Monday, February 28, 2011

Pranab makes bold moves. Gets 8/10 from me!

Here’s the best part of the budget. If all goes to plan on the revenue side (basically if we grow 9%), we will be a $2 trillion economy next year! We’ll be breathing down the necks of UK and France. In just 4 short years, we would have doubled our GDP in $ terms! The world order is surely changing! No wonder the world is taking note of India.

There is a lot that you must have ready already in the papers about the budget. I don’t intend to get into the details here. I only want to highlight a few very bold moves and a few very exciting possibilities emerging in India in this post of mine:

1)      Growth oriented budget: By not rolling back the excise cuts that he announced in 2008, Pranab Mukherjee surprised all and won the wholesome support of all in industryl. India Inc’s CEOs are raving about the budget because the message is very clear. The government is not going to let go of the growth momentum. Lower excise duties will keep inflation in check in addition to boosting industrial growth. Further, even Service Tax has not been increased from the present 10%. Additionally, by reducing effective corporate tax rate by nearly 1%, the corporate sector should make more margins leading to higher investments. Clearly, this is the path that Pranab wants to follow since it removes many ills at the same time. It controls inflation; lowers fiscal deficit numbers; boosts job creation and raises income levels!
2)      Government is serious about cutting spends: This is what you rarely see in government and that’s why I call it a bold move. Expenditure is budgeted to rise by only 3.4%. That’s lower than even the inflation estimate of 5% and has caused many to think that it’s unachievable. It appears to me that this tightening represents a serious effort at improving execution efficiency. Departments that perform well will get more resources down the year. So NREGA hasn’t got an increase in the budget, but there is a commitment to increase if funds are used well. Likewise, by transferring funds directly into the hands of people, the corruption that exists in the Public Distribution System (PDS) will be cut drastically; thus improving government finances.
3)      Unique Identity Card: This is a game changer. Essentially here’s what happens as a result of this. Suppose you are a BPL (Below Poverty Line) family and the government has given you a ration card which entitles you to get some quantity of kerosene at cheap rates. Now, what happens in reality is that the ration shop refuses to give you the kerosene and diverts the fuel into the open market and makes illegal profit. Or maybe you don’t even go to the ration shop to claim your entitlement. You can’t do much because you are anyways a pretty dis-empowered citizen. So the government pays but you don’t get the benefit. Now, the government will simply transfer cash into your hands....which no one can take away from you. The ration shop’s corruption is cut. And here’s the best part. To take care of all the people, the government still spends less. This is a huge change. If all citizens in India could have a UIC, benefits could flow directly to the intended people and corruption could be weeded out. It’s said that by Oct 2011, we will be able to issue 10 lac UIC a day. Wow! This had to be championed by a private sector doyen.....Nandan one in government could have done this!
4)      Cutting fiscal deficit: By keeping a tight control on costs, and on the back of higher tax revenues on account of the 9% growth, Pranab Mukherjee has been able to set a relatively low number of 4.6% of GDP as the target for fiscal deficit for the year. This is a huge move.....and has been received very well by the stock markets.....a lower fiscal deficit means that the government will borrow at the same level as last year (while bank credit would increase by 20% or so as it does every year)....thus making more monies available to the corporate sector. If the fiscal deficit was higher, the government would crowd out private players in the credit market. This should provide some relief to interest rates; helping the corporate sector.
5)      Funds flow: By doubling the limit for foreign debt funds to invest in India, the government is making sure that financial resources are available in ample supply. Likewise, foreign individuals can invest directly into Indian mutual funds (in the past, they had to route it thru FIIs which would invest in several countries). Now Indian MF funds can raise monies directly abroad. Pranab has suggested that he will expand the FDI limit in insurance to 49% though he didnt announce it in this budget. Also, the withholding tax (a kind of Tax Deduction at Source) on foreign funds has been reduced to just 5% from the earlier 20%. Also, profits on foreign infrastructure funds have been made tax free. These are all bold moves to make sure the economy gets all the money it requires to grow.
6)      Focus on social sector: Some of the moves here are really bold. The tax concession given to rural borrowers has been increased to 3% from 2%. This means that agriculural loans will be given at just 4% - provided the borrower returns the money on time. This should help build a culture of paying back what you borrow! Further, the total credit provided will be increased by Rs 1 lac crore (from Rs 3.75 lac crores to Rs 4.75 lac crores). More credit at cheaper rates should encourage investments in agriculture (machinery, better seeds, fertilizers), thus increasing farm productivity. Further, there is a substantial change in the loans given for housing. Loans up to Rs 15 lacs (for a house property up to Rs 25 lacs) will be given a concessional rates. This should boost rural housing. Further, there are significant increases in the education budget, health-care budget and others. All in all, there is a big thrust to the rural economy. This is the “aam aadmi” part of the budget that many have missed.

The reason I am deducting 2 points from this budget is that Pranab should have announced FDI in retail and insurance in this budget itself. This is a political issue and his excuse has been that while the Congress supports the cause, other political parties dont do so. I also feel that the disinvestment target of Rs 40,000 crores could have been set higher. Also, I would have liked to see a higher exemption limit for individuals. I don’t think it would cost much, but it would have boosted the sentiments a lot more.

The real truth, as I mentioned in yesterday’s post, is that budget making has become easier for the FM, given India’s high GDP growth rate. Many who have not understood this truth find Pranab’s budget to be a bit of a magic trick! It’s not. It’s just easier to manage the finances better if the economy is growing at 9%. It’s been a very good budget. No wonder the stock markets have given it a clear thumbs up!

1 comment:

  1. Do agree Prashant on the points raised...I feel slabs of individual tax payers could have been raised for all three tax brackets, keeping inflation in mind. This could have given a big boost to middle class segment. FDI in retail will remain a political issue till any party comes in clear power, there is going to be arm twisting in coalition govt...