Growth continued to be the mantra of Finance Minister Pranab Mukherjee in his Union Budget for 2011-12 too. However he has done that with a pinch of salt as inflation and inflationary pressures were growing. This fiscal would be a challenge for the government as it had to maintain growth while checking inflation as well as achieving fiscal consolidation.
Markets greeted the budget for 2011-12 with remarkable enthusiasm. On the budget day, February 28, the Bombay Stock Exchange benchmark index, Sensex, rallied by 595.62 points intra-day before closing at 17823.40, a gain of 122.49 points. In the post-budget rally on March 1, the Sensex, recorded a rise of 623.10 points to close at 18446.50, its biggest single-day jump since May 2009. For the week ended March 4, it closed at 18486.45, a gain of 785.54 points as compared to the previous week's close of 17700.91.
In his budgets for 2009-10 and 2010-11, he had taken a calculated risk to achieve bountiful growth even on the face of a rising inflation. Even though managing inflation and inflationary pressures are the job of the central bank, fiscal measures of the government would give the required support for the monetary measures of the central bank in its fight against rising inflation. Reserve Bank of India Governor too in the recent policy pronouncements made tacit remarks sending out message to the government that the central bank was doing enough and now the government had to act to contain inflation with fiscal measures, including a strong and efficient public distribution system.
After the presentation of the budget for 2010-11, the Finance Minister had acknowledged that his tax proposals would have a “marginal inflationary impact”.
Last year, his argument was that while preparing the country's economy for a higher growth trajectory, inflation was bound to rise. But he expected only a marginal inflationary pressure. Today, rising food prices has become a major issue for the government to resolve and the political uprising in the Middle East and North African (MENA) countries further complicated it. Mr. Mukherjee, however, this year, has sought to rein in inflation by capping the increase in total expenditure. The budget has also stepped up social spending to soothe the pain for the economically weaker sections.
“We believe the government may struggle to meet its fiscal deficit target for 2011-12 as pressure to step up spending mounts,” said Standard & Poor's credit analyst Takahira Ogawa. “Unlike in the previous fiscal year, it will also not have any one-off revenues to fall back on.”
In fiscal 2010-11, the government benefited from revenues from 3G licensing and proceeds from divestment of State-owned corporations. Such inflows had boosted 2010-11 revenues by about 1.5 per cent of gross domestic product (GDP).
Mr. Mukherjee has sought to cap the increase in total budget expenditure at 3.4 per cent (over revised estimate for 2010-11) to Rs.12.60 lakh crore. The government has also targeted fiscal deficit for 2011-12 at 4.6 per cent of GDP, slightly less than 4.8 per cent recommended by the 13th Finance Commission in December 2009, and the revised estimate of 5.1 per cent for 2010-11. The Finance Minister has also announced that amendments to the Fiscal Responsibility and Budget Management Bill will be introduced in 2011-12 to maintain fiscal prudence in the medium-term.
The extent to which the government can achieve its deficit targets depends on the pace of economic growth and the movement in global and domestic fuel, fertilizer and food prices, said Mr. Ogawa.
Direct Taxes Code
On the revenue side, the government plans to introduce the new Direct Taxes Code (DTC) in 2011-12, Nevertheless, no time frame has been set for the rollout of Goods and Services Tax (GST). The rating agency anticipates that GST will be introduced only after April 1, 2012. The tax initiatives would significantly benefit the economy and improve the fiscal position in the medium to long term. The government has also budgeted Rs.40,000 crore from divestment of state-owned companies. Further, it has budgeted to inject Rs.6,000 crore capital into public sector banks.
One of the key officials of the Finance Ministry S. D. Majumdar, Chairman, Central Board of Excise and Customs (CBEC), said in Mumbai that the Central excise duty was not increased due to three main reasons: it would help contain inflation, sustain high growth, and finally to increase profits of the manufacturing companies, leading to larger investments and employment, thereby generating greater revenues for the government.
However, he reiterated the need to increase the contribution of manufacturing sector from 16 per cent to 25 per cent in the next ten years in order to sustain the high growth trajectory.
Goods and Services Tax
Mr. Majumdar also said that the government was constituting a GST net comprising Central and State governments and the technology partner, NSDL. With regard to the peak customs duty, he said the government was trying to follow the ASEAN rate (2-14 per cent) while also tracking a median rate of 6-7 per cent.
However, Mr. Ogawa believes the government is likely to face pressure to increase spending, at least in the near future. Fuel and commodity prices are rising, which will increase the need for subsidies on oil, fertilizer and food.
The government plans to step up measures to help lower-income households, particularly in rural areas, to deal with the recent sharp increase in food prices. Social sector spending is up 17 per cent and it accounts for 36.4 per cent of the government's total current expenditure.
Separately from the budget speech, the government is preparing to implement the national food security bill this year. “The food subsidy burden could increase by Rs.20,000-32,000 crore as the bill's coverage is wider than existing schemes. Nevertheless, the magnitude of the increase will depend on the final contents of the bill,” said Mr. Ogawa. India is likely to face a challenging year, trying to maintain economic growth, control inflation, and achieve fiscal consolidation.
