March 1, 2011 1:39:50 am
Union Budget 2011 has many positive elements,is low on bad ideas and pushes the reform agenda ahead. Finance Minister Pranab Mukherjee focused on implementing the many promises made by the UPA in previous years. This bodes well as the pending reforms on the governments wish list will take plenty of time and effort if they are to be seriously implemented. There is an attempt at fiscal consolidation and controlling expenditure,though there remains the risk that oil prices may make these calculations go haywire. The changes to direct taxes are welcome. The exemption limit needed to be raised to take account of inflation,and the corporate surcharge had to come down. On indirect taxes,the minister did not propose a GST but has taken steps toward the implementation of a GST in 2012. The government will also remain on track on the disinvestment agenda.
What characterised the budget speech,on this 20th anniversary of reform,was the announcement that the unfinished reform agenda would,on many fronts,be completed. To enable the GST,the finance minister said he proposed to introduce a Constitution Amendment Bill in this session of Parliament. He also announced a pilot project with 11 states,using the IT system that is being set up,during this year. Similarly,a large number of financial sector bills are pending. The minister announced that he would move bills such as the Insurance Amendment Bill,the LIC Bill,the revised PFRDA Bill,the Banking Laws Amendment Bill (to allow the Reserve Bank to grant banking licences to private-sector players),the SARFAESI Bill,etc. He proposed to introduce the Public Debt Management Agency of India Bill this year,which would enable the setting up of a Debt Management Office. This has been on the agenda for nearly two years but not much progress has been made beyond setting up a middle office.
The subsidy bill of the government was a budgeted Rs 1 lakh crore for 2010-11. However,the revised estimate shows that the subsidy bill crossed Rs 1.5 lakh crore. The largest element of the subsidy bill that went beyond the budget was the petroleum subsidy. It rose from a budget estimate of Rs 3,108 crore to a revised estimate of Rs 38,386 crore. The food subsidy bill rose from an estimate of Rs 55,578 crore to a revised estimate of Rs 60,599 crore. The fertiliser subsidy bill was estimated to be Rs 49,980 crore,but turned out to be Rs 54,976 crore. The three put together accounted for an increase of nearly Rs 50,000 crore beyond estimates. The risk for the coming year,2011-12,when oil prices could rise,is large. This could push government expenses beyond budget estimates. One of the most important announcements that could have significant long-run impact is the announcement of the direct transfer of cash subsidies for kerosene and fertilisers to those below the poverty line. As has become apparent,the kerosene subsidy is used to adulterate diesel,and fails to reach its intended beneficiaries. Instead of selling kerosene cheap,if it is sold at market price and the subsidy is given as cash to the targeted group,the poor will benefit,the subsidy bill will come down and the oil mafia could be sidelined. The budget proposes the first step towards a direct transfer of cash subsidy. Once the mechanisms for such cash transfers are put in place,the template can be used for food subsidy.
The budget for 2011-12 has moved ahead on opening up Indias capital account. While no announcement has been made on foreign direct investment,the FM announced that discussions are under way to further liberalise the FDI policy. However,on foreign portfolio investment,important announcements have been made. The recommendations of the finance ministrys working group on foreign investment,headed by U.K. Sinha,have been implemented. These include opening up the rupee-denominated corporate debt market to FIIs. The limit on purchase of bonds of infrastructure companies has been increased from $5 billion to $25 billion. This means that the limit for FII investment in corporate bonds has suddenly jumped from $20 billion to $40 billion. A doubling of FII investment in corporate bonds will help both the development of the corporate bond market,and Indias infrastructure funding needs. Foreign investors have also been permitted to invest in Indian mutual funds. While currently FIIs and sub-accounts are allowed to invest,the FM announced that other foreign investors who meet Know Your Client norms will also be allowed to invest. These are significant steps towards greater capital-account openness,and will attract long-term capital into the country. And given the legislative support needed for the FM to keep his promises,the budget can be as ambitious as the budget session of Parliament allows itself to be. The UPAs floor managers have their work cut out.
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