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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-àvis 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.
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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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“Women’s SHG’s Development Fund” to be created with a corpus of ` 500 crore.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. To enhance flow of funds to infrastructure sector.2 Economic Environment of Business Investment Environment Foreign Direct Investment • Discussions underway to further liberalise the FDI policy. Micro Small and Medium Enterprises • • 5.000 crore. Public Sector Bank Capitalisation • • 6. Group 1 . Financial Sector Legislative Initiatives • • To take the process of financial sector reforms further.000 crore to be provided to SIDBI for refinancing incremental lending by banks to these enterprises. the FII limit for investment in corporate bonds issued in infrastructure sector being raised. 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. Micro Finance Institutions • • • “India Microfinance Equity Fund” of ` 100 crore to be created with SIDBI.000 crore to ` 18. Government considering putting in place appropriate regulatory framework to protect the interest of small borrowers. Amendments proposed to the Banking Regulation Act in the context of additional banking licences to private sector players. Rural Infrastructure Development Fund • Corpus of RIDF XVII to be raised from ` 16. various legislations proposed in 2011-12. Foreign Institutional Investors • • SEBI registered mutual funds permitted to accept subscription from foreign investors who meet KYC requirements for equity schemes.
Group 1 .75. 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.000 crore in phased manner. capital base of NABARD to be strengthened by ` 3. Agriculture Credit • • • Credit flow for farmers raised from ` 3. In view of enhanced target for flow of agriculture credit.000 crore in 2011-12.3 Economic Environment of Business • Public sector banks to achieve a target of 15 per cent as outstanding loans to minority communities under priority sector lending at the earliest.75.000 crore to ` 4.
534) to 180. the finance minister has given industry a boost by maintaining peak excise duty at 10%. The reduction of the deficit previous FY2010-11 from 5. Improving the fiscal deficit is critical from the point of view of stimulating private investment and controlling inflation. He has also reduced customs duty on inputs used for selective industries. a bonanza for senior citizens. Industry Impact On the indirect tax front. Finance Minister planned to compensate for these sops by widening the service tax net and marginally increasing the minimum alternate tax. but the feasibility of achieving this target is less since various subsidies were believed to be under-reported. 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. It would also aid debt markets.1% was possible because of the allocation of 3G Spectrum which generated huge earnings for the economy.000 rupees ($3.6%.976).1% this year through March. but there were no major budgetary measures to keep inflation in check in the short term. this might be viewed as grossly insufficient. which will help moderate the effect of rising input prices. the finance minister announced a modest rise in the exemption limit from 160. down from 5. Taming inflation Inflation is one of the major issues plaguing India’s economy. but surprisingly the budget didn’t have a clear focus on curbing prices. Repatriating black money A five-fold strategy has been announced. thereby creating engines to fuel growth. Short Falls Finance Minister Pranab Mukherjee’s sixth budget sets for Fiscal Year 2011-2012 (Budget 20112012) seemed both balanced and growth oriented. 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. So was difficult to visualise that which revenue generating instrument the Government use to achieve the target set for FY2011-12. In an environment of persistent inflation.5% to 5. The intent of the government seemed was clear. however. There is. We believe this will trickle down to consumers in the form of lower prices. among other Group 1 .4 Economic Environment of Business II. but the seriousness of the proposals will depend on how well they are executed. Personal taxes On the personal income tax front. The exemption limit on personal taxes had been raised marginally to give some relief to the common man.000 rupees ($3.
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. the net effect to the exchequer of all the tax proposals is a loss of two billion rupees. which will help cut losses and improve supply. This budget brings an increased focus and higher spending on warehouses and mega-food parks. The allocation for the Rashtriya Krishi Vikas Yojana has been increased by 16% to 78. Reinvigorating Agriculture It is common knowledge that inefficiencies in India’s food supply chain have led to tremendous losses in perishable food items.6 billion rupees. so we are viewing the increase in funding with cautious optimism. Education Education spending remains a mixed bag. However. which will make the attainment of the fiscal deficit target even more challenging. the real challenges to the infrastructure sector are on the execution side. The outlay on education has been raised by 24% to 521 billion rupees and more stress is being laid on vocational education. 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. But the real improvement has to come from better farm productivity that leads to increased production per acre of cultivable area. Group 1 .5 Economic Environment of Business measures. which should help funding agricultural schemes. helping cool food inflation.
All other key revenue parameter showed a decline. 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. The difference is particularly because of unrealistic view of government policy maker.6 Economic Environment of Business III. 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. Indications of revenue slowing down were there almost from 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.6% is set to widen up to 5. It is not that the bad news of actual revenues falling behind the target had hit the government all of sudden. The budget at the start of the year had projected receipts (minus borrowings) growth of around 4%. Take for instance.5% compared to 18% budget target set at the start of the year. There was some restraint on plan expenditure against a target of allowing only Group 1 . Even its tax revenue calculation went seriously wrong should the growth in tax revenue collection have fallen to just 7.5% growth in tax revenue (that to would be because of inflation).5-6%. 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. the government’s total receipts (minus borrowings) in April-Dec 2011 which fell 16% over the figure for the corresponding period of 2010. The remarkable feature of this dismal revenue scenario is that except a 7.9%.
The reality is that the government fail to keep check on its expenditure after anticipating a slower economic growth rate.4%.7 Economic Environment of Business 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. Group 1 . total expenditure in the first 9 months grew by 14% while the budget target allowed in an increase of only 3. 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.
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