ANALYSIS OF UNION BUDGET - FY11

The Finance Minister (FM) presented the Union Budget for 2010-2011 this morning. The key Macro themes, of the Budget are as follows:

	Fine Balance between Fiscal consolidation and Economic growth momentum
	Partial Withdrawal of Stimulus measures
	Impetus to Consumption & Investment
	Reformist Agenda
	Social Sector & Infrastructure focus continues

Fiscal Consolidation:

Fiscal Deficit Trends	FY09	FY10	FY11 (BE)	FY12	FY13
Centre's Fiscal Deficit	5.9%	6.7%	5.5%	4.8%	4.1%
States' Fiscal Deficit	2.6%	2.9%	2.6%
Off-balance sheet Subsidies	1.9%	0.2%	-
Combined Fiscal deficit	10.4%	9.8%	8.1%

Centre’s Fiscal deficit (Total Expenditure minus Total Receipts) as a % of GDP for FY10 stood at 6.7% for FY10 vs Budget Estimate of 6.8%. The targeted fiscal deficit number of 5.5% for FY11 has been largely achieved through controlled expenditure which has ensured that the government has the necessary room for a calibrated roll-back in stimulus. Revenues from disinvestments were seen at Rs 250bn for FY10 and ~Rs. 400 bn for FY11. The FM’s commitment to fiscal consolidation via economic reforms comes through his roadmap for phased reduction in fiscal deficit to 4% over the next 3 years. Tax reforms, subsidy rationalization and disinvestments will be crucial tools in achieving the fiscal consolidation targets over the next four years. Implementation of reforms in these areas will remain a key monitorable.

Partial Withdrawal of selective Stimulus measures:

	Partial rollback of Excise Duty cuts (2% hike)
	No change in Service Tax rate, Service Tax net expansion

At the same time, all direct and indirect tax measures have been to a large extent, motivated by the need for a seamless integration into Direct Tax Code (DTC) and Goods and Service Tax (GST) respectively by the next fiscal year.

Efforts to boost consumption and investments

With the partial roll-back in stimulus measures, the government has ensured consumption and investment momentum to gather speed. In line with the proposed move towards DTC, Income Tax slabs have been redefined to leave more money in the hands of consumers. Changes in personal Income Tax slabs were unexpected, but significant, positive moves towards the DTC. Individual with the income of Rs 8lacs will save Rs 50,000 per annum on Income Tax. Additionally, investment in infrastructure bonds upto Rs 20,000, over and above the existing limit of Rs.1lac will lead to further savings. Interest subvention on home loans less than Rs 10lacs and for houses costing below Rs 20lacs will be extended by a year. Current surcharge of 10% on domestic corporates has been reduced to 7.5%. Boosting private consumption demand growth is vital for the government if it wants to achieve fiscal consolidation through lower public expenditure.

Reformist Agenda

On tax reforms, the FM has indicated roll-out of major tax reforms – DTC and GST from April 1, 2011 onwards. He has specifically pointed out that the government will increasingly play an enabling and supportive role thereby paving the way for more involved participation of the private sector. This is specifically seen in the proposed further liberalization of the banking sector with intent of providing more banking licenses to private players and NBFCs.

Social Sector & Infrastructure focus to continue

The thrust on agriculture and rural sectors continues through lower interest rates to farmers for crop loans and extension of agriculture debt waiver timeline. Social security schemes in the areas of food, employment and unorganised sector workers are steps in the right direction if India has to grow equitably. Thrust on infrastructure continues, with allocation of 47% of total capital outlay for FY11, in addition to allowance of issue of Infrastructure Bonds. Focus on infrastructure growth is also balanced between urban and rural sector with sizeable increases in budgetary allocation towards transport and energy segments.

In Sum.

The FM has adequately touched upon growth issues across various levels in the economy, setting a path for balanced and inclusive growth in the years to come, at the same time tightly reigning in fiscal deficit levels and setting a roadmap to fiscal consolidation, through far-reaching structural economic reforms.

Regards,
Credit Research Team

Disclaimer: The comments made above are informed views rather than firm predictions. BSLI recommend that these general views should be cross-verified and reaffirmed before being used for personal financial planning purpose. Neither Birla Sun Life Insurance Company Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations.

ADV no. ADV/02/09-10/3849

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