The budgetary position of the Centre has been improving impressively as tax revenues are buoyant and non-tax revenues also have spurted. The encouraging performance of the economy has facilitated mobilisation of resources for various purposes. Against the upset in calculations in 2009-10, on account of the difficulties experienced by the agricultural sector, the output of food and cash crops will be much higher in the 2010-11 season, with the yield of some crops constituting an all-time record. The industrial sector has been raising its output and offtake with a keen demand from consumers in the domestic market and satisfactory growth in exports. The services sector, for its part, is acquitting itself creditably. It is thus anticipated that the growth in GDP will be 8.75 per cent plus against 7.4 per cent in the previous year. The IMF has indicated that the increase in GDP may be even 9.7 per cent.
Buoyant tax revenues
With this favourable development, the tax collections in April-September have been heartening. What is significant is the improvement in revenues from corporate and income tax particularly, the latter, as substantial relief has been granted to assessees in the budget for this year. The receipts from excise duties are usually slack and it was being debated why there had been no concurrent growth in these receipts even when the GDP was over 9 per cent.
On a conservative basis collections from the four groups of taxes will be Rs.70,000 crore. Allowing for the State's share of taxes and Union Territories, the net accruing to the Centre can be Rs. 50,000 crore. As the receipts from auctions of spectrum and broadband facilities yielded a bonanza for the Central Exchequer of Rs. 65,000 crore over the estimate, the Union Finance Ministry is in a position to meet without difficulty even rising non-Plan revenue expenditure and at the same time increase Plan revenue expenditure.
Fiscal deficit
It is felt in knowledgeable quarters that it would be possible for the Union Finance Minister to reduce net borrowing through market loans sizably and in the process lower the estimated fiscal deficit of 5.5 per cent in 2010-11, against 6.9 per cent of 2009-10, to even 5.2 per cent. However, the official view seems to be that the fiscal deficit can be comfortably reduced to the budgeted figure.
Food inflation
As inflationary pressures are subsiding and the food inflation index has declined for the two weeks in succession to 13.75 per cent for the week ended October 16 from 15.53 per cent in the previous week, the Union Finance Minister is confident that the index may decline to 6 per cent by March and the balance of payments position will be comfortable with heady forex inflows.
The developments in the economy also have been encouraging and the Finance Minister will be inheriting a situation which is significantly different from the happenings in 2009-10. As stated above, the output of foodgrains may be around 230 million tonnes in the current season against the previous record of 233 million tonnes. The output would have been higher but for the excessive rainfall in the important regions which account for the bulk of kharif production. There will, of course, be a welcome rise in the yield of oilseeds and pulses which have been useful in easing supply constraints. As there is also a softening trend in world markets for these two primary products, the food inflation index will be on the downtrend in the coming weeks. The bumper cotton crop has encouraged the government to effect substantial exports even after meeting fully the needs of the textile industry. However, there has been an incidental rise in the internal prices for the fibre which has reduced the competitive ability of the exporters of yarn, fabrics and garments.
The sugar industry would have been in a sad predicament in the 2010-11 crushing season as the output is likely to soar to 250 lakh tonnes from 185 lakh tonnes, as a result of plentiful availability of cane supplies. Luckily for this basic industry, export prices are more attractive now than internal prices. The industry may not be in difficulty if exports are profitable and the government also adopts helpful policy.
The industrial sector also is on a good wicket and the growth has been 10.5 per cent in April – August against 5.9 per cent comparably. The growth in the whole year is likely to be 12-13 per cent especially as the trends in foreign trade have been heartening so far.
Against this background, the formulation of Budget Estimate for 2011-12 can be attempted from a highly comfortable position. It will be necessary, of course, to incorporate the changes that may be decided under the direct tax code and reduce further fiscal deficit to 4.1 per cent.
With expectations that the forthcoming Central Budget will have positive features and foreign exchange assets will be rising steadily, even after bridging a larger current account deficit and allowing investment outflows, on account of Indian entrepreneurs, the bourses have been buoyant.
With the prospect of the inflationary situation improving significantly, the monetary authorities need not be worried about the persistence of uncomfortable inflationary pressures. The policies pursued in 2007-08, when there was an upsurge in foreign exchange assets, can be followed. The opinion in government circles is that there should not be any curbs on FII inflows though the rupee should not be allowed to appreciate unduly as export prospects might be affected. Towards this end, the RBI should effect purchases of U.S. dollar for stemming undue appreciation. But the monetary authorities seem to be apprehensive of an increase in money supply that will take place if purchases of U.S. dollar had to be effected in large volume. There need not be any apprehension on this score as improvement in money supply is needed because of an unsatisfied demand for funds from industry and trade and compulsion to step up outlays in projects in infrastructure and core sectors.
Paucity of resources
The scheduled commercial banks are experiencing an inadequacy of resources so far in the current year. The growth in deposits has not been at the previous rate while bank credit has spurted by 98 per cent. Additional bank credits and investments absorbed 106 per cent of incremental deposits against 95 per cent formerly. There is thus need for augmentation of the pool of resources which should be facilitated by purchase of dollar against surging forex assets.
The monetary authorities realised, in spite of their inhibition, that the stringency in the money market should be relieved with banks being allowed to have recourse to funds under the special liquidity adjustment facility (LAF). Though it is emphasised that this facility will be temporary, a helpful policy would have to be adopted in the light of emerging situation.
