FM shows his hand: Squeeze spend, focus on reform

• Fiscal deficit target at 4.6%, down from 5.1% estimated for the current fiscal
• Units in special economic zones brought under the ambit of MAT
• Foreign investors may directly invest in MFs; FII limit in corporate bonds up

Riding on growth to help his revenues remain buoyant, Finance Minister Pranab Mukherjee on Monday presented the 2011-12 Budget that sought to cut the fiscal deficit to 4.6 per cent of gross domestic product, or GDP, by a combination of measures: A squeeze on expenditure and a small net tax give-away of only Rs 200 crore.

For next year, Mukherjee projected a nominal GDP growth of 14 per cent and hoped to garner 18 per cent more tax revenues, which was comparable to the 26 per cent revenue growth he achieved this year over a nominal GDP growth of 20 per cent. However, his more ambitious goal was to rein in total expenditure growth to only 3 per cent at Rs 12.58 lakh crore in 2011-12, compared with 19 per cent growth seen in the current year over 2009-10.

He hoped to achieve this largely by proposing steep cuts in subsidies by 12 per cent and in the cost of maintaining social and economic services by 31 per cent. Thus, the government’s non-plan expenditure next year would decline by 0.65 per cent to Rs 8.16 lakh crore and plan expenditure would go up by only 12 per cent to Rs 4.42 lakh crore.

Mukherjee also announced a series of new reform initiatives. The measures included a promise to table the goods & services tax Bill in the current Budget session of Parliament, phasing out the list of excise-exempted items, introducing a negative list of items for service tax, expanding the coverage of service tax, launching a scheme of direct transfer of cash subsidy to the poor for items such as kerosene, liquefied petroleum gas (LPG) and fertiliser from April 2012, giving a big push to disinvestment of the government’s stake in public sector undertakings, formulating a national manufacturing policy, granting new banking licences by the end of next year, introducing the new Companies Bill in the current session of the Lok Sabha, along with seven fresh financial sector legislative Bills, and infusing fresh capital into public sector banks and regional rural banks.

Missing from this list, however, was a clear articulation of a strategy to tackle the growing burden of petroleum subsidy following the rise in international crude oil prices and the government’s failure to decontrol the price of diesel, kerosene and LPG. The Budget, nevertheless, did provide for Rs 20,000 crore by way of compensation to public sector oil companies for under-recoveries on the sale of petroleum products in 2011-12, compared with Rs 35,000 crore provided for the current year.

For the capital markets, the finance minister had a special offering. He allowed foreign investors registered with the markets regulator to invest in mutual fund schemes and at the same time enhanced the limit for investment by foreign institutional investors in corporate bonds to $40 billion. Stock markets responded positively to these announcements and the Bombay Stock Exchange benchmark index, the Sensex, gained over 250 points initially, but later ended the day with a gain of only 122 points.

The finance minister had a mixed bag for India Inc. There was no across-the-board rise in the Cenvat rate from 10 per cent, as was feared. But there was no cut in customs duty, either, barring rationalisation of three rates (2, 2.5 and 3) to unify them into one rate of 2.5 per cent. The surcharge of 7.5 per cent on domestic companies was cut to 5 per cent, but the minimum alternate tax rate for zero-tax companies was raised from 18 to 18.5 per cent. In addition, developers of special economic zones and units operating in them were brought under the MAT net. Indian companies with foreign subsidiaries had a lot to celebrate, as their dividend earnings would now be taxed at a lower rate of 15 per cent.

Individuals, particularly senior citizens (with a lower age criterion of 60 years), had reason to rejoice. The FM raised tax exemption limits to Rs 1.8 lakh (up 12.5 per cent) and to Rs 2.5 lakh (up 4 per cent) for senior citizens. There was a special tax incentive for the infrastructure sector, where an additional deduction of Rs 20,000 for investment in long-term infrastructure bonds, notified early this year, was extended for one more year.

For the current financial year, the finance minister’s numbers benefited greatly from a revised GDP number resulting from the 8.6 per cent growth projected for 2010-11, buoyant revenue collections and a rise in non-tax revenues, particularly from the sale of 3G spectrum. This helped Mukherjee reduce the fiscal deficit for the current year to 5.1 per cent of GDP, against his earlier estimate of 5.5 per cent.

The finance minister also unveiled a new set of effective revenue deficit figures, based on the assumption that a considerable part of the expenditure -- now classified under the revenue head --was in the nature of capital expenditure. The revised effective numbers, Mukherjee said, put the revenue deficit at 2.3 per cent of GDP for the current year and 1.8 per cent for the next year, against the 13th Finance Commission targets of 3.2 per cent and 2.3 per cent of GDP. And the central government’s debt as a proportion of GDP was already estimated to be at 44.2 per cent in 2011-12, against 52.5 per cent, recommended by the 13th Finance Commission.