Public Systems and Policy Assignment

Union Budget 2012

Submitted By:
Ujjwal Kumar Kejriwal Roll No. 211, Sec C NITIE Mumbai

Public Systems and Policy Assignment

5 most important points from Public Policy point of view from the Union Budget 2012-13
1. Taxation
a. Changes in Tax Slabs: The minimum taxable income on which tax has to be paid was increased from 1.8 Lacs to 2 Lacs, so the new slab is as follows Nil tax between 0-2 Lacs income, 10% tax between 2-5 Lacs, 20% tax between 5-10 Lacs and 30% tax above 10 Lacs income. The taxable limit for men and women is same, which is 2 Lacs, but the limit for senior citizens (above 60 years) is 2.5 Lacs and for very senior citizen (above 80 years) is 5 Lacs. b. Tax relief for stressed sectors: Sectors like agriculture, infrastructure, mining, railways, roads, civil aviation, manufacturing, health and nutrition, and environment to get duty relief; Turnover limit for compulsory tax audit for SMEs raised from Rs 60 lakh to Rs 1 crore. c. Tax reforms: Direct Taxes Code (DTC) at earliest; GST network to be operational by August 2012; Central Excise and Service Tax being harmonized. A General AntiAvoidance Rule (GAAR) to be introduced to counter aggressive tax avoidance. d. Changes in service tax: No change in corporate tax rate, but standard rate of excise duty, as also service tax rates, raised from 10 per cent to 12 per cent; No change in peak customs duty of 10 per cent on non-agri goods. Large cars, imported bicycles, cigarettes, bidis and some imported jewellery to cost more; branded silver jewellery may get cheaper.

2. Income Tax Exemption for Health Checkup

A Rs. 5,000 deduction will be allowed for preventive health check-up U/S 80D, but the same is within the total limit of Rs. 15,000, and the threshold limit of 80D now will be used for medical claim policy as well as for preventive health check-ups. So the individual having a medical claim policy equal to or above Rs. 15,000 is not going to have any benefit from this.

3. Increment in education and health budget

There is an increment of 24% in education and 20% in health budget keeping in view the importance of health and education in the future development of the country. Finance Minister Pranab Mukherjee observed that education is the key to reaping the benefits of the demographic dividend in the form of a young population. On the health issue he quoted that the Rashtriya Swasthya Beema Yojana had emerged as an effective instrument for providing health cover to marginal workers.

4. Capital boost to financial and infrastructure sectors: Rs. 15,888 crore to be provided for
capitalisation of public sector banks and financial institutions; Infrastructure investment of Rs. 50 lakh crore in 12th period, with half from private sector; Tax free bonds of Rs. 60,000 crore to be allowed for financial infrastructure projects.

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Public Systems and Policy Assignment

5. Removal of Infrastructure bonds: The deduction into infrastructure bonds up to Rs. 20,000 will no longer be there. As such, individuals need to invest double under the new scheme in order to get the same deduction that he/she was getting by investing in the infrastructure bonds.

Impact of this budget on economic stability in India

The outlook for Indias growth changed substantially during the course of 2011-12. The tone as the beginning of the year was that India has not only emerged relatively unscathed from the global financial crisis of 2008, but has also returned to its trend growth rate of 8 per cent plus. However, as the year progressed, pressure points emerged on the domestic front, due to stubborn inflation and a policy logjam, and on the global front, due to the Euro Zone debt crisis. As managing growth and price stability had emerged as the major macroeconomic challenge for the government in FY2011-12, it was expected that besides laying out a road map to revive the growth; Union Budget 2012-13 will focus considerably on easing the supply side constraints which have been threatening the price stability in the economy. While, budget did announce measures to lift investment in agricultural and other infrastructure sector; the macro picture of boosting, managing and sustaining growth in the economy in the near term was missing. Growth in services sector, which accounts for nearly 57 per cent of the GDP, is expected to come down from 9.4 per cent in 2011-12 to 8.7 per cent in 2012-13 due to lower growth in hotels, transport, communication, community, social and personal services. However, industrial growth is expected to improve from the 2011-12 levels of 3.9 per cent to 5.6 per cent in 2012-13 due to the low base and expected monetary easing by RBI in view of moderation in inflation. Healthy infrastructure spending holds the key to facilitating economic growth in India. Inadequate infrastructure has time and again exposed the Indian economy to supply side constraints. Hence, given the importance of infrastructure for growth, the 12th plan period has pegged the investment in infrastructure at Rs. 50 Trillion. However in Budget 2012-13, the y-o-y growth of allocation to major infrastructure sectors including power, road transport, shipping, urban infrastructure and railways together has been increased by mere 7.4 per cent as compared to 36 per cent in 2011-12. Railways saw the largest jump in allocation. Inclusive growth is critical for India to sustain its current growth momentum and overall economic development in the long run. The Budget 2012-13 fuels it further by allocating more resources to the ongoing programs and mentions the introduction of the Food Security bill. The budgetary allocation to the

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Public Systems and Policy Assignment

Ministry of Rural Development stands Rs 736.8 billion, a 10 per cent increase over the revised estimates for the last fiscal. The flagship scheme (PMGSY) to provide and enhance rural connectivity has received an allocation of Rs 240 Billion, an increase of around 20 per cent over last year. Social growth plays a very important role, Budget 2012-13 gives due importance to the social sector as well by allocation Rs 2,144 billion to social services and Rural Development. GDP growth is unlikely to improve sharply in 2012-13. While transmission of monetary easing to interest rates would take place with a lag, declining cost of domestic funds would boost consumption sentiments and the growth of rate-sensitive sectors such as construction. Growth of private consumption, which accounts for around 60% of GDP at market prices, is expected to improve to an extent from around 5.1% in April-December 2011 in year-on-year (y-o-y) terms to around 6.5-7.0% in 2012-13, following the easing in headline inflation and the anticipated decline in interest rates. In addition to the impact of monetary easing, the growth performance of the manufacturing and mining sectors is likely to display some improvement given the base effect. Service sector growth, which has remained healthy despite the slowdown in industrial growth in H1, 2011-12, is expected to support overall economic growth in 2012-13. However, given the healthy estimated output of a number of major agricultural commodities in 2011-12, agricultural growth is expected to remain low in 2012-13, even if the monsoon conditions are normal. India is still front runner in world in terms of growth; share of trade has increased. In order to boost the growth a plethora of coordinated implementation of decisions being taken to improve delivery systems, governance, and transparency; and address the problem of black money and corruption in public life. Also, investment growth is expected to remain sluggish in H1, 2012-13, given the slowdown in concrete announcements of fresh projects and capacity enhancement in the recent months as well as the likely delay in commissioning of certain projects, particularly in the power sector. Enhanced focus on Governance as evident in measures like UID funding will surely enhance the disposable income in the rural areas and prevent leakages within the system. Reduction in subsidy is a welcome move, but the process of implementation needs to be detailed out further. Other laudable effort lies in definite move towards, Direct Tax Code, GST regime, FDI in multi-brand retail but it will be meaningful to set a deadline for the same.

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Public Systems and Policy Assignment

Impact of this Budget on Economic growth in India
The outlook for Indias growth changed substantially during the course of 2011-12. The tone as the beginning of the year was that India has not only emerged relatively unscathed from the global financial crisis of 2008, but has also returned to its trend growth rate of 8 per cent plus. However, as the year progressed, pressure points emerged on the domestic front, due to stubborn inflation and a policy logjam, and on the global front, due to the Euro Zone debt crisis. As managing growth and price stability had emerged as the major macroeconomic challenge for the government in FY2011-12, it was expected that besides laying out a road map to revive the growth; Union Budget 2012-13 will focus considerably on easing the supply side constraints which have been threatening the price stability in the economy. While, budget did announce measures to lift investment in agricultural and other infrastructure sector; the macro picture of boosting, managing and sustaining growth in the economy in the near term was missing. Growth in services sector, which accounts for nearly 57 per cent of the GDP, is expected to come down from 9.4 per cent in 2011-12 to 8.7 per cent in 2012-13 due to lower growth in hotels, transport, communication, community, social and personal services. However, industrial growth is expected to improve from the 2011-12 levels of 3.9 per cent to 5.6 per cent in 2012-13 due to the low base and expected monetary easing by RBI in view of moderation in inflation. Healthy infrastructure spending holds the key to facilitating economic growth in India. Inadequate infrastructure has time and again exposed the Indian economy to supply side constraints. Hence, given the importance of infrastructure for growth, the 12th plan period has pegged the investment in infrastructure at Rs. 50 Trillion. However in Budget 2012-13, the y-o-y growth of allocation to major infrastructure sectors including power, road transport, shipping, urban infrastructure and railways together has been increased by mere 7.4 per cent as compared to 36 per cent in 2011-12. Railways saw the largest jump in allocation. Inclusive growth is critical for India to sustain its current growth momentum and overall economic development in the long run. The Budget 2012-13 fuels it further by allocating more resources to the ongoing programs and mentions the introduction of the Food Security bill. The budgetary allocation to the Ministry of Rural Development stands Rs 736.8 billion, a 10 per cent increase over the revised estimates for the last fiscal. The flagship scheme (PMGSY) to provide and enhance rural connectivity has received an allocation of Rs 240 Billion, an increase of around 20 per cent over last year.

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Public Systems and Policy Assignment

Social growth plays a very important role, Budget 2012-13 gives due importance to the social sector as well by allocation Rs 2,144 billion to social services and Rural Development. GDP growth is unlikely to improve sharply in 2012-13. While transmission of monetary easing to interest rates would take place with a lag, declining cost of domestic funds would boost consumption sentiments and the growth of rate-sensitive sectors such as construction. Growth of private consumption, which accounts for around 60% of GDP at market prices, is expected to improve to an extent from around 5.1% in April-December 2011 in year-on-year (y-o-y) terms to around 6.5-7.0% in 2012-13, following the easing in headline inflation and the anticipated decline in interest rates. In addition to the impact of monetary easing, the growth performance of the manufacturing and mining sectors is likely to display some improvement given the base effect. Service sector growth, which has remained healthy despite the slowdown in industrial growth in H1, 2011-12, is expected to support overall economic growth in 2012-13. However, given the healthy estimated output of a number of major agricultural commodities in 2011-12, agricultural growth is expected to remain low in 2012-13, even if the monsoon conditions are normal. Also, investment growth is expected to remain sluggish in H1, 2012-13, given the slowdown in concrete announcements of fresh projects and capacity enhancement in the recent months as well as the likely delay in commissioning of certain projects, particularly in the power sector. A plethora of regulatory issues and policy hurdles contributed towards the slowdown in both announcement as well as implementation of fresh projects in 2011-12. Although admittedly, resolving some of these issues lies in the domain of the State Governments, there are several steps that the Central Government could initiate to ease such barriers. Moreover, ensuring consensus with various stakeholders and political groups prior to announcement of policies would go a long way in creating a stable policy environment. India is still front runner in world in terms of growth; share of trade has increased. In order to boost the growth a plethora of coordinated implementation of decisions being taken to improve delivery systems, governance, and transparency; and address the problem of black money and corruption in public life. Enhanced focus on Governance as evident in measures like UID funding will surely enhance the disposable income in the rural areas and prevent leakages within the system. Reduction in subsidy is a welcome move, but the process of implementation needs to be detailed out further. Other laudable effort lies in definite move towards, Direct Tax Code, GST regime, FDI in multi-brand retail but it will be meaningful to set a deadline for the same.

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