Budget 2010 Review

India-An Economic Overview

The last fiscal and the first half of the current fiscal saw India dealing with the impact of the
global slowdown that resulted in the GDP growth rate slowing down from an average of 9%
achieved in the last five years to 6.7%, plummeting exports, a booming fiscal deficit and an
alarming fall in the industrial production. Capital flows shrinked and the stock market tumbled
into an abyss landing a blow to the “decoupling” hypothesis. Despite these negative impacts,
when compared to the rest of the world, India stood out as the better performer and continues to
remain a primary focus for many businesses

Over the last 12 months the Indian economy has picked up steam again. After the high of 9.2%
achieved in2007-08 followed by a dip in 2008-09 to 6.7%, thevital indicators of the economy are
improving and the concerted efforts of the government through thefiscal stimulus and loose
monetary policy have ensured that the Indian GDP growth rate has sped up to are spectable
7.2%. The stable economic growth is backed by strongdomestic demand, rise in private
consumption, investment & trade and positive capital inflows. The robust industrial sector
growth has ensured thatIndia will march ahead in its journey towards economicprosperity.

The fiscal expansion undertaken by the CentralGovernment as a part of the policy response to
counterthe impact of the global economic slowdown in 2008-09 continued in fiscal 2009-10. The
expansion tookthe form of tax relief to boost demand and increasedexpenditure on public
projects to create employmentand public assets. The net result was an increase in fiscaldeficit
from 6.2% of the GDP in 2008-09 to 6.8% inthe budget estimates for 2009-10.

The recent trends in the levels of inflations areworrisome. Inflationis not demand-push but driven
by supply constraints– hence direct monetary and fiscal policy interventionwill have limited
impact. Monetary measures such asincrease in CRR, SLR orinterest rates etc may not be a
solutionfor this inflation; rather, distribution from stocks, higherimports of food items for
immediate consumption andbetter logistics may ease out the pressure in the shortrun

Budget 2010

The Union Budget delivered by Mr. Pranab Mukherjee was better than market expectations with

the focus shifting towards fiscal consolidation while ensuring that the growth trajectory is
maintained.  As expected it has turned out to be a pro-people budget with its primary focus on
the “Aam admi” or the common man.

The government has laid out a road map to reduce fiscal deficit (including below the line items)
to 5.5% in FY2011 and 4.1% by FY2013 from 7.2% in FY2009 and 6.9% in FY2010
respectively. The Indian economy is expected to grow by 7.2% in FY2010 as compared to a
growth of 6.7% witnessed in FY2009. The Indian economy is expected to accelerate in FY2011.

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Budget has announced that gross tax receipts for FY2011 are estimated at Rs, 746,651 crore
while non tax revenue receipts are estimated at Rs. 148,112 crore. Planned expenditure is
estimated to grow by 15% to Rs. 373,092 crore while non plan expenditure is estimated to grow
by 6% to Rs. 735,637 crore. The net Government borrowings for FY2011 are estimated at Rs.
345,010 crore.

The Government has also emphasized on inclusive development with an increase in spending on

social sector being increased to 137,674 crore representing 37% of the total plan outlay for
FY2011. Moreover another 25% of the plan allocations are devoted to the development of rural
infrastructure. The farm loan waiver scheme has been extended by another six months. In context
of fertilizer subsidy a very important step was unveiled by the minister.It has now become
‘nutrient based’ rather than being ‘price based’. Economist and analysts say that this is major
positive step towards the rationalization of subsidies which incidentally is a significantly high
amount.With the urban poor in mind he has promised Rs.3937 crore for their development.Plan
allocation for school education has also been increased by 16% to Rs. 31,036 crore. Defense
outlay for Fy2011 has been increased from Rs. 141,703 crore to Rs. 147,340 crore.

Partial rollback of stimulus

With a pickup in economic activity the Government has begun the process of rollback of the
stimulus package with a 2% hike in basic excise duty to 10%. The service tax rate has been left
unchanged at 10% to bring it in line with the basic excise duty. This is in line with the
Government’s vision of implementing the GST regime which is important as it would
complement the proposed direct tax code which is likely to be implemented from April 2011.

The Government has clarified that it would continue export sops and has extended the 2 per cent
interest subsidy given to exporters on rupee export credit on certain items till March 2011 in
order to help Indian exports sustain growth and stabilize it at 15 to 20 per cent.

Implementation of GST

The budget also addressed some of the key medium term issues like the implementation of the
GST by April 2011. The Government has pushed back the deadline for implementing GST from
April 1, 2010 to April 1 2011. This has happened because some of the states were not ready
for implementation of the GST as some of them feared that they may lose financial autonomy
while others just fear the novelty of the tax in the country.

Deficit reduction through disinvestment

The Government has re iterated its intention of offloading partial stake in approximately 60 state-
owned companies over the next couple of years which includes steel giant SAIL, coal major CIL,
telecom giant BSNL. The government would come out with a detailed action plan for offloading
its stake in PSUs by March which would be to ensure maximum returns for the government and

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bigger retail participation. The disinvestment target for Fy2010 and FY2011 are pegged at Rs.
25,000 crore and Rs. 40,000 crore respectively.

Direct Tax

With the rising inflation and the global recession in the last year, the Common Man was hoping
for reasonable tax reliefs. The Finance Minister (FM) had the daunting task of balancing the
fiscal deficit. He has definitely made an attempt by making some changes to the
existing individual tax regime. 
The basic income tax exemption limits for individuals, women & senior citizens were left
unchanged at Rs. 160,000, 190,000 and 240,000 respectively.With an intention to provide
the common man with more net disposable income to combat the inflationary trends, the existing
income slabs subject to tax have been modified. At the same time it is also a step forward
towards implementing the direct tax code by April 2011. The FM has increased the income
threshold at which the higher rates of tax apply. This can be tabulated as under:

Tax Rates Current (Rs.) Proposed (Rs.)

NIL Up to 1,60,000 Up to 1,60,000

10% 160,001- 3,00,000 160,001- 5,00,000

20% 3,00,001- 5,00,000 5,00,001- 8,00,000

30% Above 500,000 Above 800,000

The above changes will result in a maximum annual tax savings of upto Rs.20,600 for people
with an annual income of Rs.5,00,000 or below. Also it will translate into an annual tax savings
in the range of Rs 20,601 to Rs. 51,500 for people earning higher than Rs 5,00,000. 

In line with the policy of boosting the infrastructure sector by promoting investments,
an individual who invests in long term infrastructure bonds (to be notified by the Government)
will now get an additional deduction for the amount invested in such bonds to the extent of Rs.
20,000 under section 80(C).  This is a good measure as presently there is a tax deduction limit of
Rs 100,000 which is anyways having various investment options all lumped up together.
Anindividual who invests in these infrastructure bonds will also be able to get incremental
tax reliefs. 

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Corporate tax rates have been left unchanged at 30% for FY2011. India Inc would have to wait
for fiscal 2011-12 for the rate to be 25 per cent as proposed in the draft Direct Tax Code.
However surcharge was brought down from 10% to 7.5%.

Rate of Minimum Alternative Tax (MAT) has been increase from 15% to 18% of book profits
which would impact the profitability of companies currently paying MAT. Weighted deduction
on expenditure incurred on in-house R&D enhanced from 150% to 200%.

Indirect Taxes

Some of the major sector specific highlights of the Union Budget are as follows:

The specific rates of duty applicable to Portland cement and cement clinker are also being
adjusted upwards proportionately. Similarly, the excise duty on large cars, multi-utility vehicles
and sports-utility vehicles are being increased by 2 percentage points to 22 per cent.

The basic duty on crude petroleum is being restored to 5 per cent while duties on petrol and
diesel are being increased to 7.5 per cent. The duties on other refined products are being raised to
10 per cent. Central Excise duty on petrol and diesel are being enhanced by Re.1 per litre each.
Scheme of one per cent interest subvention on housing loan up to Rs.10 lakh, where the cost of
the house does not exceed Rs.20 lakh which was announced in the last Budget has been extended
by one year till March 31, 2011.

Conclusion

The budget presented by Finance Minister Pranab Mukherjee was a very balanced one which
focused on sustaining the growth in the economy along with reducing the Everest mounted Fiscal
Deficit. A calibrated exit from the stimulus was required but without hampering the growth..
In the Union Budget the government has also provided clarity onimplementation of GST as well
as the proposed direct tax code.

Based on the measures announced in the budget and also taking into account the global
macroeconomic scenario, it is expected that the economy will grow by 8.0 per cent at factor cost
in 2010-11.Growth in the services sector, which accounts for nearly 57 per cent of the GDP, is
expected to moderate from 8.7 per cent in 2009-10 to 8.4 per cent in 2010-11 due to slower
growth of government expenditure. In contrast, the hotels, transport, communication, finance and
real estate sectors would expand at a faster pace as compared to 2009-10 with the expected
revival in household demand. Industrial growth is expected to remain at 2009-10 levels on the
back of sustained increase in demand - both exports and domestic. In the event of a normal
monsoon, agriculture is expected to grow at a higher rate than its trend because of a low base of
2009-10, when the sector had contracted due to severe drought.

Investment activity is likely to pick up, with gross fixed capital formation growing at 12.5 per
cent as compared to 5.2 per cent in 2009-10. Corporate profits are at relatively healthy levels as

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corporates are having increasing access to external sources of finance. Hence, supply of funds is
not expected to present any roadblocks to investment growth, unless government borrowing goes
beyond the budgeted numbers.

The main threat to growth arises from the escalating inflation, at least in the first half of 2010-11,
due to the agricultural price shock, rising commodity prices and recent petrol and diesel price
hike. In the event of an unanticipated sharp rise in inflation, the Reserve Bank of India would
have to tighten the monetary policy at a faster pace and this would impact market interest rates.

In recent months, the Rupee has remained relatively stable at around 45.5 to 46.5 per US$ mark.
Foreign investments are expected to start flowing back into the country at a faster pace in 2010-
11, thus enabling the currency to continue on its fundamental trend of appreciation. The analyst
expect the Rupee to stabilize in the range of Rs 43.5-44.0 per US$ by March 2011.

On the fiscal front, tax receipts are expected to increase sharply by 14.8 per cent along with
rising economic growth. In addition, the combined expected revenues of Rs 750 billion from
disinvestment in public sector enterprises and revenues from the auction of 3-G would bring in
additional revenues. As a result of a significant increase in government revenues, the fiscal
deficit to GDP ratio for 2010-11 is expected to decline to 5.6 per cent from 6.7 per percent a year
earlier.

Other Highlights of Union Budget 2010 are as follows:

 Income Tax department ready with two-page Saral-2 return forms for individual salaried
assesses.
 A unique identity symbol would be provided to the Indian Rupee in line with US Dollar,
British Pound Sterling, Euro and Japanese Yen.
 Rs 1,900 crore allocated for Unique Identification Authority of India.
 Rs 1,73,552 crore provided for infrastructure. (46% of total budget amount)
 Government committed to ensure continued growth of Special Economic Zones
development.
 Repayment of loan by farmers extended by six months to June 30, 2010 in view of drought
and floods in some part of the country.
 Allocation for new and renewable energy ministry.
 Clean Energy Fund to be created for research in new energy sources.
 Rs 500 crore allocated for solar and hydro projects for Ladakh region.
 Alternative port to be developed at Sagar Island in West Bengal.
 Allocation for National Ganga River Basin Authority doubled to Rs 500 crore.
 Government for competitive bidding for coal blocks for captive power plants.
 Mega power plant policy modified to lower cost of generation; allocation to power sector
more than doubled to Rs 5,130 crore in 2010-11.

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 Government proposes to set Coal Development Regulatory Authority.
 Propose to maintain thrust of upgrading infrastructure in rural and urban areas. IIFCL
authorized to refinance infrastructure projects.
 Interest subvention for timely repayment of crop loans raised from one per cent to two per
cent, bringing the effective rate of interest to five per cent.
 Rs 200 crore provided for climate resilient agriculture initiative.
 Government to provide Rs 16,500 crore to public sector banks to maintain tier-I capital.
 Allocation for women and child development hiked by 80 per cent.
 Government decides to set up National Social Security
 Fund with initial allocation of Rs 1000 crore to provide social security to workers in
unorganized sector.
 Rs 1,270 crore provided for slum development programme, marking an increase of 700 per
cent.
 Allocation for development of micro and small scale sector raised from Rs 1,794 crore to Rs
2,400 crore.
 One per cent interest subvention loan for houses costing up to Rs 20 lakh extended to March
31, 2011; Rs 700 crore provided.
 Indira Awas Yojana scheme's unit cost raised to Rs 45,000 in plain area and Rs 48,500 in
hilly areas.
 Allocation for NREGA stepped up to Rs 40,100 crore in 2010-11.
 For rural development, Rs 66,100 crore have been allocated.
 Deficit in food grains storage capacity to be met by private sector participation.
 Exclusive skill development programme to be launched for textile and garment sector
employees.
 Plan allocation for Ministry of Minority Affairs raised from Rs 1,740 crore to Rs 2,600 crore.
 Plan outlay for Ministry of Social Justice raised by 80 per cent to Rs 4,500 crore.
 Government to provide Rs 300 crore to organize 60,000 pulse and oilseed villages and
provide integrated intervention of watershed and related programme.
 Government to continue interest subvention of 2 per cent for one more year for exports
covering handicrafts, carpets, handlooms and small and medium enterprises.
 Government intends to make FDI policy user friendly by compiling all guidelines into one
document.
 RBI considering some additional banking licenses to private companies, NBFC will also be
considered if they meet criteria.

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