Dadamoney for reform

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Union finance minister Pranab Mukherjee arrives to present the Union Budget 2011-12 at Parliament in New Delhi on Monday.

Finance minister Pranab Mukherjee on Monday presented a Budget which, while displeasing no one, attempts to spread some cheer all around.
In form, the Budget is a fine example of an accountant’s good book-keeping. In content, it offers driblets to almost all segments of society and the economy, yet rolls out some subtle reforms without fanfare. Small wonder then that the market is in raptures.
He proved many wrong by not presenting a populist Budget. At the same time, the exercise has the clear stamp of a seasoned politician. He should be able to take forward his economic agenda without ruffling too many feathers.
Mr Mukherjee has given higher income-tax exemptions to the salaried class and senior citizens, and cut tax on dividends from foreign subsidiaries of Indian companies.
Taking care of a large constituency, he doled out higher wages to the rural jobless under the rural job scheme and provided farm loans at four per cent for those who repay promptly. This interest subvention for the purpose alone will cost `9,000 crores, which has been set aside.
In another quiet reform, he has announced a systemic changeover to curb corruption and leakages in the distribution of essential items to the poor. Subsidies on kerosene, cooking gas and food will from now on be given in cash directly to the beneficiaries.
As the Budget measures were announced on Monday, companies — both domestic and foreign — and the markets rejoiced at the government’s intention to phase out the surcharge on corporate tax, a long-standing demand of India Inc. Mr Mukherjee has made a beginning with a 2.5 per cent cut. He has also chosen to just tinker with the minimum alternate tax — which now stands marginally raised to 18.5 per cent from 18 per cent.
A manufacturing policy is also in the offing, Mr Mukherjee said.
He has doled out some other concessions — lower excise on automobiles running on green fuels, textiles, solar lanterns, environment-friendly laundry soaps and baby napkins.
It is a revenue-neutral Budget of over `12,57,729 crores. He has not changed peak rates of customs or excise duties; nor has he changed corporate tax or income-tax rates, reasoning that stable tax rates have broadly laid the foundation for the introduction of the two biggest tax reform measures — the goods and services tax (GST) and the direct tax code (DTC). He has promised to introduce DTC in April next year, but kept the date for the launch of GST open, pending conclusive discussions with state governments.
The service tax net has been cast wider, without changing the rate, which stays at 10 per cent. As a result, eating out in air-conditioned restaurants with bars will become more expensive, and club membership and air travel will become costlier. Medical treatment in air-conditioned hospitals will come under the service tax net. Insurance services will be available at an added cost. Repair and servicing of vehicles also is in the net.
The real Budget action is on the market front. The minister has raised the FII investment limit in the corporate bond market to $40 billion. Within this broad cap, $25 billion is for exclusive investment in infrastructure, a sector which has been moribund of late. FIIs have also been allowed to take exposure in unlisted companies’ bonds, though there is a rider — a three-year lock-in.
Mr Mukherjee has shrugged off his non-reformist image by promising a more liberal FDI policy which is in the works. He has emphasised the resolve to move forward on insurance, pension and banking reforms by getting the relevant legislation adopted with 12 months. One key market reform is the permission to foreign investors to invest in Indian mutual fund equity schemes.
Continuing with the policy of stake sale in major state-owned companies, he has targeted a revenue mop-up of `40,000 crores in 2011-12. In view of the revenue buoyancy and the 3G spectrum bonanza, he decided to postpone the follow-on offers of ONGC and SAIL. This will now take place in the new financial year when, hopefully, the share market sentiment improves.
Mr Mukherjee spent a good deal of time in his Budget speech to speak about black money and the government’s intent to tackle it. He has spoken of corruption and announced the move to curb ministers’ discretionary powers, apart from strengthening the tax infrastructure to bring black money back from foreign banks.
To both help the agricultural sector and contain food inflation, Mr Mukherjee has announced packages with a focus on improving the production of fruits, vegetables, palm oil and cereals. Credit flow to the farm sector has been stepped up by a massive `1,00,000 crores, to `4,75,000 crores.
With the same objective, cold storage capacity will be expanded, more foodgrain godowns set up, mega food parks created and infrastructure expanded as part of the larger task of food economy management.
On the macro-economic front, he has struck the right note. He has projected nine per cent GDP growth and a fiscal deficit cut to 4.1 per cent from 5.1 per cent in 2011-12.
The revenue deficit is targeted at 1.8 per cent (against this year’s 2.3 per cent). By making some fund transfers to the capital account, he has claimed to have brought the revenue deficit under control.
The fiscal deficit target is 4.6 per cent, as a result of which the government’s market borrowings will drop to `3,43,000 crores from the current year’s `4,30,000 crores.