March 2 , 2010

Crisil Research Report

Union Budget: Inclusive Growth remains priority

The backdrop against which FM Mr. Pranab Mukherjee presented the first budget of UPA II government has dramatically changed. In Budget 2010-11, although sustenance of growth continues to be an important agenda, unabated rise in food prices coupled with high fiscal deficit has emerged as a major challenge for the government. The Finance Minister in his budget speech did try to touch upon both the challenges. While he has laid out a road map to bring down the fiscal deficit to 4.1 per by 2012-13, he did not spell out any such target to bring down the prices. This is understandable; as the economic survey presented in parliament on 25th February 2010 has also pointed out that there is no easy way out of the current bout of inflation. Thus FM appears to have chosen to focus on the root cause of the price rise and highlighted the importance of the agricultural sector in providing food security. To spur growth in this sector he proposed a four-pronged strategy covering (a) agricultural production; (b) reduction in wastage of produce (c) credit support to farmers; and (d) a thrust to the food processing sector.

In terms of new fiscal initiatives, the Finance Minister has done very little in this budget and it is not difficult to understand why as the government’s endeavour is to introduce new direct tax code and GST by 1 April 2011. Nevertheless, the FM did tinker with direct taxes, offering some concessions to personal income tax payers and increasing the rate of minimum alternate tax for the corporate sector, which together with other manoeuvres will result in a revenue loss of Rs. 26, 000 crore. In the case of indirect taxes, the excise duty reductions resorted to in the previous budget for stimulating demand has been partially rolled back. Similarly, excise and customs duties have been increased on petroleum products. Thus the revenue gain on this count is estimated at Rs. 43,500 crore. Another Rs. 3000 crore increase in revenue is expected on account of services tax. Overall, these measures are projected to yield additional revenues to the tune of Rs. 20,500 crore in 2010-11.

Another focus area of this year’s budget is the infrastructure sector. According to the Planning Commission, the country would need investments worth Rs 20,561.5 billion (at 2006-07 prices) during the Eleventh 5-year Plan to overcome the deficit in areas such as road, port, airport, power, telecom etc. Thus a sum of Rs 1,73,552 crore has been provided in the budget for 2010-11 for infrastructure development, which accounts for over 46 per cent of the total plan allocation.