The Union Budget 2011-12 has addressed almost all the challenges which the Indian economy is currently facing namely high inflation, corruption and declining investor confidence. In this backdrop the budget has tried to achieve sustained, equitable and inclusive growth while at the same time attempting to reducing fiscal deficit, encouraging foreign investment and reducing supply side constraints. The budget intends to have a sustained level of economic growth with concentration on infrastructure sector by creating infrastructure debt funds and by proposing tax free bonds. Measured to improve agricultural productivity has been attempted and fertilser sector has been given infrastructure status. Provision of direct subsidy to people below the poverty line is a novel attempt. This will reduce price distortions and lower the level of subsidy the oil companies require. Further, this will eliminate the black market sale of products like kerosene. The emphasis on the rural sector remains.
The Finance Minister reassured to introduce the direct tax code from 1st April 2012; hence no major changes in Direct Taxes have been introduced in this budget. Indirect taxes like central excise, custom and service has been maintained at 10% level by eliminating certain exemptions to smoothen the progress to GST. The budget gave importance to the long term growth drivers for the economy. While looking to achieve the above, the budget also emphasized the need to promote greater economic inclusion with measures focusing on increase in allocation in social sector, the rural population and farmers as well as improvement in the government spending on subsidies through direct transfers.
The FM announced that the need for continuing fiscal support to the economy was no longer required and hence, government borrowing is not being increased for the coming fiscal and the fiscal deficit has been brought down to 5.1% from 5.5% and kept at 4.6% of GDP for 2011-12. This will lead to a lowering of yields on G Secs and thus profitability of banks would increase and overall artes of interest could fall.
The budget has been disappointing for the corporate sector. There has been increase in MAT for the corporate sector, and also brought SEZs under the MAT ambit.
The Union Budget is based on the assumption that if economic growth of around 8.75% to 9% can be achieved, then everything else will fall in place. Tax revenue will grow and fiscal deficit can be controlled. The budget has gone beyond number crunching and adhered to sound economic principles. Reducing price distortions by providing direct subsidies is a strong step in that direction. Recognising supply side bottlenecks and steps to address it also mature.
Highlights of the budget
- Sustained high rate of growth of around 8.6% with more concentration on infrastructure sector, social sectors and agriculture.
- Monetary policy measures expected to address moderate inflation in coming few months.
- Enhancement of FII limit in corporate bonds.
- Investments by foreign individuals in Indian mutual fund industry.
- Increased service tax on air travel.
- Increase in export duty on iron ore.
- Enhanced allocation for education.
- Enhanced credit targets for agriculture.
- Interest subvention of 1% on housing loans.
- Commitment of capital allocation to public sector banks to achieve 8% Tier I CRAR.
- Direct transfer of cash subsidy to farmer and people below poverty line.