Budget 2011-12: general budget-280B USD, defence gets-36.5B USD, borrowings reduce

[Daredevil]

Let's count what we have

P. Vaidyanathan Iyer Posted online: Tue Mar 01 2011, 02:10 hrs

You can't get more ambitious than this. Finance Minister Pranab Mukherjee expects that the total expenditure will grow by a meagre 3.38 per cent, or just Rs 41,153 crore in absolute terms, in 2011-12 compared with what the government spent in 2010-11. In real terms — even if one accepts the minister's estimate that average annual inflation rate for the next year will be 5 per cent or so — then the government's expenditure is actually shrinking. If Mukherjee manages to control government expenditure in such a brilliant fashion, he certainly deserves kudos. But I'll wait till he presents his supplementary demand for grants during the year. For the record, the government is spending Rs 1,92,089 crore more in 2010-11 than the previous financial year. In fact, Mukherjee overshot his budget estimate of total expenditure for the current financial year by Rs 1,07,827 crore. Subsidies, pensions and loans to PSUs — which are not really productive expenditure — account for a bulk of the increase. They add up to Rs 64,000 crore, or almost 60 per cent of the increase. Much of these additional expenses are not related to the fiscal stimulus the government was providing to the economy over the past two years. These are spends that reflect on poor management of finances.

Going ahead, given the rise in global crude oil prices due to a volatile and still simmering political milieu in West Asia, there is little to suggest that subsidies on petroleum products or fertilisers would be any less in the coming financial year. The current trend in global food prices also do not provide any room for cuts on food subsidy. On the contrary, enactment of a law on food security — which Mukherjee has promised in the budget — may only increase the subsidy burden of the government.

Next fiscal, he hopes to cut non-Plan expenditure by Rs 5,370 crore but projects Plan spends to increase by Rs 46,523 crore. Mind it, items like subsidies and pensions are part of non-Plan expenditure. This raises doubts about Mukherjee's ability to keep a tight leash on expenditure. A buoyant economy, estimated to grow by over 14 per cent in nominal terms, has helped him project an almost 25 per cent rise in gross tax receipts. So, the finance minister has boldly projected that the fiscal deficit will be 4.6 per cent of GDP in the next financial year.

Any finance ministry will take umbrage if anyone suggests the numbers are dressed up. But what Mukherjee has done deserves appreciation. Given the robust economic growth rate of 8.6 per cent expected this year (18-19 per cent nominal growth rate), he could have easily projected a fiscal deficit of 4.8 per cent of GDP in 2010-11. He seems to have consciously chosen to peg it at 5.1 per cent, clearly building a cushion for himself. In absolute terms, this translates into extra resources of almost Rs 27,000 crore. Moreover, inflation, almost certainly, is unlikely to average at 5 per cent as estimated. So, a higher nominal GDP growth rate will bring him more revenues. The buoyancy in tax receipts, for sure, will be more than the 24.9 per cent he mentioned in his speech.

In a nutshell, Mukherjee has presented an expenditure budget for 2011-12. His tax proposals don't bring him any extra money. There is an upside on the revenue front, but a sharper downside on the expenditure front.

 

[Daredevil]

Sweet smell of radicalism


Surjit S Bhalla Posted online: Tue Mar 01 2011, 22:56 hrs

For the first six years of its tenure, the UPA government has confidently been in populist tax-and-spend mode. It assumed that it won in May 2004 because the poor were not being helped by the NDA; and that it won in May 2009 because it went on a spending spree to help the poor. Then came the Bihar election of November 2010. I believe that that election will be remembered as a watershed in Indian economics, and politics.

And it already has had an effect on the budget.

Before the budget, there was a lot of discussion as to how much social expenditures will go up and therefore destroy any attempt at fiscal consolidation. No one expected much from this classic tax-and-spend government. And the UPA has had more than six years at practice; each year, surprised by the GDP growth and tax revenues, the UPA government increased social expenditures to such a level that allocations were not being spent!

Until the Bihar elections, and high unsustainable inflation for the last three years. After averaging close to 4.5 per cent per annum for the long period 1996 to 2007, inflation has registered above 7 per cent for each of the last three fiscal years. RBI Governor D. Subbarao more than broadly hinted that there were precious few tools left in the monetary cupboard to attack this inflation; and that a necessary condition for inflation to be brought under control was that the fiscal situation improve.

Now there are two ways by which the fisc can be brought under control. The first method is to increase taxation; the second is to decrease the rate of growth of expenditure. There is a golden third method, one rarely chosen by Indian politicians, especially those belonging to the spend-loving Congress party. It is to not increase taxation, and only reduce expenditure growth.

To everyone's surprise, and certainly mine, the finance minister has chosen this third option. It is such a surprise that in informal discussions with experts, the common refrain is — it can't be so, that the government in effect is lying. That is the depths to which the credibility of this government has reached.

My belief is that the government is not lying. And not because I think that nobility is at the core of this government. It is that from Libya to Lucknow and from Cairo to Calcutta, governments have no place to hide, or lie, anymore. Before, there was no policeman for the government sector, no authority that could expose governments. Today, technology and civil society and media are the new "police". If you lie through documents like the Union budget, you will be exposed and lose elections faster than you can say Raja. It is okay to be cynical, but not to be naively so.

Let us look at some hard numbers on expenditure in India. In 2009-10, the government had budgeted a total expenditure level of Rs 11,09,000 crore for 2010-11. What actually happened? The spending level was actually about 10 per cent higher, at Rs 12,16,000 crore. Revenue growth in excess of budgeted estimates was also 10 per cent higher, so the excess expenditure growth was not felt on the fisc.

For 2011-12, the government has budgeted the following. First, nominal GDP growth of 14.1 per cent — and, though the break-up is not given, it should roughly be in the zone of 8.5 per cent GDP growth and 5.6 per cent inflation. The numbers are consistent and seem broadly accurate. Tax revenue growth is budgeted at 18 per cent, which, given a nominal GDP growth of 14 per cent, is also realisable. The reduction in effective tax rates via exemption-slab expansion should help compliance and tax buoyancy. But, and this is the key point, total expenditure growth is budgeted to increase by only 3.3 per cent!

A perspective on this expenditure growth is that if realised, this will be the second slowest expenditure growth in Indian history since 1970-71. The lowest realised growth: 1.5 per cent, in 2005-06. In that year, the UPA government was committed to sensible macro policies, before the rot set in. The lesson from Bihar is unmistakeable: good politics is good economics. With its back to the wall, more than any government since 1991 (or before), the UPA government is doing what is absolutely necessary for its survival.

This is not a workmanlike budget; this is not a conventional budget. It is radical. It smells of good economics. Expenditures on infrastructure and education have increased. Capital flows have been eased, and investment encouraged. Taxes have not increased. And there is a commitment to and planning for further disinvestment. It is likely that this budget is a major turning point in India's fiscal history. In short, a brilliant budget, one exceeding all expectations.

For that, the finance minister and the budget-makers need to be congratulated.

 

[Rage]

^ Nice Article. Thanks Daredevil.

 

[Daredevil]

Income Tax sops in budget; air travel, health check-up to be costlier

A play-safe budget on Monday raised the threshold income tax exemption limit from Rs 1.60 lakh to Rs 1.80 lakh that will leave at least Rs 2000 more in the hands of tax payers across the board and made changes in the service tax that will make air travel, hotel accommodation and drinking in AC restaurants costlier.

Presenting the budget for 2011—12 that will result in a net revenue loss of Rs 200 crore, Finance Minister Pranab Mukherjee imposed an excise duty of one per cent on 130 specified items which will, however, exempt food and fuel.

He also gave some relief to corporates by reducing the current income tax surcharge of 7.5 per cent on domestic companies to five per cent but raised the Minimum Alternate Tax (MAT) from 18 to 18.5 per cent including developers of Special Economic Zones (SEZs) in it.

While leaving the rest of exemption slabs, surcharge and cess on income tax untouched, he reduced the qualifying age of senior citizens from 65 to 60 years, raised their exemption limit from Rs 2.40 lakh to Rs 2.50 lakh. No special benefit was announced for women whose basic exemption limit remains at Rs 1.90 lakh.
Mr. Mukherjee also created a new category of "Very Senior Citizens" of 80 years and above who will be eligible for a higher exemption limit of Rs five lakhs.

Service tax
The budget sought to widen the ambit of the service tax net by which hotel accommodation above Rs 1,000 a day and AC restaurants that serve liquor will be included.

The scope of life insurance service is being widened to cover all services provided to any person by an insurer and legal services provided by business entity to individuals and individuals to entities but not individuals to individuals.

Opposition parties flayed the budget saying it was very "disappointing and direction less" while the industry welcomed it as "positive and growth oriented".

Hailing the "commendable job" done by his Finance Minister, Prime Minister Manmohan Singh said the signals are that this is a government which is reform oriented but admitted "you cannot please all people".

Diagnostic services
All services including diagnostic services provided by AC clinical establishments with more than 25 beds and services provided by a doctor who owns such establishments have been brought under the service tax net.

Economy class domestic travel by air will cost Rs 50 more while international travel will cost Rs 250 more. Higher class domestic travel by air attract a standard 10 per cent service tax bringing it on par with international higher class travel.

While direct tax changes are expected to result in a revenue loss of Rs 11,500 crore, the net revenue gain on account of indirect taxes is likely to be Rs 11,300 crore, including an additional Rs 4,000 crore on account of service tax changes.

Food stuff
Prepared food stuff like sugar confectionery, pastry and cakes, starches, paper and articles of paper, textile goods, drugs and medicinal equipment will become costlier with increase in the concessional rate of excise duty from four per cent to five per cent.

Ready made garments and branded textile made ups will also become costlier with the levy of mandatory 10 per cent excise duty. Exemptions from excise duty is being withdrawn on micro processor for computers, floppy and hard disc drive, CD—Rom drive, DVD drives and writers making it costlier but they will attract only five per cent concessional duty.

Sanitary napkins
Items that will become cheaper are sanitary napkins, baby and clinical diapers and adult diapers with reduction of excise duty, factory built ambulances, precious metals including gold and silver. However, one per cent excise duty is being imposed on branded jewellery and branded articles of precious metals.

The Budget for next year pegs the fiscal deficit at 4.6 per cent of GDP for 2011—12 which works out to Rs 4,12,817 crore. Gross tax receipts are estimated at Rs 9,32,440 crore, an increase of 24.9 per cent over the Budget Estimates for 2010—11.

Net non—tax revenue receipts for the next financial year are estimated Rs 1,25,435 crore. The total expenditure proposed for 2011—12 is Rs 12,57,729 crore. Plan expenditure will be Rs 4,41,547 crore, an increase of 18 per cent and non—Plan expenditure will be Rs 8,16,182 crore, an increase of 10.9 per cent over Budget estimates of 2010—11.

Defence
Defence expenditure for the next year has been pegged at Rs 1,64,415, an increase of Rs 17,071 crore over the last financial year. This includes a capital expenditure of Rs 69,199 crore.

"Needless to say, any further requirement for the country's defence would be met," Mukherjee said.

The Budget has raised allocation for social sector spending by 17 per cent to Rs 1,60,887 crore and the allocation for Bharat Nirman programme by Rs 10,000 crore.

Allocation for infrastructure has been increased by over 23 per cent to Rs 2,14,000 crore and the credit to farmers hiked by Rs 1 lakh crore to Rs 4,75,000 crore.

The Budget assumes open market borrowing of Rs 3.43 lakh crore. Extension of nutrient—based subsidy to cover urea is under active consideration.

In a boost to housing sector finance, the Budget continued the scheme of interest subvention of one per cent on housing loans and liberalised it by extending it up to Rs 25 lakh from the present Rs 10 and Rs 15 respectively.

GST
The Finance Minister also proposed various measures to achieve a closer fit between the present Service Tax regime and its successor Goods and Services Tax (GST).

The Minister announced a broad set of financial sector reforms, saying he proposed to move the legislations relating to insurance laws, LIC, revised pension fund bill, banking laws amendment bill, State Bank of India Subsidiaries Bill and a bill on Factoring and Assignment of Receivables.

Kerosene, LPG
In an effort to curb diversion of subsidised items like kerosene, LPG and fertilisers, the Budget proposes to introduce from March next year a scheme that will move towards direct transfer of cash subsidy to people living below poverty line (BPL).

On the much—speculated roll—back of stimulus measures implemented three years ago in the midst of global financial crisis, Mr. Mukherjee said a counter—cyclical fiscal policy is required for insurance against external shocks and localised domestic factors.

Aiming towards fiscal consolidation, the government proposes to introduce an amendment to Fiscal Responsibility and Budget Management Act, laying down the fiscal roadmap for the next five years.

The Finance Minister also proposed to introduce the Public Debt Management Agency of India Bill in Parliament in the next year.

FDI
In a bid to make the Foreign Direct Investment policy more user—friendly, Mr. Mukherjee said discussions are underway to further liberalise the policy.

To liberalise the portfolio investment route, it has been decided to permit SEBI registered mutual funds to accept subscriptions from foreign investors for equity schemes which will enable Indian mutual funds to have direct access to foreign investors.

To enhance the flow of funds to the infrastructure sector, the FII limit for investment in corporate bonds, with residual maturity of over five years issued by companies in infrastructure is being raised by an additional limit of USD 20 billion taking the limit to USD 25 billion.

This will raise the total limit for FIIs investment to corporate bonds to USD 40 billion.