UNION BUDGET 2010-2011

The Union Budget 2010-2011 presented by the Hon’ble Finance Minister Sri Pranab Mukherjee is a well crafted and balanced budget. It has long range vision with its focus on fiscal consolidation, GDP growth, accelerating investments on infrastructure, agricultural development and promoting consumption by putting more money in the hands of people. The budget seeks to serve three main objectives namely, reduction of fiscal deficit, maintenance of growth momentum and restricting the public borrowing to the lowest extent possible.

The most significant aspect of the budget is the effort to reduce fiscal deficit in 2010-2011 to 5.5 per cent of the GDP as against the alarming 6.8 per cent in the current financial year. Fiscal deficit has been restricted to Rs.3,81,408 Crores in 2010-2011 as against Rs.4,14,041/- in the current fiscal (revised estimate). For reducing the gap between expenditure and income, the Finance Minister is relying on growth of the economy and capital market. Increase in the rate of basic excise duty by 2 per cent on anticipated GPD growth of 8.5 per cent is estimated to fetch more tax revenue. Also, the Finance Minister hopes to mobilise about Rs.40,000 Crores from dis-investment of PSUs and another Rs.30,000 Crores by auctioning licence for 3G Mobile.

The budget has also provided road map for fiscal consolidation for next two years; the rate of fiscal deficit will be 4.8 per cent in FY 12 and 4.1 per cent in FY 13.

The borrowing plan for next year is also lower than what was expected. The Finance Minister has done a good job in ensuring that fiscal deficit is under control while at the same time, not sacrificing the need for ensuring GDP growth as well as social needs and inclusiveness to growth. The road map adopted for reduction of fiscal deficit and simplification of tax laws by implementing Direct Tax Code and GST effective from 01.04.2011 will ensure that India is on a healthy growth path. As the road map for fiscal consolidation has been adopted for the next two years it is clear that the government will go by fiscal prudence and strictly adhere to the targets. However, mobilizing funds to the tune of Rs.40,000 Crores by selling PSU shares will depend on several factors such as business confidence level, state of stock market state of global economy etc. Also, buoyancy in tax revenue will be a reality only if GDP growth occurs as anticipated.

The budget has rightly given primacy to agriculture and rural development. A four pronged strategy has been adopted to spur growth of the farm sector. The strategy covers (a) increasing agricultural production (b) reduction in wastage of produce (c) credit support to farmers and d) thrust to the food processing sector. The first element of the strategy is to extend green revolution to the eastern region comprising Bihar, Chattisgarh, Jharkhand, Eastern UP, West Bengal and Orissa. Rs.400 crores have been allocated for this. The decision to organize 60,000 “pulses and oil seeds villages” in rain fed areas in 2010-11 is a welcome step. The budget seeks to provide an integrated intervention for water harvesting watershed management and soil health to increase productivity of dry land farming areas. An amount of Rs.300 Crores has been allotted for this. The second element is reduction in wastages in storage as well as in the operations of existing food supply chains in the country. The third element is increased credit support to agricultural sector. Target for agricultural credit has been stepped up to Rs.3,75,000 Crores (Rs.325000 Crores in 2009-10). The fourth element is increased focus on development of food processing sector by providing state of the art infrastructure. In addition to 10 mega food parks already being set up government has decided to set up 5 more such parks. To facilitate better farm mechanisation the basic customs duty has been reduced to 5 per cent on agricultural machineries like paddy trans-planter, laser land leveler, cotton picker, reaper cum binder sugar cane harvesters etc. The government has also proposed major reductions in indirect taxes for agriculture and food processing sectors. The renewed and increased stress on raising agricultural production and providing incentives for food processing are welcome aspects of the budget.

The Budget has rightly given lot of importance to social sectors. Social sector spending accounts for 37 per cent of the total plan outlay for 2010-11 while another 25 per cent is proposed on rural infrastructure. Mahatma Gandhi National Rural Employment Guarantee Scheme has been allocated Rs.40,100 Crores and Bharath Nirman Programme of building rural infrastructure Rs.48,000 Crores. Also, the allocations for health and housing-rural and urban have been increased. In the case of fertilisers the Government has adopted the nutrient based subsidy scheme and has even proposed switch over to a system of direct payment of subsidy to farmers. This is a welcome development. As regards food security, the government has already finalised draft of food security bill and the same will be circulated for public debate.

Another notable aspect of this budget is the move on reforming financing sector. It is proposed to establish Financial Stability and Development Council to exercise macro prudential supervision over the economy including over large financial conglomerates and to co-ordinate the work and functioning of different regulatory authorities.

One more positive seen in this budget is the signal to the process of reform in the FDI sector. The Finance Minister has proposed to create a new body for handling FDI related matters. This will encourage increased blow of FDI to India.

The budget has given lot of relief to income tax payers. Income tax payers have gained much from the broadening of income tax slabs and also from tax deductions for investment in infrastructure bonds and contribution to Central Government health schemes. As a result of broadening of tax slabs, those who earn Rs.5 Lakhs per year will have Rs.2500 more every month for spending as they are required to pay less tax. Also, those who earn Rs.8 Lakhs a year, will have extra money of Rs.4000 per month for spending. The Finance Minister has thus, put extra money in the hands of people. This will act as a spur for consumption which will turn act as a driver of growth.

Defence budget has been hiked to Rs.147000 Crore. This is most welcome. The centre has announced a Rs.2500 Crore national clean energy fund to develop clean energy technologies that will help India move on to a low carbon economy as per the commitment made at the UN. Introduction of tax sops for solar energy wind energy electric cars etc will go a long way in developing these sectors. Tax benefits coupled with a 60 per cent increase in the allocation of ministry of new and renewable energy may go a long way to help the industry to green technologies to the market unlike the existing system in which the popularity of these technologies is restricted due to their high initial cost.

The cut in surcharges in corporate tax from 10 per cent to 7.5 per cent is balanced with the hike of minimum alternate tax to 18 per cent. Among the specific sectors real estate that has been hit the most by the slow down has been provided some concession. So also the medical equipment and mobile phone manufacturers and the cinema industry. The restoration of general excise duty to its original level of 10 per cent and of the duty on large cars and multi utility vehicles from 20 per cent to 22 per cent will result in the rise in the prices of these vehicles. However this will not have any impact on the common people. As a result of increase in the prices of petrol and diesel cost of transportation of all goods and commodities including food articles will go up which will result in rise in prices. The proposals relating to petroleum products contained in the budget will have inflationary overtones and inflationary potential as the increase in excise duty from 8 to 10 per cent and the hike in customs duty on petroleum products will result in higher prices. The hike in custom duty on crude to 5 per cent ( `0’ per cent earlier) and on petrol and diesel to 7.5 per cent (2.5 per cent earlier) and hike in excise duties on petrol and diesel by Rs.1 a litre each have been passed on to consumers by hiking petrol and diesel prices with effect from the midnight on 26th February 2010. Price rise and increase in the rate of inflation will adversely affect the common people and the poorer sections of society.

The budget proposes setting up of a coal authority. This will be positive for the sector as it may speed up mine allocation and help reduce lead time to commence production. No change is proposed in iron ore export duty and it is positive for iron ore producers as the industry was expecting a hike in duty.

The budget has rightly given lot of importance to the development and stability of the financial sector. Banking and financial sector plays a crucial role in the task of promoting growth of an economy. It is therefore in the fitness of things that the budget has some important initiatives aimed at boosting the banking and financial sector. These initiatives are:-

1. Infusion of extra capital of Rs.16500 crores to PSU banks in order to strengthen their capital base and to enable them to adhere to Basel II norms is a positive for the public sector banking industry. This will enable the banks concerned to expand their business volumes and increase the lendings which will in turn, enable them to increase their earnings and profitability. With increased financial strength they can more aggressively involve themselves in the financial inclusion efforts of the country.
2. Proposed re-capitalisation of RRBs will go a long way in building up their capital base and will enable them to play still more active role in financing rural sector particularly, agriculture and rural non-farm sector.

3. The budget has heralded the third phase of opening up of the private sector to the banking arena. After the birth of Kotak Mahindra Bank through NBFC conversion route RBI has not given licence for establishing new banks. Now it is proposed to give licence to NBFCs and private players for launching a few more new banks. With the birth of a few more banks there will be increased competition in the banking sector and the same will benefit the customers. With increase in the number of banks there will be more participants in the drive for financial inclusion and as a result faster financial inclusion of the presently excluded is possible. The new banks may also come out with innovative products and services for the benefit of customers. The decision to provide banking facilities in all centers with a population of above 2000 by 2012 is most welcome as the same will help expand financial inclusion.

4. It is proposed to provide distinct identity to Indian Rupee with official symbol. With this Rupee will join select club of currencies such as American Dollar, Japanese Yen, Euro and Pound Sterling. This will appropriately project Indian Rupee and enhance its status. This will also mean a categorical assertion of India’s economic strength among comity of currencies. As a result of this value of Indian Rupee may also witness considerable appreciation.

The budget is silent regarding strategies adopted by the government to contain inflation. As some of the taxation proposals have inflationary potential it would have been better for the Finance Minister to indicate the strategies for combating and containing inflation. Also, the budget is silent on the need to cut down subsidy on a large number of items. In spite of the above short-comings, the Finance Minister has done a commendable job in balancing several competing priorities both short term and long term including urban renewal, rural job creation education health care and environment. All this was done in the face of large fiscal deficit the risk of crowing out private sector borrowing scrutiny by foreign investors and also by global rating agencies. The Finance Minister has achieved large measure of success in the process of balancing mentioned above and also in restricting fiscal deficit to 5.5 per cent of the GDP in 2010-2011. The budget has succeeded in spreading a message of optimism, hope and confidence.