The Union Budget has taken some steps forward towards fiscal consolidation, although somewhat less than our expectations. Revenue raising through an increase in the excise duty and service tax rate from 10% to 12%, and broad-basing the service tax was pragmatic and in line with expectations. The move to a negative list on services tax, and the harmonising of the service and excise tax at a higher rate are steps in the right direction. However on subsidies, while there were no populist measures, we need to see whether tough action on fuel and fertiliser subsidies is taken later. Without this, the budget would continue to be exposed to volatility in commodity prices. Bond and equity markets have both reacted negatively to the high market borrowing requirement.
A timeline of August 2012 was given for implementing the GST, which if achieved would be very positive. Some positive announcements include the move to a direct cash transfer system through the Unique ID (UID) system to provide for direct cash transfers in a larger number of districts. The budget was also positive for investments in infrastructure. More infrastructure sectors were added as eligible for gap funding from the government. The amount of tax free bonds which state-owned infrastructure companies can issue was doubled (from Rs 30,000 crore to Rs 60,000 crore); spending on key infra sectors was increased significantly; external borrowing through the ECB window was opened for capital spending on highways, working capital for airlines, low cost affordable housing, among others.