Budget 2011-12 - An analysis - Dr Suresh Srinivasan
The Union Budget for the year 2011-12 was tabled in the Parliament by the Finance Minister last month. This article will help understand the nuances of the Budget and also appreciate the impact of key proposals.
The Budget is a document that forecasts as to where the government will raise its streams of revenues, generally denoted as receipts, where such receipts would be spent, generally denoted as expenditure, and what would be the surplus or deficit. It is generally a deficit, as expenditure always exceeds the receipts. The deficit, known as fiscal deficit, is an important component of any government’s Budget as it has to be eventually financed, generally through market borrowings, and hence should not cross acceptable limits.
In the process of estimating the receipts, expenditure and deficit, the government identifies the appropriate heads from where such receipts would be raised, the appropriate heads of expenditure and the extent of deficit. The challenge any government faces is in intelligently structuring the receipts and expenditure in such a way that the corporate and individuals are not taxed excessively. At the same time, enough funds are raised in order to spend on developmental programmes for the economy to grow at a targeted rate. Besides, the overall deficit should not be too large, such that financing the deficit should not become a burden on the government. This is an extraordinarily challenging task, and this is where the experience and innovativeness of the Finance Minister comes in handy.
Given the above, let us review the receipts, expenditure and deficit proposed by the Finance Minister in the 2011-12 Budget. The Finance Minister has proposed a total receipt of Rs 8.5 lakh crore (Figure 1). This largely comprises areas where the government is expected to raise revenues from, and includes receipts from personal and corporate taxes, service tax, receipts from indirect taxes like customs duties, and various other non-tax revenue like telecom auction fees, disinvestment proceeds from public sector undertakings, etc. Given the target to raise Rs 8.45 lakh crore as receipts, the government has identified Expenditure to the tune of Rs 12.58 lakh crore; this comprises subsidies provided to various sections of the society including subsidies on food, fertilisers, petroleum and petroleum products, allocation towards infrastructure, defence, rural development, social welfare schemes and elevation of the poor to bring in financial inclusion, healthcare schemes, educational proposals, and expenditure towards agriculture.
This throws up a deficit of Rs 4.13 lakh crore (difference between receipts of Rs 8.45 lakh crore and expenditure of Rs 12.58 lakh crore) which is known as fiscal deficit. A key indicator that judges the appropriate balance between receipts of expenditure is fiscal
deficit as a percentage of the country’s Gross Domestic Product (GDP); in the present case India is expected to achieve a GDP of around Rs 90 lakh crore, which means fiscal deficit as a percentage of GDP translates to 4.6 percent. This is within acceptable limits and the government is further targeting to decrease this over the next two years.
In order to qualitatively judge the Budget and rate the performance of the Finance Minister, we need to assess if the receipts raised and expenditure proposed will maintain the growth of the Indian economy and whether the deficit levels are appropriate, given the current economic situation of the country? Figure 2 analyses key proposals of the Budget 2011-12 and the impact of these proposals on the Indian economy.
| Key Budget 2010-11 Provisions |
Intended Impact on the Indian Economy |
Balancing the Receipts, Expenditure & deficit
- Targeted GDP Growth 9% for 2011-12
- Fiscal deficit for 2011-12 targeted at 4.6% (2010-11: 5.1%)
- Total Govt. Debt at 44% of GDP; within acceptable limits
- Food inflation a key concern
- International Crude Prices a major concern
- Governments Delivery Mechanism to be improved through
better management of the system through fighting corruption |
The government has successfully contained the Fiscal deficit for 2010-11 at 5.1% of GDP against an earlier target of 5.5%. This is positive and was possible due to a 'windfall' 3G auction receipt of around Rs.1 Lakh crore. The government is now targeting Fiscal Deficit at 4.6% of GDP for 2011-12. The Receipts and Expenditure proposed will allow the economy to grow at 9% during 2011-12. Adequate Provisions are made to ease supply side constraints on Food inflation through enhancing Food Storage Capacity. |
Receipts and Taxes
- Min.exemption raised from 1.6 to Rs1.8 lakh
- Above 80 years, exemption at Rs.5 lakh
- Senior Citizen age decreased from 65 to 60
- Rs.30,000 crore tax free bonds; individual exemption
- Corporate tax: Surcharge down to 5% from 7.5%
- Minimum Alternate Tax (MAT) up from 18% to 18.5%
- MAT imposed on SEZ units
- Tax benefits for the IT industry not extended beyond Mar'11
- Air Travel, hotels, restaurants, legal services, Service Taxed
- No reduction in Excise Duty, Customs Duty (peak), CENVAT
- Customs duty eliminated on food items
- GST to be introduced in 2011-12
- Direct Taxes Code to be introduced on 01 April 2012 |
Overall the priority has been to make taxes moderate, and keep the tax collection process simple and manageable. The proposals which the FM has made towards this objective has been positive. Minimum Exemption limits for Direct Personal Taxes have been enhanced, which will have a positive impact on the individuals. Although, the basic Corporate Tax rate has not been reduced, Surcharge has been reduced, which is in the right direction. But the concerns arise with the Finance Minister (FM) increasing the MAT and also bringing in SEZ's into the MAT purview. Also not extending the IT benefits for Software Technology Parks (STP) has been a major let down for the companies in the IT sector. For example, China still exempts business tax on outsourcing companies. No major changes in Indirect taxes. It is positive that the Government has committed to implement GST from 2011-12 and will pass the required constitutional amendment in the parliament. Direct taxes Code implementation by 04/2012 is positive. |
Expenditure salients
- 2010-11 saw agriculture growing at 5.4%
- Credit flows to farmers raised
- Funds allocated for improving Technology in farming
- Rebate/ Interest subsidization for farmers to continue
- Fund allocations to strengthen NABARD
- Infrastructure spending to be raised by more than 20%
- Tax free bonds for Rs.30,000 crore for infra. Development
- Education sector allocation increased by close to 25%
- Health sector allocation increased by more than 20%
- Rs.500 crore allocated for Women self help group
- Social sector allocation increase by more than 15%
- Old age pensions raised from Rs.200 pm to Rs.500 pm
- More than Rs.1.5 lakh core for defense allocations |
The intelligence and appropriateness of choice in allocating valuable resources to various heads of Expenditure is evident in the current Budget 2011-12 proposal. Balanced allocations have been made to Agriculture (as Indian Economy is basically Agriculture based), Infra-structure, Defense, Social and Rural Sector, Healthcare & Education. Overall, with the given constraints of Receipts, the government has wisely allocated funds to those areas which will drive the country's growth; as achieving a 10% plus GDP growth for the next twenty years would be the top most priority of the government. For example, India cannot achieve the 'double digit' growth unless adequate physical infrastructure in terms of power, roads, ports and railways are created; the government has increased the infrastructure allocations by around 20% as compared to the last budget. |
Administrative/ Institutional Reforms
- Finance sector reforms to be expedited
- Insurance bill to be passed in 2011-12
- Banking sector reforms also committed in 2011-12
- Further liberalization in FDI limits has been promised |
These reforms are extremely critical for opening up the economy. The
government has committed to open up the Finance Sector further, pass the insurance bill, further liberalize the country's Foreign Direct Investment (FDI) laws such that more 'long term' foreign investment flows into the country; all of these are very positive |
All said, the above mentioned proposals in the Budget 2011-12 documents is only a forecast, ie, proposed plan of implementation in terms of receipts and expenditure. But, in reality how the government is actually able to generate this targeted level of receipts during 2011-12, whether it is able to contain expenditure in line with the above forecast and whether it is able to contain the deficit at the level
targeted in the Budget are all real challenges the government will face. Where can this go wrong?
The major risk points are
the international developments where the government does not have control; like the increase
in international crude prices,
the global impact of food and commodity price increase, etc all of which can have a ‘spill over’ impact on the Indian economy, the government would have to proactively manage these issues as they develop in order to achieve the forecasted figures in the Budget 2011-12.
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