Union Budget 2009 focuses on growth and inclusive development, says ICRA
The Union Budget for 2009-10 was presented by the newly-formed Government at the Centre against a backdrop of relative stability on the domestic political front and continuing economic uncertainty in the global arena. While the expectations were enormous, so were the challenges, given that further counter-cyclical measures seeking to stimulate economic growth had to be weighed against their impact on the fiscal balances in the light of the burgeoning fiscal deficit.
Against this backdrop, the budget's overarching priority has been on reviving growth and promoting inclusive development with a focus on stepping up investments in the infrastructure and social sectors. Thus, outlays on various social sector schemes, such as the National Rural Employment Guarantee Scheme, have been increased substantially. Emphasis has been placed on infrastructure development, with increased allocation for roads, highways, urban infrastructure and power, though increase in MAT rates is a clear negative, even after accounting for the extension in tax credit period. The proposal for IIFCL to refinance up to 60% of loans extended by commercial banks for PPP projects, as well as evolving a mechanism for take-out's financing is a positive for financing infrastructure projects.
The manner in which the additional expenditure will be offset by increased revenue mobilisation remains a matter of concern. The changes in direct and indirect tax rates are expected to result in a mere 2% increase in tax revenues relative to the revised estimates for 2008-09. In addition, the Government's capital receipts from disinvestment are estimated at only Rs. 11.2 billion. While a slippage in the deficits compared to the Interim Budget estimates was perhaps unavoidable, it was expected that the Budget would indicate a clear roadmap towards fiscal consolidation. However, the Budget has only mentioned that fiscal deficit will be reduced to 4% of GDP in 2011-12 from the current 6.8 %.
Additionally, the State Governments have been permitted to incur a fiscal deficit of up to 4% of their gross state domestic product (GSDP) in 2009-10, higher than both the initial target of 3% set under the Debt Consolidation and Relief Facility and the relaxed target of 3.5% of GSDP announced previously. The combination of higher deficits and therefore higher borrowing programmes of the Central and State Governments is likely to result in some upward pressure on bond yields and negatively impact the banking sector.
The Budget has met expectations with respect to areas such as abolition of Fringe Benefit Tax, extension of tax holidays for the IT and ITES sector and tax holiday on production of natural gas from NELP blocks. The CENAVT rate cuts that were announced previously were not rolled back, which should provide relief to the manufacturing sector .A reaffirmation of the deadline for introduction of the proposed Goods and Services Tax (GST) at April 1, 2010 is another positive. The biggest disappointment in the Budget is clearly the lack of policy announcements on the expected big ticket reforms, especially with respect to FDI limits, financial sector reforms, opening up the coal sector to private participation and disinvestment. However, as the Budget Speech clearly stated, “a single Budget Speech cannot solve all our problems, nor is the Union Budget the only instrument to do so.”
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