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FM offers little on inflation & corruption in Budget
March, 01st 2011

Finance minister Pranab Mukherjee seemed determined to please all constituencies with his Budget speech on Monday, but if first impressions are anything to go by he was at best only partially successful. Significantly, on the two issues agitating most people today inflation and corruption he had little concrete to offer.

India's middle class has over the last few years got used to the idea that finance ministers must hand out tax sops on Budget day and they weren't entirely disappointed, with hikes in exemption limits that could save individual taxpayers anywhere between Rs 1,030 and Rs 26,780. Senior citizens were the biggest gainers with those over 80 getting the largest tax savings.

Business got an unexpected gift with the rollback of the stimulus package introduced during the global financial crisis being put on hold and the surcharge on domestic firms being pared.

Foreign investors have been given greater access to India's capital markets. Reformers were given enough reason to believe that the process initiated 20 years ago has not been abandoned and would be carried forward, even if there were more promises of action in the future than actual changes introduced.

There were promises too for the aam admi who was referred to only once in the speech but a closer look at outlays on social sector programmes suggests that the rhetoric hasn't really been followed up with the moolah needed to make it come true.

The mood of the markets reflected the uncertain nature of the response to the Budget. Up almost 600 points at one stage, the sensex, probably on closer scrutiny of the fine print, ended the day barely 122 points up over the weekend close.

The speech had a whole section dedicated to black money. While there were few details in the speech, a reading of the Finance Bill suggests that some steps are being taken, particularly to check the flow of funds from countries with opaque disclosure norms.

The middle class has reason to have mixed feelings about this Budget. While the tax sops will clearly be welcomed, their impact could be more than wiped out by the extension of service tax to cover healthcare and diagnostic facilities not covered so far and to a host of other services.

Similarly, at first glance, the fact that a one percentage point subsidy on home loan interest rates will now be available on loans up to Rs 15 lakh for houses costing up to Rs 25 lakh rather than on loans up to Rs 10 lakh for houses costing up to Rs 20 lakh may seem like very good news. But how many people who can put down Rs 10 lakh from their pocket would buy a house worth Rs 25 lakh or less?

Some sections of industry too might wonder whether extending the coverage of the minimum alternate tax (MAT) to units in special economic zones and a marginal hike in the MAT rate does not offset the gains from a lower surcharge.

Perhaps the only category to have unambiguously gained is the foreign investor. FIIs have been allowed to invest up to $40 billion in corporate bonds against the $20 billion available to them earlier. That's because they can now put in up to $25 billion cumulatively in long-term bonds of infrastructure companies against the $5 billion they were earlier permitted.

Further, individual foreign investors can now invest directly in Indian mutual funds rather than having to route their money through FIIs.

Reformers might be unsure whether they should celebrate or moan at the fact that parts of the Budget speech read more like the annual Economic Survey the ministry brings out.

On the plus side for them, it's after many years that the Budget speech has given assurances of bold reform the subsidy regime, at least in kerosene, fertilizers and cooking gas, will be replaced by a mechanism of direct cash transfers to the intended beneficiaries, the FM promised.

He also talked of new banking licences being issued to the private sector and discussion being underway to "further liberalize the FDI (foreign direct investment) policy". On the flip side, none of this is to happen immediately.

Disinvestment of public sector shares, Mukherjee said, would remain on course, but was quick to add that the government would retain both a majority stake and management control.

Similarly, tackling inflation is clearly something the FM views as a long-term programme to be dealt with by developing warehousing facilities, cold chains and the like. From a purely budgeting point of view, the FM can claim that he has done a remarkable job by reining in the fiscal deficit to a projected 4.6% of GDP for the next year, but the numbers show that the achievement banks on unrealistic expenditure projections.

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