BUDGET 2010

The Union Budget 2010-11: A Detailed Review - Suresh Srinivasan

The annual Economic Survey generally sets the tone for the following year’s budget, and as a customary practice, is released a day ahead of the presentation of the Union Budget for the following year. The Economic Survey for the current fiscal year, 2009-10, was tabled by the Finance Minister in the Lok Sabha on 25 February 2010. India’s Finance Minister Mr. Pranab Mukerjee presented India’s Union Budget 2010-11 on 26 February 2010. Earlier, India’s Union Minister for Railways, Ms. Mamata Banerjee presented the Railway Budget 2010-11 on 24 February 2010.

The objective of this article is to provide a brief background of the budgeting process, its importance, and more specifically, to highlight the salient features of the current year’s budget 2010-11.  

Background

The Budget is a mere statement of expected income and receipts of the government; generally, the government does not announce ‘big bang’ policy reforms as a part of the budget exercise. That said, the Budget is still, very much an important document that tables the intention of the government with respect to reforms to come, market and industry friendliness of the government’s policies, and thereby provides an important signal to the corporate sector, stock markets and the international community on how the government proposes to shape the country’s economy in the short to medium term future. 

The Union Budget is an annual exercise, generally presented by the Finance Minister to the Parliament on the last working day of February. It is technically a document that sets out the projected annual financial position of the Government of India; i.e., the income, expenditure, and the surplus or deficit, of income over expenditure of the Government of India, for the following financial year (01 April – 31 March). The Railway budget is very much part of India’s Union budget, but as a general practice, has always been presented separately.

Railway Budget 2010-11

The sheer size of the Indian Railways makes it the second largest rail network in the world, operating more than ten thousand trains a day, employing close to fifteen lakh people. Especially, given India’s geographic diversity, Indian Railways is a special entity that facilitates seamless movement of passenger and freight traffic across the country; freight traffic approximately contributing to 70% of the Indian Railway’s total revenue. 

Indian Railways is already facing significant challenges. On one hand, drop in freight revenue in the face of the economic slow down and resultant drop in industrial demand is impacting the ‘top line’; on the other, the increased outflow of expenditures resulting from the sixth pay commission increases is squeezing the ‘bottom line’. Further, many of the assets of Railways, including wagons, engines, tracks, bridges and other structures are aged, and may need immediate replacement; this has been ignored for many years and may have implications for passenger safety. All of these require large sums of funds to be allocated, in a phased manner. The big question is where these funds will come from to cater to the wide variety of needs.

Increasing passenger fares has been a very sensitive political issue that could have a severe backlash from the electorate; the government will resort to this only as a last measure. However, year on year, the government has been increasing freight charges in order to garner that extra revenue in the budget, though it implies squeezing industry. All said, the current Railway budget also seemed to have played to the political gallery, did not increase passenger charges, but increased freight charges.

Let us briefly review the highlights of the Railway budget:

The financial summary of the Railway Budget 2010-11 sets out Rs.41,000 as the plan outlay; the Railways would need this amount to be spent in order to run their day to day operations and for the various capital expenditure, including increasing the rail network by around 1,000 km to around 65,000 km, during the year 2010-11. How would this expenditure be funded? Around Rs.15,000 crore will come out of India’s Union Budget support, an additional Rs.15,000 crore would come out of the profits of Railways from the past periods, The railways will additionally borrow around 10,000 crore from banks and financial institutions and the balance Rs.1,000 crore will come out of diesel cess. The expectations for 2010-11 in terms of activity are expected to be close to 1,000 tonnes of freight, being more than 5% as compared to 2009-10. The government has been implementing the budget 2009-10 promises reasonably well; of the 120 new trains announced during the last year’s (2009-10), more than 115 are expected to be introduced by 31 March 2010.

Major items of the proposed budget spending include upgrading of close to a hundred stations and positioning ten railway stations at international levels. Various initiatives are expected to be announced that will develop the existing railway assets and facilities and introduce global ‘best practices’ and technology in the Indian Railways. Multilevel parking, issue of e-tickets through mobile vans, enhancing availability of drinking water in trains, manufacture of wagons axles wheels and tracks, training and safety are some of the areas towards which funds would be allocated.  Railways owns huge land assets along its rail network; large scale commercial development and setting up of multi-modal facilities that will link railways with other modes of transport is also being planned. A large part of these expenses is expected to be funded through the ‘public-private partnerships (PPP)’ modality, where the private sector participates in these schemes through financial contribution and pooling in their management expertise.

Economic Survey 2009-10

In the annual Economic Survey for the year 2009-10, released a day ahead of the Union Budget 2010-11 presentation, the Finance Minister highlighted the following key issues:

The survey pointed out that the Indian economy has successfully come out of last year’s slow-down and the outlook for India's trade sector in 2010 has brightened. Core industries and infrastructure services have also shown recovery signs in the midst of overall industrial growth. Bank credit to industry, and consumers, has started to show an upward trend since the fag end of 2009. As a result of all of these, the country’s Gross Domestic Product (GDP) is expected to grow in the range of 8.25% to 8.75% during the current year 2009-10. Based on this, the GDP growth for the next year 2010-11 is expected to be close to 9%. Although a strong growth in the country’s foreign exchange reserves has been seen, the need to bring down the fiscal deficit, which is now hovering above 8% of GDP, was highlighted. In spite of all the economic progress, the government indicated that the poverty levels in India are too high, especially when compared to other growing nations. The government also highlighted the need for a roadmap in order to gradually exit the fiscal stimulus regime, without drastically hurting the economy.

In the Survey, the government identified that it should free grain stocks as and when food prices rise; inappropriate reaction on this front could lead to high inflation levels, as has been witnessed of late in the economy. Delay in market release of imported sugar has also been attributed to its increasing prices. In spite of a below-average monsoon, adequate stocks of food grains are available. The government highlighted the need to significantly improve the country’s food production, productivity and stock management. Water in the country’s reservoirs is also significantly lower than expectations.

Given such an economic situation, the challenges facing the government can be summarized as follows:

1. Revert to high GDP growth path of 9% plus, and secure a road map to grow at 10% plus, in the medium to long term
   
   
2. Ensure, critically, that the above ‘high growth’ is inclusive, i.e., the gap between the rich and the poor is not widened in any way!
   
   
3. Ensure that the existing weaknesses in the government’s delivery mechanisms, structures and institutions at different levels of governance are strengthened

In the context of such challenges, let us now review the highlights of the Union Budget 2010-11.

Union Budget 2010-11

Improving investments, sustaining growth and privatization

As a part of the ongoing efforts to simplify the country’s Foreign Direct Investment (FDI) regime, a number of steps have been taken by the government. A clearer definition of the method of calculating indirect FDI by foreign entities into Indian companies has been established. The government has also eased restrictions and regulations relating to pricing and payment of technology transfer fee and trademark, brand name and royalty payments by Indian companies to their foreign partners.

The Reserve Bank of India (RBI) has spelt out the fact that it is likely to provide additional banking licences to private sector players and other non banking financial corporations (NBFC). More capital is being infused to strengthen public sector banks and regional rural banks.

Efforts towards tax reforms are an integral part of this budget! The government has commenced discussions with a cross section of stakeholders on the issues of new Direct Tax Code (DTC) with an objective to implement the DTC from 01 April 2011, after substantial public deliberation. Similarly, the structure of Goods and Services Tax (GST) is being finalized for an April, 2011 implementation, although this was earlier promised to be implemented by 01 April 2010.

The government is steadily driving the pace of privatization of public sector units; around Rs.25,000 crore is expected to be raised during the budget year arising out of the sale of shares in public sector corporations like Oil India Limited, NHPC, NTPC and Rural
Electrification Corporation.

With the objective of improving agricultural productivity and reducing fertilizer subsidy over the short to medium term, a Nutrient Based Subsidy policy for the fertilizer sector has been approved by the Government and will become effective from April 1, 2010.

The Petroleum and Diesel pricing policy is set to undergo sea change with an objective to pass on the market price to consumers in a reasonably just manner. A viable and sustainable system of pricing of petroleum products has been drawn out by an expert committee and the government is seriously considering its recommendations, expected to be implemented soon.

Reviving Agriculture, the Backbone of the Indian Economy

Funds worth Rs.400 crore have been allocated to the eastern region of the country comprising Bihar, Chattisgarh, Jharkhand, Eastern UP, West Bengal and Orissa with the objective of boosting agricultural production. Additional funds have been allocated to make available pulses and oil seeds in rain-fed areas. Programmes focusing on water harvesting, watershed management and soil health have also been instituted.

Aiming to reduce wastage of production of food and grain items, policy measures have been taken such that farmers secure reasonable prices for their produce. Gaps in ‘food grain’ storage capacity are proposed to be bridged through private sector participation. Additional credit support is being provided to farmers through public sector and rural banks.

Under the debt waiver and debt relief scheme, the government has extended the loan repayment period by over six months to 30 June 2010. More incentives in terms of interest rate discounts have been provided to farmers who repay their existing loans on time. More incentives are also being provided to encourage construction of food parks and cold storage rooms, across the country.

Bridging the Infrastructure Gap

This is one of the critical areas where the government has failed to allocate required resources in the past budgets.

Close to 50% of the current plan allocation has been dedicated towards this critical area with around Rs. 1,75,000 crore allocated for infrastructure. This includes Rs.20,000 crore towards construction of new roads and Rs.17,000 crore towards development of Railways. More thrust has been provided for India Infrastructure Finance Company Limited (IIFCL) to disburse loan funds towards infrastructure creation in the country; a target of Rs.20,000 crore has been set for the year 2010-11. Also, companies having already spent in infrastructure projects can sell their investments in infrastructure and receive cash, which can be reinvested in fresh infrastructure projects - a take-out financing for Rs.25,000 crore over the next three years is being set up.

Allocation for power generation in rural areas increased close to Rs.5,000 crore. More emphasis is being provided for improving transparency in allocating coal blocks for captive mining for entities involved in power generation; a coal regulatory authority in the coal sector is intended to be set up.

Substantial thrust has also been provided for enhancing the capacity of renewable energy covering solar, small hydro and micro power projects. A National Clean Energy Fund for furthering research and innovative projects in clean energy technologies to be established.

Inclusive growth

More than 30% increase in spending for the social sector has been announced; this now amounts to around Rs. 1,40,000 crore comprising rural infrastructure, education, health, micro-financing and rural banking, urban development and housing and social welfare. Further allocations have been made during this budget to strengthen schemes focusing on rural employment guarantee, rural infrastructure, development of hilly areas, urban housing and poverty alleviation.

Various skills development programs are being instituted with an objective to develop skilled labor in the country. Allocations towards women and child development, female literacy and women farmers have also been stepped up.

Taxation related

Substantial taxation related reforms have been seen in this budget. Tax administration has been further strengthened with the commissioning of a Centralized Processing Centre at Bengaluru, which is capable of processing around 20,000 returns daily; two more such centres would be implemented during the year. Tax filing is further being simplified by the notification of SARAL-II; this will go to improve the tax collection mechanisms in the country. 

The direct tax slabs for individuals have undergone a change; income upto Rs.1.6 lakh will not be taxed, income above Rs.1.6 lakh to Rs.5 lakh would attract 10% tax, income between Rs.5 lakh to Rs.8 lakh would attract 20% tax and income above Rs.8 lakh would attract a 30% tax. A deduction of an additional amount of Rs.20,000 has now been allowed, over and above the existing limit of Rs.1 lakh on tax savings, for investment in long-term infrastructure bonds as notified by the Central Government. Surcharge of 10% on domestic companies has been marginally reduced. The rate of Minimum Alternate Tax has been increased to 18% of book profits. Limits of turnover, over which books of accounts need to be audited, has been enhanced to Rs.60 lakh for businesses and Rs.15 lakh for professionals.

On the indirect taxes front, rate reduction in Central Excise duties on all non-petroleum products has been enhanced from 8% to 10%. Excise duty on large cars, multi-utility vehicles and sports-utility vehicles has also been increased by 2%. The basic duty of 5% on crude petroleum and 7.5% on diesel and petrol has been restored. In addition, Rs.1 increase in the central excise duty on fuel has also been announced, all of which will push up their prices in the retail outlets.

The government has already started to partially roll back many of the measures announced as a part of the financial stimulus package in the current budget.

What do the Budget 2010-11 numbers say?

As we said earlier, the Union Budget is technically a statement of accounts relating to revenue and expenditure; the gross tax receipts are estimated at around Rs.7,50,000 crore and non tax revenue at Rs.1,50,000 crore. Fiscal deficit, i.e., excess of expenditure over revenue, amounted to around Rs.3,80,000 crore, which is around 5.5% of the country’s GDP; this will result in a net borrowing of  around Rs.3,50,000 crore to the government. The government is steadily proposing to reduce the fiscal deficit to 4.8% of GDP in 2011-12 and 4.1% of GDP in 2012-13 respectively.

Criticisms

Analysts on one hand have lauded this budget as being focused on the common man, while on the other hand it is being criticized for being inflationary on account of the increase in fuel product prices and excise duties. It has also been pulled up for missing opportunities in speeding up reforms, especially in banking, insurance and healthcare sectors. Lack of fund allocation towards setting up of new hospitals, a pressing need, has also been severely criticized.  Similarly, inadequacy of allocations towards infrastructure has been adversely commented upon. Delay in implementation of GST has come through as a disappointment.

Union Budget 2010-11: The Highlights

February 26, 2010
It was a budget that carefully trod the middle line as it sought to meet the combined challenges of reverting to 9% growth while ensuring food security, rural infrastructure development and inclusive growth.
Some of the key announcements of the budget are as follows:

1. Economic growth during the current fiscal could exceed 7.2 per cent projected by the Central Statistical Organisation (CSO)
2. The proposed new Direct Tax Code will in all probability be in place from April 2011. The Integrated GST should also be implemented by April’ 11.
3. The slabs for Income Tax have been broadened as follows:
   There will be no tax on income upto Rs 1.6 lakh
   Income above Rs.1.6 lakh and upto Rs. 5 lakh will be taxed at 10%
   Income above Rs. 5 lakh and upto Rs.8 lakh will be taxed at 20%
   Income above Rs.8 lakh will be taxed at 30%
   Tax-paying interface will be further simplified.
4. Deductions announced for investment in long term infrastructure bonds (over and above the existing limit of Rs 1 lakh for savings)
5. Corporate tax surcharge for domestic companies reduced from 10% to 7.5%
6. Minimum Alternate Tax for companies raised to 18% from 15%
7. Four pronged approach towards agriculture that will look at boost to agricultural output, minimization of wastage in distribution, credit support to farmers and thrust on food processing
8. Target for agricultural credit raised to Rs.3.75lakh crore; crop loans at subsidized rate of 5% (2% subvention) on timely repayment; farm loan waiver scheme extended to June 30, 2010
9. Draft of Food Security Bill will be unveiled shortly
10. RBI is considering the issue of fresh banking licences to private players as well as non-banking financial corporations;  Rs.16,500 crore provided towards re-capitalization of PSU banks
11. RBI also working towards greater financial inclusion – every village with a population of 2000 or above shall have a bank
12. Allocation worth Rs. 1.73 lakh crore has been made for infrastructure development – accounts for 46% of total plan allocations. 20 kilometers of road targeted to be added very day under the national highways project
13. Total social sector spend allocation of Rs.1.37 lakh crore has been made.  A National Social Security Fund will be set up for the unorganized sector with a corpus of Rs.1000 crore
14. Special thrust on pollution management and clean energy development- allocation to new and renewable energy sector increased to Rs.1000 crore
15. A National Clean Energy Fund has been proposed. To fund the corpus, clean energy cess of Rs.50 per tonne has been imposed on coal produced in India
16. Rs 1900 crore has been allocated for the Unique Identification Authority – the first set of ID cards will be rolled out by the end of this year.
17. A partial rollback of excise cuts have been effected; the standard central excise rate has been taken to 10%; peak excise duty raised to 22% (Large cars, MUV, SUV)
18. Central excise on Petroleum and Diesel have been hiked by Re.1 a litre
19. 5% basic duty on crude petroleum has been restored
20. Duty exemptions announced on heat pumps, solar energy equipment, photovoltaic metals, toys etc.; excise on CFL halved
21. Service tax left unchanged at 10%; accredited news agencies satisfying certain criteria have been exempted from service tax
22. Gross Tax receipt estimates: Rs 7.46 lakh crore
    Non-tax receipt estimates: Rs 1.47 lakh crore
    Plan and non-plan expenditure to go up by 15% and 6% respectively
    Fiscal deficit target for 2010-11 is 5.5% of GDP (Rs.3.81 lakh crore); this will be further attempted to be brought down to 4.8% in 2011-12
23. The projected revenue loss from the rationalization of direct taxes has been estimated at Rs 26000 crore while projected revenue gain from indirect tax adjustments has been placed at Rs 46500 crore, leaving a net revenue gain over Rs. 20500 crore.