INDIAN UNION BUDGET ‘11

– POST BUDGET ANALYSIS

BY: TEAM ECOBIZZ
 Indian Union Budget – Post Budget Analysis

It‟s that time of the year, when we have Budget Estimates and Declarations knocking the
door. However, as the euphoria sinks in finally, what does the Budget really amount to?
What‟s the impact it could have on our day to day life? Here‟s a simple unfolding of
What‟s In the budget and What‟s not.

To begin with, the Economic Survey presented on Saturday estimated our GDP
growth rate to border around 9% with a probable quarter shift forwards or backwards.
This leaves us with a range of 8.75-9.25% growth rate for the financial year ahead. The
positivity about our economy stemmed from the rising consumer demand, shifting
demographics and the ever growing services industry. Therefore the Survey signaled on
to efficient means of Demand management on the Domestic front. When we talk about
„Domestic‟ there are major issues related to inclusion that need to be tackled with. As
per reports by ‘The Economist’, India and China are bound to be the growth drivers
for the times to come. We believe, it is this very temperament that fuelled the Budget
Allocation for 2011-2012.

Some major indicators:

The Fiscal Deficit which has been a cause of great concern lately turned out to
be a dud. The estimates are drawn at 4.6% against the projected 4.8% earlier.
This improvement has primarily been due to divestments and the 3G auctions
which improved liquidity in the Short Run.
The Divestment Target for this year has been set up as Rs. 40,000 Crores.
Another area of improvement is the „Direct Cash Subsidy’, wherein direct cash
will be transferred to people below the Poverty Line.
The government continues to Pull out the Stimulus and phase in a Tighter
Monetary Policy as treading on to a higher growth rate. Thus, rise in interest
rates are likely which would impact future bond prices.
With the introduction of two types of Banking Licenses: Basic Banking &
Universal Banking Operations, competition within private players is bound to
increase.
Investments in infrastructure have been revved up with increase in limit for FII‟s.
Internally, the Infrastructure Outlay has been increased to Rs. 2.14 lac
crores. In addition creation of Tax Free Debt funds worth Rs. 30,000
crores will be issued by the Government. In all, Infrastructure has been
allocated 48.5% of the total allocation.
 Some of the Direct Tax changes are as follows:
o IT exemption for general increased to 1.8lacs from 1.6lacs (for males
alone)
o IT exemption for Senior citizens (Now from Age 60-80) increased to
2.5lacs
o IT deduction limit of 5lacs for Super Senior Citizens ( Age 80 and above)
o Surcharge on Tax for corporate reduced from 7.5% to 5% for domestic
firms and 2.5% to 2% for international firms
o MAT increased from 18% t0 18.5% which will make SEZs bleed
Some of the major Indirect Tax changes are as follows:
o Excise duty for non-petroleum goods reduced to 4%-5%
o Full exemption granted for Computers & Cold Storage equipment.
o Ad Valorem duty rates for Cement.
o Increase in export duty of Iron Ores from 15% to 20%
o Service Tax increased for restaurants, hotels, Airfares, Health care,
Branded Clothing and Insurance.

Even though there has not been any specific step taken to tackle the inflation w ith
these tax changes, the impact of higher inflation will be reduced. The major impact on
all these policy changes will be by of the crude oil price volatility.

These are some of the generic changes that are bound to make an impact on the
economy for the coming year. Now, how do they actually make the impact? Firstly the
9% odd growth rate can be achieved by taking care of the Consumption and Investment
portions of the National Income Accounting equation. To put it bluntly, the economy is
bound to prosper by rising domestic consumer demand which would demand higher
industrial production. This would be backed up with higher investments. As a result, the
government has now permitted FII‟s to invest in Mutual Funds, which will go a long way
in improving the capital inflows and liquidity in the Stock Market. Though the lock in
period has been reduced to 3 years (In terms of Infrastructure), the government still
needs to be proactive in encouraging FII inflows to boost the economy. The levies for
FDI‟s also don‟t seem to be working.

The Ad Valorem duties for Cement are going to hurt companies who are already
struggling with rising input prices and fluctuating demand. This would in turn be passed
to the consumer. The overall sentiment for Oil and Gas companies remained somber as
no major reforms were announced in the face of the Middle East Crisis and Supply
Shocks. This would in turn affect the automotive industry.

But the full exemption from SAD (Special Additional Duty) and concessional
CVD (Counter Veiling Duty)@5% to further the cause of environment safeguarding
(emphasis on hydrogen fuel cell technology) and bring up promotional policies for the
development of specialized sectors will be benefiting few companies which are
operational in these areas. Also, the definition of CKD (Completely knocked down)
vehicles is changed so as to include even the two wheelers which were earlier included in
concessional import duty which might have an impact on “on road” prices of vehicles.
The increase in duty for Iron Ore exports will help in catering to the local domestic
demand which would benefit the manufacturing sector.

While the Finance Minister has tried to focus on reforms, all that has been done
is a few amendments in terms of the financial regulatory framework. There are certain
key areas that seem to have been left out (Hopefully not intentionally).

Firstly Multi-Brand Retail needs to be encouraged. Counting 2-3 years

down the line, Multi Brand Retail can combat inflation, strengthen the
supply chain and help control rising food prices with greater transparency.
However, this boils down to the implementation problem as the some of
the State governments have vehemently opposed the plan while others
have embraced it.
Secondly, the MAT tax has been implemented which would adversely
affect the IT majors which were enjoying a tax holiday. This would impact
prospective business growth and productivity levels.
Thirdly, in terms of implementation, another area that needs attention is
the GST which would serve as an umbrella tax in turn wiping out the price
distortion and irregular taxing regime that‟s being followed as of now. It‟s
slated to be implemented by April 2012. This would require greater
involvement by the government to resolve the co-ordination problem
between the opposition and wandering states.

Another area for concern is the Government Debt to GDP ratio which is
projected to reach 68.7% by 2013-2014. Keeping the true GDP perspective in mind, the
government should target a Debt to GDP ratio below 60% in order to function in a
healthy macro environment. Keeping these issues in perspective, the Government also
needs to implement better governance, stricter regulations and transparency to tame the
government deficit that has crept in lately leading to scams.

Basically what does this Budget mean for me as a Student? Well, Branded clothes are
bound to be more expensive with the hike in excise duty, so would be Hotels &
Restaurants in the Premium segment, Health Care along with Air Travel costing higher
from Rs. 50 – 250. Basically lean is in along with judicious spending!