Budget sets new benchmarks for growth, equity and reforms

The Union Budget for 2010-11 marks a significant stage in Indian economy's growth rebound, enabling Government to make a calibrated exit from stimulus measures taken earlier to weather the global crisis, advance further the inclusive development processes, and, at the same time, resume the path of time-bound fiscal consolidation. The pragmatism underlying the budget would enhance the rating India enjoys globally as a fast-growing economy and an attractive destination for investors. Also, the budget makes new reform openings. The Rs. 11,08,749-crore Budget, presented to Parliament by Finance Minister Pranab Mukherjee on February 26,  envisages GDP growth at 8.5 per cent in fiscal 2011, given the renewed momentum in the manufacturing sector and prospects of significant private investment to become a principal driver of growth. Economy had recovered to 7.2 per cent in current year. Higher levels of public expenditures will provide strong support to infrastructure and social development, accounting for 46 and 37 per cent respectively of the total plan outlay for 2010-11. Priority is accorded to Agriculture. Rural employment guarantee and other flagship programmes have been well-funded.

Fiscal Consolidation

The Budget aggregates have been worked out keeping view the recommendations of the 13th Finance Commission under which States would get a higher 32 per cent share of Centre's tax revenues for the next five years (2010-15). It incorporates the Commission's road-map for fiscal consolidation at the Centre and States under which fiscal deficit would get gradually reduced to 3 per cent of GDP and the combined debt of Centre and States would also be capped at 68 per cent of GDP by 2014-15. It will be the first time for Government to target an explicit reduction in its domestic debt-GDP ratio.

The Centre has to bear a substantial additional burden in the higher annual transfers to States both under tax proceeds and grants-in-aid on the basis of the distribution formula worked out for individual states by the Commission. The States together would get an additional Rs.40,000 crores from the central pool of taxes in 2010-11 over the revised estimates of  the current year.  The Budget in a way sets the pace for two landmark tax reforms to be ushered in on April 1, 2011 - Direct Tax Code for personal and corporate tax-payers and the Goods and Services Act (GST), which is designed to knit the country as a common market.

Resource Mobilisation

In the Budget, the Finance Minister has broadened the income tax slabs to put more disposable incomes in the hands of tax-payers which could be of use to stimulate demand for goods and services. Corporate tax surcharge has been reduced from 10 to 7.5 per cent and other incentives have been provided for investments, such as in infrastructure bonds. A revenue loss of an estimated Rs.26,000 crores would be more than made up by changes in the Union Excise and Customs duties to yield Rs.43,500 crores and Service tax changes to gain Rs.3000 crores. Net gain would be Rs.20,500 crores.  With ongoing economic recovery tax revenues would become buoyant. The new changes on the indirect taxes keep the peak average import tariff at 10 per cent while the revised excise duty and services tax have also been held at 10 per cent as a step toward GST.

Disinvestment and Subsidy Reductions, along with expenditure reform, have now become the pathways to achieve fiscal consolidation and channel increasingly larger resources for Inclusive Development which the Finance Minister said is an "article of faith" for Government. It will also help to provide more for asset-creating capital expenditure as currently, some part of domestic borrowings are used to finance non-plan (unproductive) expenditure. Government gave a push to the policy of disinvestment of limited stake in public undertakings without giving up majority control to realise over Rs.25,000 crores in the current year. The budget assumes Rs.40,000 crores under this head in 2010-11 which is also expected to see Rs.35,000 crore realization under the 3G Spectrum auction. Other new duty adjustments and natural growth as economy picks up would take Centre's total tax and non-tax revenue to Rs.682212 crore.

Plan and Non-Plan expenditures are estimated at Rs. 3,73,092 crore and Rs. 7,35,657 crore, an increase of 15 and 6 per cent respectively in 2010-11 to take the total expenditure at Rs.11,08,749 crore. Besides revenues and non-debt receipts, the Centre would fill the budgetary gap with capital receipts including market borrowings. Fiscal deficit at Rs.381408 crores would be 5.5 per cent of GDP in the new fiscal year as against 6.7 per cent 2009-10.

Signalling the start of fiscal consolidation, the Finance Minister has also set the fiscal deficit targets at 4.8 and 4.1 per cent of GDP for 2011-12 and 2012-13. Though the revenue deficit is relatively high at 4 per cent of GDP as budgeted at present, the Finance Minister hopes to bring it down to 3.4 and 2.7 per cent over the following two years toward eventual phase out of revenue deficit by 2014-15. Actual net market borrowing of the Government in 2010-11 would also be lower at Rs.3,45,010 crore, to leave enough space for private sector to meet its credit needs.

Expenditure Reform

A major thrust in reducing non-plan expenditure is to begin with a cut in subsidies, especially petroleum products and fertilizers, as reflected in the budget estimates. A start has been given on fertilizers with nutrient-based subsidy with the assurance that there would be no price increases in the ensuing kharif season. More importantly, the system of issuing bonds to oil and fertilizer companies, as off-budget liability, is being discontinued so that any subsidy cash outgo  would be brought into fiscal accounting. Government expects to take a decision on a market-related system of pricing of petroleum products, recommended by the 'Kirit Parikh Committee,' in due course".

Meanwhile, in indirect tax changes, the budget restores the import duty on petroleum crude and refined products, which had been reduced when global oil prices were too high, now that oil prices are relatively lower. An excise levy of Re. one per litre on petrol and diesel is also proposed. The changes in duties on POL have encountered resistance from opposition parties, in the context of inflation. On all other non-petroleum goods, the excise duty has been uniformly kept at 10 per cent, up from 8 per cent under the stimulus package.

There are reforms proposed as part of the budget to ensure that budgetary provisions result in intended outcomes and there would be renewed focus on mechanisms for effective delivery of public services.

Growth Consolidation

Double digit food price inflation is a matter of "major concern", the Finance Minister said and hoped recent consultations with Chief Ministers would result in bringing down inflation "in the next few months" and arrest the transmission of high food and fuel prices into the general price level. Agriculture has thus come to the forefront again and the Budget makes provisions for extending the green revolution to the eastern region and for encouraging production of pulses and oilseeds.  Farm credit would rise to Rs,375,000 crores and interest subvention has been raised to two per cent for timely repayment of short term crop loans.

Besides fiscal consolidation, the Budget seeks to improve investment environment such as simplifying  the FDI regime, as part of reform measures to consolidate growth of the economy. A Financial Stability and Development Council  will be set up at the apex level for macro-prudential supervision in the financial sector including the functioning of large financial conglomerates. Public Sector Bank capital base would be strengthened with a provision of Rs.16,500 crores. To expand access to the banking system, RBI is considering grant of additional licences to private sector players. Government is also providing further capital to Regional Rural Banks so that they have adequate base for increased lending to the rural economy.

The Budget makes substantial provisions for expanding infrastructure - roads, power, railways - and social sectors like education and health, and rural development (employment guarantee and Bharat Nirman programmes), A National Social Security Fund for unorganised sector workers and a National Clean Energy Development Fund for research and innovative projects in clean energy technologies also form part of the budget proposals. (PIB Features)

Disclaimer :  The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB

RTS/VN    

SS-50/SF-50/03.03.2010