Budget 2011-12: Growth and Fiscal Consolidation – Can We Achieve It?

The union budget for the year 2011-12 was presented amidst an unstable macro-economic environment characterized by high inflation, high interest rates and a need for lowering the fiscal deficit. This budget has tried to balance the need for sustaining the growth of the economy along with controlling inflation and fiscal deficit. The government has tried to address all these issues to an extent through various measures, albeit the implementation of these measures can be very difficult.

The fiscal deficit target was lowered to 4.6% in 2011-12 from 5.1% in 2010-11 and is targeted to reach 4.1% and 3.5% in FY13 and FY14 respectively. This estimate is based on an optimistic growth in tax collections and a substantial decline in the subsidy bill. The government has assumed a growth in tax collections of 18% with a real economic growth of 9%, which seems highly optimistic and at the same time, is expecting to reduce the oil subsidy bill to INR 23,640 crores from over INR 38,000 crores in 2010-11.

With the global crude prices touching $110 per barrel, this cannot be achieved unless the prices of petroleum products are increased substantially in the country, which can be very difficult to implement in the current political scenario. If we look at FY2010-11, even with proceeds from tax collections and telecom auctions exceeding the budget estimates substantially, the deficit for 2010-11 reduced very marginally, highlighting the additional expenditure requirements over the course of the year compared to the budget estimates. This can make it very difficult for the GoI to achieve the fiscal deficit targets mentioned in the budget.

The gross government borrowing is projected to decrease based on the budgeted fiscal deficit, which will bring the possibility of interest rates remaining under control and benefit the corporate sector with lower cost of raising funds. However, if the fiscal scenario turns out to be less positive than presented in the budget, the interest rates might go up. The surcharge on corporate tax has been brought down from existing 7.5% to 5%, however this has been neutralized by a increase of 0.5% in MAT.

The excise duty was left unchanged, bringing a cheer especially for the automotive industry, which was expecting a rise in the excise duty. The service tax was also left unchanged, though some new services were brought under its ambit. The government has also committed to implement the DTC from April, 2012 and is hopeful of implementing the GST in 2012-13.The budget announced some important measures to aid the growth of the economy by increasing the budgeted outlay for infrastructure. Other measures such as increasing the FII investment limit in corporate bonds and reduction in tax withholding for investment in infrastructure bonds should aid the flow of funds to this sector.

The government has announced incentives (such as according infrastructure status to cold chains) to support the development of supply chain & cold storage infrastructure for food grains and vegetables. The development of food supply chain infrastructure is very important to control the increasing food inflation. However, no concrete plans or steps were announced to control spiraling inflation figures and nothing was mentioned about the highly anticipated increase in FDI for the retail sector, which could improve the the food supply chain infrastructure.

Allocations for social sectors such as education, health and family welfare have been increased and allocation to agriculture has also been increased. The credit flow to agriculture is targeted to increase by INR 1,00,000 Crores and an additional 1% interest subvention to farmers repaying loans in a timely manner has been announced. However, policy level measures to aid farmers in increasing productivity were missing.

The government did not make any big reform announcements, but has tried to balance the objective of sustaining the growth along with lower fiscal deficit and lower inflation. We have to wait and see if the measures announced by the government will achieve this objective

Written by