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Economic Environment of Business

Analysis of Union Budget 2011-12 (India)

I. Key Facts of Union Budget 2011-2012

Agriculture and Related Sectors Scope of exemptions from Excise Duty enlarged to include equipments needed for storage and warehouse facilities on agricultural produce. Basic Custom Duty reduced for specified agricultural machinery from 5 per cent to 2.5 per cent. Basic Custom Duty reduced on micro-irrigation equipment from 7.5 per cent to 5 per cent. De-oiled rice bran cake to be fully exempted from basic Custom Duty. Export Duty of 10 per cent to be levied on its export.

Manufacturing Sector Basic Custom Duty reduced for various items to encourage domestic value addition vis-vis imports, to remove duty inversion and anomalies and to provide a level playing field to the domestic industry. Rate of Export Duty for all types of iron ore enhanced and unified at 20 per cent ad valorem. Full exemption from Export Duty to iron ore pellets. Basic Custom Duty on two critical raw materials of cement industry viz. petcoke and gypsum is proposed to be reduced to 2.5 per cent. Cash dispensers fully exempt from basic Customs Duty.

Infrastructure Exports Of 23 suggestions made by Task Force on Transaction Cost, constituted by the Department of Commerce, 21 suggestions already implemented. Action to be taken on the remaining two suggestions. Transaction Cost of ` 2,100 crore will thus be mitigated. Self assessment to be introduced in Customs to modernize the Customs administration. Proposal to introduce scheme for refund of taxes paid on services used for export of goods. Mega Cluster Scheme to be extended for leather products. Seven mega leather clusters to be set up during 2011-12. Jodhpur to be included for the development of a handicraft mega cluster. Parallel Excise Duty exemption for domestic suppliers producing capital goods needed for expansion of existing mega or ultra mega power projects. Full exemption from basic Customs Duty to bio-asphalt and specified machinery for application in the construction of national highways.

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Investment Environment

Foreign Direct Investment Discussions underway to further liberalise the FDI policy.

Foreign Institutional Investors SEBI registered mutual funds permitted to accept subscription from foreign investors who meet KYC requirements for equity schemes. To enhance flow of funds to infrastructure sector, the FII limit for investment in corporate bonds issued in infrastructure sector being raised.

Financial Sector Legislative Initiatives To take the process of financial sector reforms further, various legislations proposed in 2011-12. Amendments proposed to the Banking Regulation Act in the context of additional banking licences to private sector players.

Public Sector Bank Capitalisation 6,000 crore to be provided during 2011-12 to enable public sector banks to maintain a minimum of Tier I CRAR of 8 per cent.

Micro Finance Institutions India Microfinance Equity Fund of ` 100 crore to be created with SIDBI. Government considering putting in place appropriate regulatory framework to protect the interest of small borrowers. Womens SHGs Development Fund to be created with a corpus of ` 500 crore.

Rural Infrastructure Development Fund Corpus of RIDF XVII to be raised from ` 16,000 crore to ` 18,000 crore.

Micro Small and Medium Enterprises 5,000 crore to be provided to SIDBI for refinancing incremental lending by banks to these enterprises. 3,000 crore to be provided to NABARD to provide support to handloom weaver cooperative societies which have become financially unviable due to non-repayment of debt by handloom weavers facing economic stress.

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Public sector banks to achieve a target of 15 per cent as outstanding loans to minority communities under priority sector lending at the earliest.

Agriculture Credit Credit flow for farmers raised from ` 3,75,000 crore to ` 4,75,000 crore in 2011-12. Interest subvention proposed to be enhanced from 2 per cent to 3 per cent for providing short-term crop loans to farmers who repay their crop loan on time. In view of enhanced target for flow of agriculture credit, capital base of NABARD to be strengthened by ` 3,000 crore in phased manner.

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Economic Environment of Business

II. Short Falls

Finance Minister Pranab Mukherjees sixth budget sets for Fiscal Year 2011-2012 (Budget 20112012) seemed both balanced and growth oriented, although it falls short in some key areas as below: Managing fiscal deficit The fiscal deficit target for FY2011-12 was been ambitiously pegged at 4.6%, down from 5.1% this year through March, but the feasibility of achieving this target is less since various subsidies were believed to be under-reported. Improving the fiscal deficit is critical from the point of view of stimulating private investment and controlling inflation. It would also aid debt markets, thereby creating engines to fuel growth. The reduction of the deficit previous FY2010-11 from 5.5% to 5.1% was possible because of the allocation of 3G Spectrum which generated huge earnings for the economy. So was difficult to visualise that which revenue generating instrument the Government use to achieve the target set for FY2011-12. Taming inflation Inflation is one of the major issues plaguing Indias economy, but surprisingly the budget didnt have a clear focus on curbing prices. The exemption limit on personal taxes had been raised marginally to give some relief to the common man, but there were no major budgetary measures to keep inflation in check in the short term. Repatriating black money A five-fold strategy has been announced. The most prominent initiatives are the formation of a Financial Action Task Force for anti-money laundering and a comprehensive national policy for taking legal action on black money from drug-trafficking. The intent of the government seemed was clear, but the seriousness of the proposals will depend on how well they are executed. Personal taxes On the personal income tax front, the finance minister announced a modest rise in the exemption limit from 160,000 rupees ($3,534) to 180,000 rupees ($3,976). In an environment of persistent inflation, this might be viewed as grossly insufficient. There is, however, a bonanza for senior citizens. Industry Impact On the indirect tax front, the finance minister has given industry a boost by maintaining peak excise duty at 10%. He has also reduced customs duty on inputs used for selective industries, which will help moderate the effect of rising input prices. We believe this will trickle down to consumers in the form of lower prices. Finance Minister planned to compensate for these sops by widening the service tax net and marginally increasing the minimum alternate tax, among other

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Economic Environment of Business

measures. However, the net effect to the exchequer of all the tax proposals is a loss of two billion rupees, which will make the attainment of the fiscal deficit target even more challenging. Accelerating Infrastructure Development The infrastructure sector has received a shot in the arm with an increase in planned outlay and the raising of the limit on foreign institutional investment in corporate bonds to $25 billion, among other measures. However, the real challenges to the infrastructure sector are on the execution side, so we are viewing the increase in funding with cautious optimism. Reinvigorating Agriculture It is common knowledge that inefficiencies in Indias food supply chain have led to tremendous losses in perishable food items. This budget brings an increased focus and higher spending on warehouses and mega-food parks, which will help cut losses and improve supply, helping cool food inflation. The allocation for the Rashtriya Krishi Vikas Yojana has been increased by 16% to 78.6 billion rupees, which should help funding agricultural schemes. But the real improvement has to come from better farm productivity that leads to increased production per acre of cultivable area. Education Education spending remains a mixed bag. The outlay on education has been raised by 24% to 521 billion rupees and more stress is being laid on vocational education, but no impetus was been provided specifically for higher education. Education loans should have been brought under priority sector lending to help young talent access better education.

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III. Where we went wrong

The myth is that the marked slippage in fiscal deficit this year is largely because of the economic slowdown in current year that had not been correctly anticipated at the time of finalising the 20112012 budget numbers such as the fiscal deficit target of4.6% is set to widen up to 5.5-6%, at the time of presenting budget government had projected GDP growth rate of 9% where as the advance estimate growth which are recently realised placed it at 6.9%. The difference is particularly because of unrealistic view of government policy maker. Lower economic growth should take only tiny part of blame for the substantial fiscal deficit slippage taking place in the country a deeper blame and one that has a far more debilitating impact on the long term health of the economy and government finances is the manner in which the finance ministry has managed its expenditure in spite of falling revenues and the growing realization that key revenue projections were inflated and without much basis. Take for instance, the governments total receipts (minus borrowings) in April-Dec 2011 which fell 16% over the figure for the corresponding period of 2010. The budget at the start of the year had projected receipts (minus borrowings) growth of around 4%. It is not that the bad news of actual revenues falling behind the target had hit the government all of sudden. Indications of revenue slowing down were there almost from the start of the year. The remarkable feature of this dismal revenue scenario is that except a 7.5% growth in tax revenue (that to would be because of inflation). All other key revenue parameter showed a decline. Even its tax revenue calculation went seriously wrong should the growth in tax revenue collection have fallen to just 7.5% compared to 18% budget target set at the start of the year. At the same time non-plan expenditure in the first 9 months of the current financial year increase by over 15% while the budget have projected a marginal decline of the of such expenditure by about a per cent. There was some restraint on plan expenditure against a target of allowing only

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12% growth, the government plan expenditure in April-Dec 2011 showed a rise of 11% but due to increase in no-plan expenditure in excess, total expenditure in the first 9 months grew by 14% while the budget target allowed in an increase of only 3.4%. So it would be unfair to blame a slowing economy for its tax revenue short fall and attribute that to the widening of fiscal deficit. The reality is that the government fail to keep check on its expenditure after anticipating a slower economic growth rate.

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