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What it means for your investments? 06:03 March 10, 2011
Alok Agarwala
Research Head
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Union Budget 2011-12: What it means for your investments?

The Union Budget for 2011-12 has brought cheers to equity and bond markets alike, with stocks rising by more than 3% a day after the budget and 10 year g-sec yields easing to sub 8% levels post the budget. Though the budget did not have much relief for the beleaguered common man who is suffering from high inflation, it was nevertheless taken as a positive by financial markets. A peculiar and probably heartening feature of this budget has been the lack of any short term populist measures for the masses. Though it sought to address the ills of inflation, the focus was more on improving the supply side in the medium to long term rather than providing short term relief measures to the common man such as lower taxes.

The budget was presented in the backdrop of high inflation and high interest rates, signs of slowdown in growth, corruption, high fiscal and current account deficits and a pause in the reforms process. Though no decisive steps were announced on issues such as corruption and reforms, there were proposals to control inflation by ensuring a robust supply chain for food items, support growth by way of higher investments in infrastructure and managing fiscal deficit by announcing revenue neutral tax proposals and by not proposing significant populist doles.

Fiscal Deficit: There was a real surprise on this front. Fiscal deficit for 2010-11 was revised at 5.1% of GDP (against a target of 5.5%) and the one for 2011-12 was projected at 4.6% against a target of 4.8%. With the government borrowing figure for 2011-12 set at Rs. 3.43 lakh crores, less than that in the current fiscal, both the equity and debt markets were taken by surprise and rallied. Though the government seems to be a tad too optimistic on revenue targets for 2010-11 and hence 2011-12, the figures projected shall nonetheless provide relief to bond markets as interest rates are likely to remain subdued. Apart from that, the expenditure targets also seem to be too low with a growth of a mere 3.4% being projected for 2011-12. The projected oil subsidy bill of about Rs. 23000 crore also seems a bit too low given the current volatility in oil prices and deteriorating political situation in the Middle East. Global oil prices thus remain a crucial factor in deciding whether the projected fiscal deficit is met or not. Whereas the revenue targets are a bit optimistic and run the risk of not being met, the expenditure side threatens to be higher than expected for 2011-12, thereby raising the risk of the actual fiscal deficit exceeding the estimate by some margin.

Inflation: Instead of providing temporary relief to tax payers, the finance minister chose to address the menace of high inflation by announcing measures to improve the production and supply of farm / food products. Capital investments in Fertiliser and Cold Storage were granted infrastructure status, businesses engaged in fertiliser production were made eligible for investment linked deduction, process was formulated to create additional storage capacity for farm produce, mainly food items, target for bank credit to agriculture sector was increased by a whopping 26.7% to Rs. 475000 crores, additional 1% interest subvention was provided to farmers who repay short term crop loans as per schedule, the interest subvention scheme for crop loans was extended by a year, fifteen mega food parks were announced to be set up in 2011-12, Rs. 300Cr was provided to attain self-sufficiency in production of pulses, Rs. 300Cr to bring 60000 hectares of area under oil palm plantation, etc. The task of managing core inflation was largely left to the Central Bank though the Budget too did its bit by not hiking basic rates under customs and excise duty. It is heartening to see the government taking long term decisive steps to address supply side issues in inflation.

Growth: The Finance Minister chose to address future concerns on growth by focusing on infrastructure. A 23% increase in funds allocated for infrastructure to Rs. 214000cr. (48.5% of total plan expenditure), creation of income tax exempt notified Infrastructure Debt Funds with a lower withholding tax rate of 5% to attract foreign investments in infrastructure, nod to infrastructure finance companies to raise Rs. 30000Cr in 2011-12 by way of tax-free infrastructure bonds, increasing the FII limit for investment in bonds issued by infrastructure companies with residual maturity of 5 years or more to $25 billion from $5 billion, allowing FIIs to invest in unlisted bonds of infrastructure companies with minimum lock-in period of three years and extending the Income tax exemption u/s. 80CCF for Infrastructure bonds, are steps in the right direction. With this, the finance minister has sought to ensure ample funds for the infrastructure sector at reasonable cost. The only missing link is now execution and that too should begin soon as projects are awarded by concerned ministries and orders start flowing in.

Corruption: Though it is outside the scope of the budget to address issues related to corruption, the finance minister showed an intent to tackle the same by announcing the formation of a GoM to consider measures for tackling corruption. The Group has been tasked with addressing issues relating

to State funding of elections, speedier processing of corruption cases of public servants, transparency in public procurement and contracts, discretionary powers of Central ministers and competitive system for exploiting natural resources.

Reforms: The budget remained neutral on the reforms side with no concrete steps being announced for major reforms expected in insurance, multi-brand retail and banking. The Finance Minister simply reiterated the government's resolve on getting the Direct Tax Code implemented w.e.f. April 01, 2012 and introduce the Companies Bill as well as the GST related Constitution Amendment Bill in the current session in the Lok Sabha.

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