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VMW Research & Analysis

India Budget 2011 Review: Finance Minister Is Quite Optimistic On The Indian Economy But Fails To Energize The Important Sector.
Research Published on: 18th Mar, 2011

Tone of Mr. Mukherjee's speech was primarily buoyant, and he's quite confident about the consolidated growth of the economy. However, India is still getting short on social welfare spending and spending on education. Overall, VMW sees the Budget 2011 as an introduction to reforms apart from a speech of the government accounts.

Union Budget In Brief What The FM Has Unfolded For A Common Denizen
If we compare the budget speech for India in the given fiscal year, over the past two years, government framed the union budget to confront the challenges from the global economic downturn, which lacked the economic reforms but contained relief package for several sectors to stimulate the economy. Last years budget has primarily addressed to put the Indian economy back on track to the pre-crisis growth rate (i.e. 9%), sustainable economic expansion with moderate inflation and fiscal deficit. While, this time around, announcing the budget for fiscal year 2011-12, Indias Finance Minister Pranab Mukherjee, most interestingly, has addressed all the sectors and laid down the policies to support the industries by making user-friendly policies for foreign direct investments (apparently trying to attract FDI in certain sectors). Apart from focusing on the economy and businesses, Mr. Mukherjee has also addressed the social welfare spending by revising the priority housing mortgage from Rs20 lakhs ($44,000) to Rs25 lakhs ($55,000) and strong focus on the rural side with the commitment of giving out cash subsidy on kerosene, LPG and fertilizers via Aadhaar. Going back to the previous year budgets is important since the solid material growth of the Indian economy is largely supported by the expansion of service sector, which contributes over 57 percent. Since FY2009, Mr. Mukherjee has announced the budget to inoculate the economy from the external shocks and he wanted to maintain the economic growth of over and above 7 percent. It is quite interesting to know that the Indian economy is expected to expand further by 8.6 percent in FY2011 amid concerns of high inflation rate, uncomfortable interest rates, current account deficit and shocking oil prices. Furthermore, the implementation of the budgets proposal over the past couple of years could be palpable and the government is trying to reinforce the rural participation in the economic growth. Although, the governments focus on the agriculture sector is blemishing, and the one time credit waived-off to the farmers could not support in the long run. Now, VMW is going into details of the agriculture sector of the country and will give you an important perspective.

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Budget 2011 in Detail

Discussion Topic I : Agriculture Sector

Lets discuss the Union Budget for the fiscal year 2011. Starting with the Agricultural Sector and rural side of the country. Although, Indias agriculture sector accounts for over 15 percent to the economy, however its importance is much beyond from this contribution. Over the past few years, the agriculture growth has been in decline phase. Over the past decade, VMW analyzed Indias agricultural growth at 3 per cent, which is almost half of the manufacturing growth rate and one-third of the service sector growth. Another nerve-racking point is, Indias agriculture sectors contribution to the Indian economy is consistently declining.

Source: VMW Analytic Services. 2011 VMW. All Rights Reserved. Read Copyright Policy.

In the above figure, we can observe the level of prompt attention, the agriculture sector needs at this point. From the budget speech, we found nothing attractive which can lift this sector up. Mr. Mukherjee gave attention to the credit facility by revising the credit flow to farmers from Rs375,000 Crores ($82 billion) to 475,000 Crores ($105 billion). Perhaps, India has a good rural financial institution network, or generally known as Regional Rural Banks (RRBs) set-up by nationalized banks, in the rural part of the country. However, indigent farmers are still away from the credit facility due to inefficiency of banks or financial institutions, since they are having a high level of nonperforming assets (average NPA of 3 percent on their books) amid extremely thin margins and under this condition rural banks could not even afford the single basis point rise in bad debts, threatening the rural banks to sustain in the business to extend credit facility, high cost of credit and high risk associated with lending to agriculture sector.

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Thus, extension of credit flow alone could not prop-up sectors growth. Stringent land regulation, non-access to markets due to inadequate key infrastructure such as road, (even absence of road connectivity in several villages) electricity -leading to poor supply chain management, storage management, which ultimately reduces the food security. It is more important to make Indias agriculture sector internationally competitive and increase productivity by focusing on research by investing in agricultural biotechnology to meet the sectors challenges and proliferating demand in the 21st century, promoting the non-farm sector by investing in Horticulture and Cattle . Furthermore to this, severe land regulations discouraging the private investments in rural parts of the country. Currently, several states in India are still lacking the access to the modern day agricultural technology, which includes part of Uttar Pradesh, Madhya Pradesh, Bihar, Jharkhand and Orissa, ultimately losing the productivity and since there is no water management or slow execution of water management projects are causing the severe floods.

"Agricultural reforms are the cornerstone of the countrys economic expansion and for a country like India, where the resources are ample; India should strongly focus on the land regulations to encourage private investments by enhancing the land access policy to the landless farmers."

Discussion Topic II : Infrastructure Sector

Infrastructure development is the key to the economic growth and to make India a competitive global marketplace in todays globalize world. According to the latest data, available with VMW, more than 28 per cent of Indias population living in urban areas and out of this, housing crisis along with other key social infrastructure is a problem, when people from smaller towns and villages are shifting towards the urbanized parts of the country in search of an economic opportunity. To alleviate the urban poverty, government is improving the key infrastructure by setting up "Jawaharlal Nehru National Urban Renewal Mission" (JNNURM) in which the government is signing up the agreement with the states to fund in their projects and to facilitate the state governments to improve their housing situation (since 1/4th of the urban population living in slums), transportation system. Over the next seven years (from 2005-06), government has projected over Rs120,536 Crores ($26.5 billion) of investments in urban sector. As proposed, maximum investments will be done in 35 cities with over 1-4 million population, focusing on social housing and special attention to slum dwellers. JNNURM has great scope of mission to facilitate the states with funds to invest in the existing urban cities in their key social infrastructure such as water supply, sewerage, telecom, health, roads, and public transportation. However, it could not be able to urbanize the rural parts of India, since its objective is limited to existing urban areas.

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Many infrastructure projects are stuck in mid-way and taking a longer time to execute the project due to insufficient access to credit. Moreover, cost of capital has also risen significantly in the past few months, stalling the execution of projects. For an infrastructure development across India and to serene the flow of credit, Finance Minister has proposed to enhance the flow of funds to the infrastructure sector by increasing the investment limit of FIIs in corporate bonds from $20 billion to $25 billion. By enhancing the investments by foreign investors, it will attract their participation in the infrastructural development and credit flow to the sector. However, the annual capital investments by the central government in this union budget are 4.6 percent of total GDP, which is still very low in comparing to what exactly proposed to invest up to 9 per cent of the countrys GDP, which is a discouraging signs. To achieve a double digit economic growth or at least consistently achieve a 9 per cent growth rate, India should need to meet the target of 11th five year plan and to reduce the infrastructure deficit. In its 11th plan, India made an investment target of $498 billion in the infrastructure sector alone. Further to our analysis on the infrastructure sector, there is a wall-to-wall financing gap of $40 billion, which could deter the governments target to achieve it. On the other side, plentiful of challenges are making to achieve the target more strenuous such as lack of creditworthiness of the local municipal bodies to support the governments desire of infrastructure development and to renew the existing one.

Discussion Topic III : Taxes

The main source of revenue to the government is Tax. Better and simplified tax reforms have a greater importance to simplify the laws and compliance. To improve the tax governance and to simplify the process, Mr. Mukherjee has introduced Direct Taxes Code or DTC in Aug last year, and it will bring a greater compliance in terms of several heads of income. Most importantly in DTC, surcharge on income tax and the education cess on tax has been abolished. Not only this, the DTC has also brought men and women taxpayers under the same tax net (or same exemption limit for all). Nevertheless, the disappointment is, the application of DTC has further been extended to fiscal year 2012. On account of tax evasion, the Indian government has signed an agreement of Tax Information Exchange Agreements (TIEAS) with two countries named as The Bahamas (signed on 11th Feb 2011) and Bermuda (signed on 7th Oct 2010). This will equip India and allows both countries to exchange the information on individuals, companies, publicly traded companies and many other entities. The harmful tax practices were adopted backed by lack of effective exchange of information and the TIEA with several other island nations, which are considered as a tax heaven, will improve the poor practices of evading tax. Until now, India has a long way to go further improve the taxation system in the country and to get maximum revenue out of the direct taxes, which is the main source of income to the government. Moreover, India should strongly focus on the money laundering issue by empowering the independent investigative organization such as Enforcement Directorate (ED) to give complete autonomy to make them stronger to contain the issue.

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Discussion Topic IV: Price, National Income & Liquidity

The current nasty problem this year is Inflation. Indias central bank, Reserve Bank of India has revised its policy rate several times this fiscal year to bring the inflation levels back to its comfortable zone. However, so far, RBI has been unable to contain inflation and now the tight liquidity situation is threatening the robust economic growth. Even the 9 per cent of economic growth is looking unachievable under this kind of policy environment and hawkish tone of the central bank. RBI, itself is in a dilemma to contain inflation (surging due to demand side) alongside a task of maintaining the current pace of economic growth. VMW believes, persisting tightness in the liquidity and further increase in interest rates will eventually lead India to lose the ground of modest economic growth.

Source: VMW Analytic Services. 2011 VMW. All Rights Reserved. Read Copyright Policy.

As discussed in our research on the Indian Economy 2011, VMW seeing the current account deficit as a major cause of concern. Inflation is expected to come down in the next few months, however the political uncertainty in the country would make the foreign inflows a challenge to finance the trade deficit, since the inflows via portfolio investments or investments by the Foreign Institutional Investors (FIIs) are the major source of capital account and Indian equity markets are expected to remain range bound due to several economic and political challenges. So far this year, Foreign Direct Investments (FDI) remains robust and expected to outpace the previous years record. Further to our discussion on foreign investments, Finance Minister has proposed to make a favorable FDI policy and to review the investment guidelines every six months.

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