India's Union Budget 2010-11

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Macro direction outlined in the Union budget 2010-11, by and large is positive though there are a few risks in perfectly executing the Finance Minister’s vision.

Commendable features of the budget are as follows:

For the first time, the budget has laid out a road map for fiscal consolidation in line with the new FRBM targets – central fiscal deficit estimated at 5.5%, 4.8% and 4.1% of GDP in FY11, FY12 and FY13. This will necessitate a pro-growth approach to policy making and strict adherence to the April 1, 2011 deadline for implementation of GST and the New Direct Tax Code.

The budget focuses on containing revenue expenditure and non-plan expenditure and increasing capital expenditure – here it is important to highlight that loan waivers and VI pay commission arrears which were part of the FY10 numbers could have also contributed to the expenditure mix change.

The budget boosts consumption and consumption is the biggest component of GDP – the personal tax benefits for the second consecutive year and continuance of the NREGA program at almost the same level (just a Rs1000cr increase) focuses on infusing cash (disposable income) directly in the hands of the consumer.

There is a meaningful focus on the financial sector and rightly so – focus on financial inclusion; outlay for recapitalization of PSU banks; bank licenses for NBFCs meeting RBI eligibility; containing the net borrowing program to avoid crowding out private investments are all steps in the positive direction.

The GDP assumption used for drawing up the budget is realistic (12.5% nominal GDP growth) and net tax revenues forecasted for FY11 look achievable.

Shortcomings in the budget

The FY11 fiscal deficit numbers are heavily contingent on 3G and divestments (together ~Rs76000cr). Divestments are a function of the market and will have to be front-loaded in FY11 as the second-half of FY11 could see investors focused on exit policies in West and India’s new Direct Tax Code (including taxing long term capital gains) and IFRS impact on earnings. The government will not take the risk of waiting till 2HFY11 for divestments. The government borrowing program also will likely to be front-loaded keeping the 10-year yield firm.

The budget has not provided for compensation to oil companies on under recoveries. If oil prices move up, there could be big fiscal deficit slippages. The positive read here is that the government could be seriously considering implementation of the Kirit Parikh Committee recommendations.

Partial roll back of excise duties can either contribute to inflation or compress profitability (if not passed on) in sectors with high competitive intensity.

In summation, the budget is banking on resilient growth in the economy, and marks an exit from the previous era of fiscal profligacy. In that context, any slippage on the growth front may impact the fiscal deficit predictions. Overall, the budget can be termed as a pro-growth budget, which aims to stimulate consumption, while striving to imbibe fiscal prudence.