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Budget

Budget

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A PROJECT ON ANALYSIS OF BUDGET 2009-2010

Project report submitted in Partial Fulfilment of the requirements one year post Graduate Diploma in Business Administration By MARIA ARUL CHRISTINA Under the Guidance of Ms. Lorna Raymonds

MOUNT CARMEL INSTITUTE OF MANAGEMENT BANGALORE 560052

CONTENTS 

Introduction  Economic survey  Highlights of the Budget 2009-2010  Impact of the budget on the people  Impact of the budget in different sectors  Conclusion

INTRODUCTION
Budget (from French bougette, purse) generally refers to a list of all planned expenses and revenues. It is a plan for saving and spending.[1] A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms. In summary, the purpose of budgeting is to: 1. Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out. 2. Enable the actual financial operation of the business to be measured against the forecast.

Government budget
The budget of a government is a summary or plan of the intended revenues and expenditures of that government. The United States federal budget is prepared by the Office of Management and Budget, and submitted to Congress for consideration. Invariably, Congress makes many and substantial changes. Nearly all American states are required to have balanced budgets, but the federal government is allowed to run deficits. The Union Budget of India, referred to as the Annual Financial Statement[1] in Article 112 of the Constitution of India, is the annual budget of the Republic of India, presented each year on the last working day of February by the Finance Minister of India in Parliament. The budget has to be passed by the House before it can come into effect on April 1, the start of India's financial year.

ECONOMIC SURVEY
PRE - BUDGET HIGHLIGHTS

Expectation from the Budget 2009: 1. There are lot of expectation from the Individuals to provide some tax relief from this year. Upto Rs.1,50,000 there is no tax at present should be increased to Rs. 2,50,000. 2. For females the limit should be increased from Rs. 1,80,000 to Rs. 3,00,000 and for senior citizens it should be increased from Rs. 2,25,000 to Rs. 3,50,000. 3. Highest Tax rate of 30% should be increased from Rs. 5,00,000 to Rs. 10,00,000. 4. Peak rate of 30% should be reduced to 25% 5. Surcharge of 10% was collected to meet certain contingent and now it should be reduced. 6. Under Sec. 80 C, the investment in Bonds, LIC and Mutual funds were allowed upto Rs. 1,00,000. This amount should be increased to Rs. 2,00,000. 7. The non-taxable Medical expenses for salaried class is at present Rs.15,000 per annum. this amount looks very low and should be increased to Rs. 50,000. 8. Fringe Benefit Tax should be removed. 9. Transport allowance is allowed upto Rs.800 per month for travelling from home to office and back. This should be increased to Rs.2,500 per month. 10. Interest paid for Housing Loan under Sec 24 is Rs.1,50,000 at present to Rs. 2,50,000 . 11. Senior citizens are considered people aged above 65 years. This should be reduced to 60 years.

HIGHLIGHTS OF THE BUDGET 2009-2010

Economy
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India remains second-fastest growing economy in the world Economy expected to grow 7.1 percent this fiscal Budgetary support increased for Ministries of Rural Development, Road Transport and Highway, Power, Railways, Industrial Policy and Promotion and IT. Revised fiscal deficit estimated at 6 per cent of GDP as against 2.5 per cent in the Budget estimate. Revised revenue deficit placed at 4.4 per cent as against 1 per cent in the Budget estimate for 200809. Fiscal deficit has gone up from Rs 133,287 crore in the budget estimates to Rs 326,515 crore in the revised estimates for 2008-09. Rs 40,000 crore relief extended through tax cuts to counter economic slowdown. Budget estimate for expenditure for 2009-10 put at Rs 953,231 crore. This includes Rs 285,145 crore for plan expenditure while non-plan spend put at Rs 668,883 crore. Need to make economic growth inclusive Global economic situation not encouraging Extraordinary situation merits extraordinary measures

y

y

y

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y y y

y y y y y y y y

Need to consider additional fiscal measures in regular budget Financial sector reforms need to be accelerated In past three years, India grew by average of over nine per cent Per capita income expanded by 4.7 per cent per annum Fiscal deficit was brought down from 4.5 per cent to 2.7 per cent Revenue deficit was cut from 3.6 per cent to 1.1 per cent A record US dollar 32.4 billion FDI received in 2007-08 Notwithstanding financial uncertainty and slow down, FDI inflows during April-December 2008 were US dollars 23.3 billion recording a growth of 45% over the same period in 2007.

Infrastructure
y

Government spent Rs.70,000 crore on 37 infrastructure projects in 2008-09 54 central infrastructure projects approved under public-private partnership (PPP) Total expenditure of PPP projects estimated at Rs.67,700 crore India Infrastructure Finance Company to raise Rs.10,000 crore by end-March India has weathered inflation crisis, but no room for complacency Bharat Nirman, the time-bound plan for building rural infrastructure receives Rs 40,900 crore. This package has six components ² rural roads, telephony, irrigation, drinking water supply, housing and electrification.

y

y y

y y

Agriculture & Rural Development
y y y

Country·s agriculture outlook is encouraging Agriculture grew by 3.7 per cent per annum Focussed attention to agriculture

y y

Plan allocation for farm sector hiked 300 percent in past five years Three-fold increase in short-term agriculture credit to Rs.250,000 crore Farm debt worth Rs.65,300 crore waived Government will continue to provide additional subsidy to farmers Corpus of Rural Infrastructure Development Fund hiked to Rs.14,000 crore from Rs.5,500 crore Bharat Nirman, the time-bound plan for building rural infrastructure receives Rs 40,900 crore. This package has six components ² rural roads, telephony, irrigation, drinking water supply, housing and electrification.

y y y

y

Education
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Outlay for higher education hiked 900 percent for 11th Five Year Plan 15 Central Universities, 6 new IITs established in 2008-09 Two new schools of Planning and Architecture at Vijayawada in Andhra Pradesh and Bhopal in Madhya Pradesh have started functioning. 6 new IIMs proposed for the 11th Plan in Haryana, Rajasthan, Jharkhand and Tamil Nadu. Number of beneficiaries of educational loan to students extended from 3.19 lakh to 14.09 lakh Amount of education loan outstanding has increased from Rs. 4,500 crore as on March 31, 2004 to Rs. 24,260 crore as on September 30, 2008. Since 2004-05 nearly 500 ITIs have been upgraded into centres of excellence A National Skill Development Corporation has been created to stimulate and coordinate private sector participation in skill development.

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Defence
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Defence allocation increased to Rs1,41,703 crore in wake of recent terror attacks. The Plan expenditure will be to the tune of Rs.86,879 crore against Rs.73,600 crore and will include Rs. 54,824 crore for capital expenditure as against Rs.41,000 crore in the RE for 2008-09. The raise has been made to strengthen the security in view of the recent Mumbai terror attacks.

y

y

Social Sector
y y

Country·s social security net will be strengthened A provision of Rs.100 crore has been made for 2009-10 for the setting up of Unique Identification Authority of India. The Authority, being set up under the aegis of Planning Commission, will put in place a comprehensive system of unique identity for resident population of the country.

y

Trade & Commerce
y y y

Exports increased 26.4 per cent per annum Foreign trade increased from 27.3 per cent to 35.5 per cent Tax to gross domestic product ratio expanded by 9.2 to 12.5 per cent Agriculture grew by 3.7 per cent per annum

y

IMPACT OF THE BUDGET ON THE PEOPLE

The Budget doesn·t seem to have made much of a difference as far as the finances of middle-class individuals are concerned. It has, however, benefited individuals in the higher salary bracket. The Budget failed to fulfil two major expectations that were p inned on it--increase in the Section 80C deduction limit and increase in the deduction limit of interest on a home loan. Presenting his first Budget after taking over, Finance Minister Pranab Mukherjee announced two major steps that are set to have a positive impact. It has opened the ambit of education loans to students opting for vocational courses and has cleared the air on the taxation process of the New Pension System. Also, the Budget has paved the way for rolling in tax reforms. Here are the reactions of the people belonging to different sectors:

Mr. Francis, Entrepreneur.
FBT - most entrepreneurs (SME) in India take refuge of avoiding taxes by expensing under the FBT expense heads. - Travel/Entertainment/Misc Allowances. Now most or nearly about 90% of employees of small, large and medium sized companies get tax relief from IT under the FBT provisions. (Companies absorb the FBT tax outgo) and the tax results in barely a 6-7% taxable income as opposed to 33% in employees cases.I doubt this will be mov ed out as the government does get some revenue, yes marginal but yes, it does loose out if it had taxed employees as compared before the FBT regime came into place. There are more people who will be negatively impacted by the FBT being abolished.

Mr.Padmanadan, PSU.
The disinvestment of PSU's was not made clear which PSU's to be divested. He tried to woo the investors by extending the tax exemptions limit by Rs.10000 and waived of the 10% surcharge on the tax by seems it didnt had a deep effect on the investors. A taxpayer merely saves 1030 on tax if his income is under 10lakh rupees . As well he should more focus on implementation of the policies declared rather than only declaring policies as "actions speaks better than words". So the govt. needs to have a clarity on the implemtations of the policies by streamlining the process and monitoring the progress in all the plans and policies declared by setting a deadline for the working committee to submit their reports on the progress of the work .

Mr.Sharma , Professor
This budget was just a formality by our FM., nothing much is been announced, this seems as a vote of account.The government did not gave any concerete measures for revival of the economy, not much in the infra space too, 10k incerese in IT limit was like people are demanding to incerease so it is incereased, it is not even 1000/ month, the FBT was scraped but the MAT was incereased by 5% to 15%.Even the most awaited was the scrap of SST , that too did not happen, what was scraped was Comodity Tax, which does not affect us at all. So i believe that the FM has given the budget just for the sake of giving it, and the markets have reacted sharply to that...

Jyothi , associate , Barclays
I think the Budget should have given more incentive to infrastructure sector.The kind of fillip that the market was expecting is missing.No policy announcement on divestment was dampener for the stock market.Even the raised exemption limit of Rs.10,000 in personal income tax is hardly any relief given the high prices in the markets, though the abolition of fringe benefit tax is a good step. The finance minister should have initiated bold measures to boost economic revival given the current circumstances and especially since the economy is on a comeback trail.

Mr. Shyam , Real Estate Owner
The sector was expecting measures such as extension of incentive for affordable housing, measures to boost capital funding and eliminating liquidity crunch, providing a mechanism for taxation of REMF, increasing available deduction for interest on housing loans and so on but the budget fell short on such expectations. Overall, budget 2009 failed to make an impact on the real estate sector and has left it wanting for more. Hopefully, the new Income tax code to be released in the next 45 days will have measures, which shall provide much needed impetus to the Indian real estate sector.

Miss. Ranita , HDFC
On taxes, the simplicity of the approach is endearing. The FM has talked of stable tax rates, and that are simple to administer. Though the market started coming off once it was announced that there were no reductions in corporate tax, there was actually little hope for cuts this year considering the fiscal situation. In fact, to leave taxes untouched, and yet provide so much for social welfare is a big achievement. It·s pragmatic and reasonable. One wish though, is to take taxes progressively down by 2% all the way to 20% over say 6-8 years. This may look difficult now, but many micro industries, whose entire chain works in cash, may start paying taxes, and this may well offset the loss of income. This will directly add to official GDP numbers, will strengthen the balance sheets of those companies and help them leverage to grow. More so, this will help global investments, as it will make India more competitive in terms of return on their equities. Many observers may have expressed discomfort that the fiscal deficit is high. In fact, contrary to expectations, the fiscal stimuli on customs and excise continue. But this is actually a great decision, as growth will bring in taxes to address the fiscal deficit. Higher growth and buoyant stock markets will help divestments, and all this can address fiscal deficit. Notice that he is taking the fiscal deficit seriously, it·s only that his prescription is one founded on growth.

Mr. Manoj Agrawal , Metaliks ltd.

It's a growth budget with emphasis on generating consumption and investment by increasing money in the hands of individuals. The Finance minister has made a bold statement of getting the GDP growth rate back to 9 %, which in itself will provide impetus by way of large spending in infrastructure projects. The plan to increase investment in infrastructure to 9% will boost in fra related sectors like steel, cement, power sectors and few others.

Sharvan , Student
I hope the total public spending on education is increased. We keep fretting about all kinds of issues but education, which can become our tool in slaying most of those issues like unemployment, is not given much attention. To enable students from economically weaker sections to access higher education, the Budget proposed to introduce a scheme to provide education loans full interest subsidy during the moratorium period. The scheme will cover loans taken by students from scheduled banks to pursue any of the approved courses of study in technical and professional streams from recognised institutions in India. Education loans is low be available to a larger section of students. It is estimated that over 5 lakh students would avail this benefit.Section 80E of the Income Tax Act provides for a deduction in respect of interest on loans taken for pursuing higher education in specified fields of study. Even the parents can avail Section 80E benefit.

IMPACT OF THE BUDGET IN DIFFERENT SECTORS
IT COMPANIES
Extension of tax holiday ² Short-term respite! One of the positives is the extension of tax holiday for Software Technology Park of India (STPI) scheme. The industry was eagerly awaiting the announcement of extension to the tax exemption given to export income under the STPI scheme. The extension of the STPI scheme provides short-term relief to the industry, which is facing tremendous margin pressures due to the economic slowdown. This will have a significant impact on almost all IT and BPO companies in the immediate future. However, extension of the 1 0A benefit for a period of five years could have done the industry much more good and a reason to celebrate. In addition to this, the budget has cleared the long standing ambiguity in Section 10AA on the 100% tax holiday. Until now, tax holiday applies to the profits of a company·s operation within the special economic zone (SEZ). However, the Finance Minister has now extended the tax benefits to the total earnings of the ¶undertaking· Some other positives Some of the recommendations by the Finance Minist er of relevance to the BPO/IT sectors include the following. Removal of Multiple Taxation on ¶Packaged Software·: A move towards removal of multiple taxation on ¶packaged software· will help in adoption of IT in general, and also reduce costs for all businesses, and especially IT and BPO companies which are big buyers/users of technology. However, clarifications are awaited on issues of defining transfer of rights to use, software valuation and coverage of the current exemption that will enable better quan tification of the extent of benefits. Abolition of Fringe Benefit Tax: This is another positive for the companies, though marginal (FBT accounts for not more than 5% of the total tax provisions of these companies). This however will reduce the administrative burden for companies and might bring back the popularity of ESOPs. Increased Outlay for Institutions: The Finance Minister has given special attention to the education sector and has proposed increased outlay for institutions such as IITs and National Institutes of Technology (NITs) to Rs 20,000 m. This will benefit

the industry in the long term with the availability of a larger and employable talent pool. Safe-harbor Mechanism for Captive Centers: The Central Board of Direct Tax (CBDT) will formulate a safe-harbor mechanism for the captive centers (software and back office) of multinational companies. The safe-harbor provisions are expected to provide a degree of certainty to the captives of foreign companies in matters of taxation as the results declared by taxpayer who fulfill some prescribed conditions are accepted without detailed scrutiny. However, this is just a proposal at this stage and benefits will depend on its implementation .

EDUCATION SECTOR
For the education sector, a slew of schemes to leverage literacy rate in India along with helping students to study higher education has been announced. A new Centrally Sponsored Scheme to centralize education at higher secondary level has been introduced. The outlay on Higher Education has been increa sed 900 percent in the eleventh five year plan. Along with the six IIT universities that were inaugurated last fiscal year, two more new campuses will be setup at Madhy a Pradesh and Himachal Pradesh.The Education Loan Scheme (ELS) has been revised and increases four times to facilitate students to avail more loan accounts. The ITIs upgraded into centres of excellence will be funded to promote skill development in the education sector.

REAL ESTATE
On the positive side, measures such as increased outlay on schemes such as JNNURM/Rajiv Awas Yojana, allocation of Rs 2,000 crores for Rural Housing Fund, launch of programme of housing to create 1 lakh dwelling units for Central Para-Military Forces personnel, increased allocation for common wealth games are all welcome initiatives. Introduction of 100% deduction for capital expenditure incurred for setting up and operating warehousing facilities for storage of agricultural produce should result in investments in the segment. Reduction of TDS rates on rental payments from 20% to 10% on use of land, building or furniture and unconditional excise duty exemption to prefabricated structures for building and so on are steps that should have a positive impact on the cash flows of real estate companies. Rationalisation of tax holiday provisions in respect of deductions available to developers of affordable housing, deemed valuation for property transfers not registered for stamp duty purposes are steps that would go a long way

in promoting transparency in the sector. However, not all measures which were announced are applauded by the sector. Benefits of the composition scheme of 4% under ¶works contract service· would now be available only if tax is paid on the entire value of goods and services (whether under the same contract or any other contract including goods received free of cost). CENVAT credit has been denied on specific goods used for construction of shed, building or structure for support of capital goods, which would further add to the cost of construction. These could have an adverse impact on the costs and consequently sales in the current market.

Rural Development
The Indian Government continues to accord highest priority to rural development. A number of programmes have been designed to help improve the living conditions of the rural population. The programs designated under the Indian Interim Budget 2009 are: (i) The Rural Infrastructure Development Fund (RIDF). The RIDF is the main instrument to channel bank funds for financing rural infrastructure, through State Governments. The corpus of RIDF was increased from Rs.5,500 crore in 2003 -04 to Rs.14 thousand crore for the year 2008-09 to ensure greater availability of funds for its activities. A separate window for rural roads was created under RIDF with a corpus of Rs.4 thousand crore for each of the last three years. (ii) Indira Awaas Yojana (IAY). Given the importance of housing for the weaker sectors of the rural population, 60 lakh houses were to be constructed under the Indira Awaas Yojana by 2008-09. In the period between 2005 -06 and December 2008, 60.12 lakh houses have already been constructed. (iii) Panchayat Empowerment and Accountability Scheme (PEAIS). The PEAIS is an existing scheme under the central sector plan which has been recognized as a powerful instrument to incentivise States to empower the Panchayats and put in place accountability systems to make their functioning transparent and efficient. The Interim Budget acknowledges the need to build in incentives for encouraging States to devolve funds, functions and functionaries and set up an institutional framework for such devolution. The Indian Government has proposed to substantially expand the scheme through State allocations. (iv) Project Arrow. The Department of Posts has launched ´Project Arrowµ to

revitalize its core operations and to provide new technology enabled services to both rural and urban Indians. So far this has been successfully implemented in 500 post offices in the country. This Project will receive full government support as it will enhance the services offered to India and will also lay the foundation for a vibrant delivery mechanism for many social sector schemes such as Pensions, and the National Rural Employment Guarantee Scheme (NREGS).

CONCLUSION
In a global scenario where the major economies continue to contract, even if more slowly than before, there is no way the government could have taken the pedal off fiscal expansion, to keep India·s growth momentum going. Thus, the largest ever fiscal deficit, measuring 6.8% of GDP for 2009 -10 and a tax burden on the economy that is lower, proportionate to GDP, than in the last fiscal, is a plus, rather than a negative. In fact, 6.8% of GDP is the Centre·s deficit alone. Take into account the states· deficit of nearly 4% of GDP and likely, albeit unstated, off-budget borrowings to finance fertiliser and food subsidies, the combined government borrowing requirement would be a little under 12% of GDP. That is a huge piece of fiscal stimulus. To avert the risk of this huge borrowing requirement pushing up interest rates and choking off growth, the government should proactively announce an intention to raise a sizeable part of it outside the country. That should settle domestic jitters over a liquidity crunch. An unheralded medium term fiscal policy statement put up on the Finmin web site targets a fiscal deficit of 5.5% of GDP next year and 4% of GDP in the year after. It is surprising that Mr Mukherjee failed to flag this off. Then there is the infrastructure agenda. The government·s direct spending on roads and railways is slated to go up sharply. Financial engineering is on the cards - takeout finance and refinancing by IIFCL - to ensure that enough credit would be available for infrastructure projects. The government continues to swear by publicprivate partnership. For all their flaws, PPP projects are enhancing India·s infrastructure right now. And there are sufficient mechanisms outside the Budget for one to hope that future PPP projects would be better designed and less vulnerable to post-contract abuse.

Many people tend to dismiss the entire inclusion, rural development and empowerment agenda as so much political fluff. On the contrary, this is the core of lasting reform. To appreciate this, one must have clarity on what constitutes reform. Reform is ultimately about freeing up the creative energies of the people at large. Not just of people who are entrepreneurs and would-be entrepreneurs now. But also of the hundreds of millions of those who currently focus just on subsistence. Financial sector, tax and administrative reforms are means to this end. True, India has a demographic dividend to reap even with existing levels of output per worker. But imagine the bounty if one billion plus Indians can aff ord to think beyond subsistence, think creatively. For that to happen, we need not only the kind of inclusive policies being pursued by the government but also complementary political mobilisation to empower people. That, of course, goes beyond the Budget.

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