Budget 2011 was presented against a very challenging macroeconomic environment, with the need to balance several conflicting objectives such as tackling inflation without impairing growth and emphasizing social inclusion at a time when fiscal consolidation is of paramount importance.
Reviving investor confidence and market sentiment, badly hurt because of a series of perceived governance and policy issues, was also high on the expectation list. In the end, the budget was devoid of any “big bang” announcements, either on the positive or on the negative side. Although the budget estimate for the fiscal deficit for 2011-12 improves over the rolling target that had been set previously, this follows from optimistic forecasts of tax revenue growth and a decline in the allocation towards major subsidies.
There has been, as was widely expected, an increase in the outlay on the infrastructure sector and some positive steps in terms of operationalizing an infrastructure debt fund. The increase in the investment limit by foreign institutional investors in corporate bonds and the reduction in withholding tax will have a beneficial impact in terms of enhancing fund flow to the sector. While there has been talk of easing supply-side bottlenecks, especially in agriculture, the tangible measures that have been announced are limited to providing “infrastructure” status to cold chains and post-harvest storage.
Spiralling crude prices are likely to have a seriously negative impact on the fiscal situation, but the fact that the subsidy budgeted for petroleum products is very modest leads to expectations that there would be policy announcements during the course of the year in terms of freeing oil prices. On the positive side, the government has reiterated its commitments to implement the goods and services tax and the direct taxes code according to the time schedules announced earlier, as well as a move towards better delivery of subsidies to prevent leakages.
On the back of an estimated 9% real economic growth in 2011-12 and with the removal of some exemptions regarding excise duty and a wider coverage of service tax, the government has estimated that its tax revenue will expand 18% in 2011-12, which may be somewhat optimistic. The focus of expenditure remains on promoting inclusive growth and infrastructure development, with 48.5% of the Plan allocation being devoted to infrastructure and an increase in the allocation towards Bharat Nirman.
Although revenue expenditure is budgeted to increase by a low 4%, this benefits from a lower allocation towards the debt waiver and debt relief scheme for farmers as well as all major subsidies, namely fuel, food and fertilizer, relative to the revised estimates for 2010-11.
Inclusive of grants for creation of capital assets (which are included in revenue expenditure) and excluding capital expenditure towards defence, the total allocation for expenditure that is capital in nature is estimated to increase by a healthy 24% relative to the revised estimates for 2010-11. While grants for creation of capital assets are estimated to expand sharply, non-defence capital outlay and gross loans and advances are estimated to decline, led by a lower allocation of Rs6,000 crore towards public sector banks to maintain tier I capital to risk weighted asset ratio at 8%. The budget has retained the target for disinvestment proceeds at Rs40,000 crore.
The budget has improved upon the rolling target set in the previous year for the fiscal deficit in 2011-12, which is set at 4.6% of the gross domestic product. However, with the assumed tax buoyancy likely to be somewhat optimistic even as pensions and subsidies towards fuel and food are likely to exceed budget estimates, we expect that there could be slippages in the fiscal deficit targets.
The corporate sector as a whole is expected to benefit from the possibility of interest rates remaining under control, given that proposed borrowing is lower than market expectations. Also, some sectors such as auto, where a rollback of excise was widely expected, also stand to gain from the absence of such a move. The decision to allow foreign investments in the local mutual fund industry will also be a positive in deepening the resource base of mutual funds.
Of key importance, going forward, will be the government’s ability to ensure that fiscal consolidation targets are achieved given that there would not be any one-time bonanzas. The disinvestment target would also be difficult to achieve unless there is a significant revival in market sentiment.