FM combines reforms with fiscal discipline

On the eve of budget day, the Economic Survey revealed encouraging macro-economic data, barring the inflation barometer, which remains a huge worry for the economy at large and potential challenge for sustaining the growth momentum.

The finance minister (FM) in his speech confirmed growth forecasts in the Economic Survey that the economy is likely to grow at 8.6 per cent during the current fiscal.

For consecutive years, economic growth has been riding high on the impressive growth trends of the service sector, which grew at close to double digits.

Backed by a remarkable turnaround in the current fiscal, Mr Mukherjee set out ambitious targets of fiscal consolidation for next three fiscal years; he aims to contain the fiscal deficit in a phased manner and achieve a deficit of 3 per cent by FY14.

A first look at the budget estimates for the fiscal deficit may appear ambitious, although the resilience of the economy of late suggests the targets are not impossible to achieve with sustained growth trends.

The FM's budget speech was replete with major policy reforms including proposals for infrastructure and banking sectors.

The FM indicated that the government would continue to pursue its disinvestment programme as he set out a whopping target of Rs 40,000 crore (Rs 400 billion) for non-tax revenue mobilisation.

For financial sector reforms, the FM proposed to introduce legislative amendments to extant legislations (for insurance and banking industry); for granting the new banking licences to the private sector players, he indicated that legislative amendment to the Banking Regulations Act will be proposed in the ongoing session of Parliament.

On the tax policy front, the announcement on the roll-out of new tax legislations - the Direct Taxes Code (DTC) and the Goods & Services Tax (GST) would be welcomed by the trade & industry.

Mr Mukherjee has re-affirmed the government's commitment to roll out the DTC by April 2012, after the standing committee's report; however, he held back from committing to the calendar for the GST roll-out.

The proposal to liberalise the policy on foreign direct investment is an encouraging move.

In line with expectations, the FM did not propose significant changes in headline income tax rates, except a marginal increase in the basic exemption limit for individual taxpayers.

A half percentage point increase in Minimum Alternate Tax (MAT) could hurt critical industries that are otherwise eligible for tax holiday incentives, though the reduction of surcharge may marginalise the overall impact.

Developers of special economic zones (SEZs) may feel the heat more than any other industry now that the FM has proposed to extend MAT applicability to hitherto exempt SEZ developers and units.

The proposal to tax the foreign dividend at an incentivised rate of 15 per cent would encourage outbound investments.

The FM has taken cognisance of the long-term growth drivers in the economy and has proposed measures to address them through focus on education and skill building to cash on unique demographic dividends the country enjoys.

Proposals to provide "tax pass-through status" to infrastructure debt funds and incentivised taxation of income from such funds will provide a fillip to infrastructure funding, a huge challenge for the 12th Plan.

Policy move to strengthen PPP and attempts to address environment-related issues are just the right policy moves in the nick of time.

To tackle the black money menace, the Budget has proposed to notify a list of non-cooperative jurisdictions and legislate anti-avoidance measures in respect of transactions undertaken with residents of such jurisdictions.

The status quo on indirect tax rates is in line with the industry's expectations; the FM has, however, proposed to broadbase the service tax net with a view to mop up additional revenues of Rs 400 crore (Rs 4 billion).

There were let-downs, nevertheless; the countervailing duty in lieu of state VAT on imports has not been withdrawn.

Proposals for indirect tax amendments broadly hovered around the transition to the GST regime, as the government braces for the overhaul with the Constitution Amendment Bill likely to be proposed in the current Parliament session.

In summary, the FM has pulled off the task with ease and as much precision without disturbing the fiscal equilibrium.

The policy initiatives for critical sectors such as banking and infrastructure will help the cause of economic inclusion and fiscal consolidation.

Having said that, it would be equally important for the government to rein in inflation with supply side measures; the enhanced emphasis in the Budget proposal for the development of agriculture should achieve this objective in the short to medium term.

(The author - Mukesh Butani, Partner, BMR Advisors - was assisted by Sumit Singhania. Views expressed are personal)