Good on long-term growth, but inflationary for now

Written by Harsh Pati Singhania | Updated: Mar 19 2012, 07:57am hrs
The Budget has sought to balance the need for accelerating growth with that of fiscal consolidation. This has been done through focus on infrastructure, deepening reforms in the capital market and widening the personal income tax slabs.

It has taken further steps to strengthen infrastructure development sector by increasing the share of the private sector in investment. The move towards widening sectors like irrigation, common infrastructure in agricultural markets, oil and gas storage facilities, to become eligible for viability gap funding has to be seen in this context. The Budget has also doubled the limits for tax-free bonds for financing infrastructure projects, which is positive.

Reducing withholding tax on interest payments on external commercial borrowings will also help to provide lower cost funds to infrastructure sectors like power, airlines, road and bridges, affordable housing and fertiliser.

The service tax based on negative list of only 17 items is a good move to garner more resources to keep the fiscal deficit under check.

The attempt to introduce amendments to the Fiscal Responsibility and Budget Management (FRBM) Act towards expenditure reforms is also welcome. The proposed provision for Medium Term Expenditure Framework is particularly important as it will set a three-year rolling target for expenditure targets. This will provide better resource allocations and efficiencies in expenditure management. The effectiveness of these would, however, depend particularly on implementation at the state-government level.

The finance minister has also aimed at restricting the expenditure on central subsidies at lower than 2% of GDP in 2012-13 and aims at lowering this further over the next three years.

How effective the efforts towards better targeting and delivery of subsidies will be, is yet to be seen.

However, the big concern is that the increase in service tax and in excise duty from 10% to 12% will cause inflation, as much of this will be passed on. This would, in turn, tend to keep interest rates high thereby hurting the revival of growth, through investments on the one hand and increase in consumer spending on the other. The lack of a specific time line for GST and DTC implementation will also adversely affect sentiments. In sum, one could have expected the Budget to be more growth oriented. This is especially when the growth rate in 2011-12 was 6.9% and manufacturing growth also lagged significantly.