and full disinvestment would only result in.
- GST has been a long pending reform from a taxation perspective and would bring states to a consensus on taxation. FM has indicated that the April 2011 deadline would be met. If the I.T infrastructure is in place, it would roll out by April 2011
- Service tax retained at 10% – Good news for corporates. Expecting the market to give a thumbs up to this
- Not much of an emphasis on FDI in retail – FM should have given FDI more room as retail is expected to boom in the years to come. Maybe the FM thinks time is not ripe yet!
- Fiscal deficit pegged at 4.6% – Borrowing numbers stand at Rs.3.43 crores(almost same as 2010-11)On expected lines. But what remains to be seen is how this gap would be filled up and where would the revenue generation happen? Good signs for banks as they see hike in borrowing. See more action in corporate bonds this year. Also the expected fiscal deficit for 2012013 has been pegged at 3.5%- not a mean task to achieve.
- Expenditure estimated to be Rs.4.4 lac crores, up 18.3%. This would be tough for the market to digest because one wonders where govt would raise so much to spend?. How long would it take to implement such expenditures?
- Storage capacities for grains to be increased – This could have be a double edged sword. Though the govt wishes to curb inflation by reducing wastage, this measure could increase the MSP(Minimum support price) which is a direct input to Inflation.
- There is not much of clarity in FII investments in infra sector bonds. Given that the current limit itself is not fully utilized, how much of an impact this would make?. A better measure would be to hike the limits for salaried employees to make these bonds an attractive option.
- Easier service tax refunds for SEZ – Well, a good sign but remains to be seen how its implemented!
- So far, no strong words on Inflation – Signs that FM would pass the buck to RBI. Not a good sign as its the govt stance and RBI core committee that devises monetary policy. In his words
- “But it (inflation) clearly remains a concern… But I expect the policy taken by RBI to further moderate inflation in coming months… Average inflation to be lower next year. Difference between retail and wholesale prices is unacceptable” finance minister Pranab Mukherjee said while presenting the Budget for 2011-12
- Fertilizer sector gets infrastructure status – Good news. Would make it easier for them to pitch for financing through the issue of bonds under infra category
- The oil sector has nothing much to cheer for as there arent any tax sops for them. Seems status quo would prevail
- Some good news for salaried individuals. Exemption limits for salaried class has been hiked from 1.6 Lacs to 1.8 Lacs. Would result in a loss of Rs.12,000 cr. But its not as good as it sounds because inflation is anyway eating away this nominal exemption hike.
- There is a proposal to hike service tax on air travel and posh restaurants – This must be bad news for airlines that are already battling losses. In lines with the popular trend of taxing the wealthy and rich
- Credit flows to farmers hiked to Rs.4.75 lac crores. Good news for the agricultural sector. Also import of agriculture machinery would be taxed at 4.5%. This is a sharp decline from 5% last year. But this may benefit only the large farmers who enjoy the subsidies and evade taxes. Would not make much of a difference to the small and marginal farmers(who incidentally comprise 75% of farming population)
- Defence sector has been getting a huge share in budgets every year. This year too, defence gets a cool 1.64L crores. FM has also indicated he may loosen the strings more if needed
- Some good news for senior citizens. The age to qualify for tax exemption has been brought down to 60%. Also a new category of senior citizens above 80 years has been formed. They would get exemption till Rs.5 Lac per year
- Tax free bonds to the tune of Rs.30,000 crores announced. Given that infrastructure has long gestation periods and grappling regulatory issues(skirmish between environment & mining ministry, for eg) one wonders how the govt plans to generate revenues to justify this huge spending
- Overall growth projection stand as under
- GDP -8.6%
- Agriculture – 5.4%
- Industry – 8.1%
- Services – 9.1%
- Projected GDP growth is at 9%
- 100% hike for anganwadi workers – A populist move
- MAT(Minimum alternate tax) to be hiked from 18% to 18.5% – Am of the opinion that the govt wants to be on the safer side in taxation to avoid tax evasion on book profits by companies
- Iron ore export duty raised to 20%
- Setting up of public debt management office is proposed. This would streamline debt borrowing program and reduce the burden of RBI. Public debt bill to be introduced soon
- There is lot of emphasis on rural infrastructure and agriculture spending but all seem very far fetched given the sorry state of affairs in the respective ministries. They have not done enough to secure food for the BPL families and farmer suicides continue unabated.
- Some encouraging news on PPP (public private partnership). The policy framework is in initial phase. Would love to see how the govt makes best use of this model in agriculture sector
- No changes in DTC implementation. The deadline of April 2012 would be adhered to
Overall, the budget seems to give an impression that the govt is planning big for the future without looking much into the present.Huge investments without any concrete time-frame for returns may come back to haunt us in the coming years. It has tall plans in almost all the sectors but little plans and no tenable road-map to realize those dreams. There has been good thrust on agriculture (30% increase in credit flows to farmers)but given the inefficiencies and rot in the system, am afraid if any of them would reach the intended recipient. As i said earlier, it would be pocketed by the big farmers. The LPG and kerosene subsidies seldom reach the BPL families. A direct transfer, if implemented properly would serve the purpose. Any ambitious plan has to be backed up by a suitable revenue model. This seems to be missing. The budget is also mum on tax exemptions as everyone seems to be waiting for DTC regime to take over. For the common man, this budget gives nothing much to cheer for. All the schemes announced would only succeed if efficient governance is in place. This budget could have focused on I.T infrastructure for governance as its public knowledge that an I.T system goes a long way in reducing corruption. Any budget would be a success only if it manages to reach the right person. Seems only baby steps are being taken in this direction. The salaried class feels utterly left out.
Budget – 2011-12 – Large dreams, no clear vision and not practical enough.
Author Blog:- http://salarb.blogspot.com