Wednesday, March 3, 2010

Focal Points of Indian Union Budget 2010-11

India's recent GDP numbers show that the economy grew 6 percent in the December quarter, as farm output fell 2.8 percent after a drought. The core sector, comprising six key infrastructure industries, grew 9.4 per cent in January 2010, compared with 2.2 per cent in January 2009 and pushes up hopes of a robust rcovery. The prime concern remains inflationary pressures which have built up by 8.9% (WPI based) in this fiscal so far, as compared to 1.51% in the last fiscal, pushed by food price inflation which has built up by a massive 14.7% during thi sfiscal compared to a 5.4% build up in the last fiscal. The Union Budget for the FY2010-11 addressed concerns on fiscal discipline with a plan to reduce the fiscal deficit to 5.5 percent of GDP in the new FY from 6.9 percent this fiscal, and further declines in coming years. Additional borrowing of 1.3% was proposed and given that the fiscal stimulus withdrawal was not aggressive so as to not choke wavering recovery, the case for policy tightening by RBI seems to be stronger. The budget lacked any direct measures to curb rising food prices, further the duty rollback on petroleum could contribute somewhat to inflationary pressures, however, reigning in of the fiscal deficit despite difficult circumstances should help cool long term inflation expectations.

Infrastructure, agriculture and social sector have been the key focus areas of budget 2010-11. From the infrastructure sector perspective, the positives are increased allocation for infrastructure by providing 46% of the total plan allocations, especially with respect to roads and the power sector and clean energy initiatives. The proposed tax relief for investment in long-term infrastructure bonds will further boost investment in infrastructure, while increased refinancing through IIFCL would help bank lending to infrastructure. Bank recapitalisation plans and the farm loan waiver are expected to benefit the banking sector. Much needed measures to boost farm spending and research and lift agriculture sector growth to 4 percent in the medium term were taken. With the key focus on inclusive growth social sector by allocation is around 37% of the total plan outlay, while urban development allocation has been increased by more than 75%.The budget has extended the interest subvention on pre-shipment credit for key export-oriented sectors and similarly extended the housing-loan interest subsidy scheme for another year, thus indicating that the fiscal stimulus would continue to sensitive sectors affected by the global slowdown. The expansion of direct personal tax slabs would help stabilise the nascent demand recovery.

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