INANCE MINISTERPranab Mukherjee’sBudget lacks tax py-rotechnics, yet it reveals aremarkably improved fis-

cal position and a conceptual break-through in delivering subsidiesthrough cash transfers for kerosene,fertilisers and cooking gas.

He has also boosted reform prospects,pledging to revive seven financial sec-tor bills, including landmark ones toraise foreign direct investment (FDI)in insurance to 49% and lift votingrights of foreign investors in banks.

Mukherjee says he did not highlightthis in his Budget speech because hisparty lacks majority in both houses ofparliament, but is optimistic of secur-ing the cooperation of other parties.On FDI in retail, he is non-committal.

A committee under UIDAI chiefNandan Nilekani will suggest ways toimplement the proposed shift fromphysical subsidies to cash transfers,using smart cards. Come October,UIDAI will issue 10 lakh Aadhar(unique identity) numbers daily, andthis should make it feasible to bringin cash transfers sometime in 2012.This reform has the potential to dras-tically curb leakages and malprac-tices in subsidies.

India’s fiscal position has long wor-ried foreign institutional investors(FIIs), the dominant players in thecountry’s stock markets. The Budgetclaimed fiscal deficit was down thisyear to 5.1% of GDP against the target-ed 5.5%, and would decline to 4.6% nextyear against 4.8% mapped out earlier.

In response, the Sensex initiallyjumped nearly 600 points, but handedback much of the gains after investorsrealised some of the Budget’s projec-tions were based on statistical revi-sions and future optimism ratherthan fiscal stringency.

For instance, the oil subsidy is pro-jected to fall to ̀ 23,640 crore next yearfrom ̀ 38,386 crore this year, but thereis no explanation how this will bemanaged in an environment of highglobal crude prices. Mukherjee maywant high prices to be passed on to

consumers, but several of his cabinetcolleagues are dead against this.

The food subsidy will be virtually un-changed next year at around `60,000crore. The reason: the implementationof the Food Security Act has been post-poned until 2012-13. The consequenthole in government finances has beenpostponed, not avoided.

Only a small part of the fiscal im-provement in the Budget relates to taxbuoyancy, with statistical revisions ofGDP data producing much of the ap-parent improvement. Yet the fact isthe central government’s debt-to-GDPratio, which the 13th FinanceCommission had projected at 52.5% ofGDP, is now only 44.2%. This is re-markable given that economies acrossthe world are weighed down by largeincreases in this ratio.

Without the spectrum auction bonan-za, fiscal deficit this year would havebeen 6.3% of GDP. Reducing this to 4.6%next year requires a massive effort tocheck spending. The Budget projects to-tal spending to rise marginally to ̀ 12.57

lakh crore next year from ̀ 12.17 lakhcrore this year, and such stringency willbe politically tough.

Investors will be encouraged by thedecision to permit foreign retail in-vestors to invest in Indian mutualfunds, and to raise the investment lim-it for foreign funds in infrastructuredebt to $25 billion, raising the overallcap for FII investment in corporatedebt to $40 billion.

But drafting footloose capital intodebt has its risks. Devising clear-sighted policies to attract FDI into in-frastructure is far superior to FIIflows. The government will allowstate-run undertakings to raise up to`30,000 crore by way of tax-free infra-structure bonds, a boost for the sector,along with the proposed creation oftax-free debt funds.

The decision to press ahead with theDirect Taxes Code and transition to acountrywide Goods and Services Taxis a welcome reform intent. However,the sheer spread and number of indi-rect tax rates listed in the Budget gaveout a whiff of the 1980s, rather than offuturistic reform.

THE BUDGET SPEECH WAS GREETEDby a relief rally that sent bond priceshigher and the Sensex soaring, but ini-tial euphoria soon gave way to realismas doubts arose whether some of the as-sumptions underpinning key numberswere far too rosy.The BSE’s 30-share Sensex rose as

much as 595 points on relief the financeminister did not increase excise dutiesand announced plans to allow foreign-ers to invest in local mutual funds whilebond yields fell after the government’sborrowing programme turned out to belower than the markets had expected.The Sensex closed 122.49 points up at

17,823 after briefly flirting with the 18,300mark while the 50-share Nifty ended29.70 points up at 5,333. Yield on the8.13% bond maturing in September 2022,the most actively-traded government pa-per, dropped 5 basis points to 8.09%. Once the relief rally played itself out,

the attention soon turned to the fineprint. And reality bit as analysts ques-tioned whether the numbers were over-optimistic. “While we applaud the lowerdeficit target, we believe the actual deficitwill turn out higher than budgeted withrevenue forecasts too optimistic and ex-tra-budgetary demands expected to raiseexpenditure above budget targets,” saidLeif Lybecker Eskesen, HSBC’s chief

economist for India & Asean.Others wondered whether the FM’s

subsidy numbers had factored in an oilmarket on the boil. Or whether an 18%tax revenue growth and an expendituregrowth of just 3.4% would materialise.“The Budget exercise hinges a lot on

keeping fuel subsidy to a minimum andthat could be a challenge in the currentoil price environment,” said emergingmarkets guru Mark Mobius of FranklinTempleton Investments.In sum, the dominant view in the mar-

ket was the Budget was a positive sur-prise given extremely low expectations. “I don’t think personally the Budget

has done enough to break us out of theshort-term challenges,” said AkashPrakash, chief executive of Singapore-based fund Amansa Capital.

Market’s Belief inPranab Dips in a DayAfter zooming 595 points, Sensex loses steam as DalalStreet discounts Pranab’s optimistic numbers

The battery ran out of the socialist clock in 1991. Two decades on, it surely is an exciting time for India and its hard-driving and globally expanding entrepreneurs. Gone are the hammer and sickle and even the last vestiges of a system of governance that dulledthe Indian spirit and dimmed the hopes of millions. Now, in 2011, the Rupee rules, a strong symbol of a new and muscular India

O G I LV Y

20 Years ofLiberalisationIndia completes 20 years ofeconomic freedom this year,and ET 50 years ofexistence. From 1961, wehave always clamoured forchange and when ithappened, in 1991,celebrated it. The change hasbeen tumultuous and largeswathes of India have beenmagically transformed,lifting millions of Indians outof poverty. For this year'sBudget Edition, wecommissioned India's top adagencies to capture the pasttwo decades with a simpleand clear brief: to capturethe journey of the last 20years of liberalisation.Across the pages, PiyushPandey, Prasoon Joshi,R Balki, Santosh Padhi,Abhijit Avasthi, Josy Paul,K S Chakravarthy andArun Iyer bring you visualson the Voyage from ’91.Dear reader, we hope youwill enjoy and preservethis special edition...

BOLD FROM THE BLUE

122.5 POINTS

SWAMINATHAN S ANKLESARIA AIYAR

It’s a Tie BetweenDeficit & Growth

Celebrating 20 years of liberalisation

Pranab Mukherjeein conversation withSwaminathan S A AiyarImpact on Economy ��15

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TUESDAY, 1 MARCH 2011

THEECONOMICTIMESInvestors

OPPORTUNITY TO investin public issues of publicsector units courtesy

`40,000-crore disinvestment

FOREIGN RETAIL investors set toenter Indian equity marketthrough mutual funds

TAX TREATMENT of debt andmoney market funds put on a parwith fixed deposits

pages 2-9What itMeansFor...

Consumers

PRIVATE HOSPITALS anddiagnostics to cost 5%more; domestic and

international air travel costlierby ̀ 50 and ̀ 250

DRESSING-UP to cost 10% morewith excise on branded clothes

EATING OUT where liquor isserved to get 3% costlier; stayingin hotels to get 5% dearer

Taxpayers

HIGHER TAX exemptionlimit of ̀ 1.80 lakh formen and a new category

of senior citizens

PROVISION FOR tax-freeinfrastructure bonds extendedby one more year

NEW INCOME-TAX return formcalled Sugam to be introducedfor small businesses

Economy

POOR USERS of kerosene,cooking gas & fertilisersto get subsidies, in cash,

by March 2012

OIL DUTY structure to bereviewed in view of West Asia;petrol prices to be revised

BOOST TO infrastructure througha record hike in public funding,more private funding too

Business

TAX HOLIDAY for ITcompanies finally ends,MAT imposed on

Special Economic Zones

130 ITEMS brought into exciseduty net for the first time with theimposition of 1% duty

CORPORATE TAX surchargereduced by 2.5% to 5%, MATraised by 0.5% to 18.5%

HIGHER GDP growth of 9%and lower inflation of 5%projected for 2011-12

LEGISLATIVE ACTIONSplanned for financialreforms, silence on retail FDI

TAX REVENUE seen rising 18%while spending growth is just3.4%, the slowest in recent years

SERVICE TAX net cast far widerto get a whopping 19% higherrevenue by next year

U N I O N BU D G E T 2 0 1 1 - 2 0 1 2

pages 16-19page 10 page 11 pages 14, 15

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Who Gains How MuchSenior citizens above 80 save the most. Those between 60 and 65gain due to lowered age limit for senior citizens

Females will continue to pay a lower tax due to the higher exemption. But theydon’t get any benefit in this budget and the difference in the basic exemptionfor males and females has narrowed to ̀ 10,000. Taxpayers between 60 and65 years gain because the lowering of the age limit for senior citizens pushesup their tax exemption to ̀ 2.5 lakh a year.

TAXPAYER PROFILE TAX SAVINGS IN ` (2011-12)

Men (below 60 years) 2,060

Women (below 60 years) NIL

Men (60-65 years) 9,270

Women (60-65 years) 6,180

Senior citizens (65-79 years) 1,030

80 years and above 26,780

BY INVITE: Top CEOs & policymakers decode the Budget for you

SUNIL MITTAL

page 10

MARK MOBIUS

page 12

MUKESH AMBANI

page 13

C RANGARAJAN

page 14

KUMAR BIRLA

page 17

LAKSHMI NARAYANAN

page 18

UDAY KOTAK | RUCHIR SHARMANIRMAL JAIN | MOTILAL OSWALPARTHA SHOME | ASHISH GUPTABHARAT IYER | YASHWANT SINHAPATRICK FRENCH | SITARAMYECHURY | SUNIL SINGHANIA

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