Union Budget 2011-12 – Balancing Act between High Fiscal Deficit

and Maintainnig Future Growth

The Finance Minister, Mr. Pranab Mukherjee in his Budget Speech of 2011-12 emphasized on ways to
move back to higher growth path of 9% and laid down a number of measures to tame the Fiscal Deficit by
curbing expenses and keeping key tax rates almost unchanged. The FM put down the current year’s
deficit at 5.1%, which was better than expected number aided by Rs 1.08 Lakh Crore thrust from 3G and
Broadband Wireless Access (BWA) spectrum auction. Meanwhile he forecasted the Fiscal Deficit to
come down to of 4.8% and 4.1% for FY 12 and FY 13 respectively.

Other than this, the positives for the corporate India came in as FM refrained from any severe Tax hikes
to encourage investment, trade and business in different sectors of the Indian economy. FM also
commented on some of the noteworthy reforms on Tax front and on the general Economy and hoped to
pass the GST Bill, New Companies Bill, FRBM Amendment Bill, Direct Taxes Code (DTC) Bill and
Public Debt Management Office Bill in the current session of Parliament.

FY 10 FY 11 FY 11 Re. FY 12
Actuals Estimates Estimates Estimates
Revenue Receipts 572811 682212 783833 789892
Capital Receipts 451676 426537 432743 467837
Total Receipts 1024487 1108749 1216576 1257729
Non-plan Expenditure 721096 736107 821552 816182
Plan Expenditure 303391 373092 395024 441547
Total Expenditure 1024487 1109199 1216576 1257729
Revenue Expenditure 911809 958724 1053677 1097162
Capital Expenditure 112678 150025 162899 160567
Revenue Deficit 338998 276512 269844 307270
Revenue Deficit % 5.18% 3.99% 3.43% 3.42%
Fiscal Deficit 418482 381858 400998 412817
Fiscal Deficit % 6.39% 5.51% 5.09% 4.60%

Budget Highlights

GDP Growth: He stated that the domestic GDP has been estimated to have grown at 8.6% (Real Terms)
showing remarkable resilience to the low growth in the global economy and despite the overall economy
being hit by continuing rise in Agri and Other commodities. For FY 12, the economy is expected to grow
at 9% with an outside band of +/- 0.25%.

Fiscal Consolidation: Against the earlier Targeted Fiscal deficit of 5.5% in FY 11, FM announced the
actual number at 5.1%, better than market expectation and projected the same to further reduce to 4.1%by
FY 13. For better management of Fiscal balances, FM called for inculcating all subsidy related liabilities
to be brought into fiscal accounting. Based on the above expectation, the Net market borrowing of the
Government in 2012 is pegged at around Rs 3.43 Lakh Crore which is way below market expectation and
would leave enough space to meet the Credit requirements of the Private sector. With this, Central
Government debt is estimated at 44.2% of GDP for 2012 as against 52.5% recommened by the 13th
Finance Commission.

Tax Reforms: FM aimed at implementing the Direct Tax code (DTC) from April 2012 and is actively
working with States to introduce the Goods and Services Tax (GST) by the same time.

Excise Duty: Signaling the governments moving towards GST and in order to enhance further investment
in the Economy by helping companies already reeling by high Raw materials costs, FM proposed on no
change in the Excise duty during the current year.

MAT (Minimum alternative Tax): In and unexpected move MAT was increase to 18.5% of the book
profit from the present rate of 18%.

Service Tax: The FM retained the Tax rate w.r.t. Service Tax at 10% while at the same time brought in a
few new services into the tax net to expand the tax base.

Sector Wise Announcements and Impact

Automobile - Positive

Announcement Impact

No change in Excise Duty. Against the general expectation that FM might raise the
Excise duty, FM kept the duty unchanged which is good
for the Auto industry already reeling under high Raw
Material costs. Positive for overall Sector

Increased Planned allocation to Increased allocation to Infrastructure sector would

Infrastructure sector by 23% to Rs 2.14 indirectly result into higher demand for the Consumer
Lakh Crore. Vehicles segment Beneficial specifically for commercial
vehicle segment; Tata Motors, Ashok Leyland &
M&M

Proposed to set up a National Mission for Move shall encourage manufacturing and selling of
Hybrid and Electric Vehicles. alternative fuel-based vehicles. Positive for M&M

Cut Excise duty on development and Positive for Electric Vehicles Manufacturers and Hybrid
manufacturing of Hybrid vehicle kits to 5% Vehicles manufacturers.
from the existing 10% besides fully
exempting customs and counter-vailing duty
(CVD) on import of special Hybrid parts.

Banking and Financial Services - Positive

Announcement Impact

Rate of tax on services retained at 10%. Good for all the companies in the Service Sector.

Fiscal deficit projection at 4.8% and 4.1%
for 2011-12 and 2012-13, while the
government borrowing program number
also lower than expected.
Lower projections on Fiscal deficit front Positive for
overall Banking sector. Net market borrowing by the
Government in FY 12 pegged at 3.43 Lakh Crore;
significantly lower than market expectation and would
leave a lot of space for smooth Credit/Deposit growth for
Banks. Positive for Full Sector.

FM said the government will provide capital
support to the tune of Rs 6,000 Crore to
enable them to maintain a minimum Tier I
Capital to Risk Weighted Asset Ratio
(CRAR) at 8%.
Though the number is lower than expected still will be
Positive for Good for small and medium sized Public
Sector Banks like UCO bank, Dena Bank, OBC and
Maharashtra Bank, Central Bank

Extension of 1% Interest rate subvention for The move is Positive for HFC’s/Real Estate as the existing
loans upto Rs 15 Lakh scheme on Int subvention has been liberalized to Rs 15
Lakh (Max Cost of the House Rs. 25 Lakh) from the
present limit of Rs. 10 Lakh (Max Cost of the House Rs.
20 Lakh) respectively. Will encourage Buyers of Low
cost houses. Positive for Stocks like LIC Hsg, HDFC

Enhanced cap on Housing loans qualifying Positive for HFC’s/Real Estate as House prices in
for priority sector to Rs 25 lakh Metro’s/Urban areas were already above the earlier
government limit of Rs. 20 Lakh. Positive for Stocks like
LIC Hsg, HDFC
 Cement – Marginally Negative

Announcement Impact

Import duty on Pet-coke and Gypsum Reduction in basic Customs duty on two critical raw
reduced by half to 2.5% materials will help Cement companies to partly offset the
rising manufacturing costs. Positive for the Sector

Proposed to replace the existing Excise duty
rate with composite rates having an ad
valorem and specific component with some
rationalization.
Excise to ad valorem will have a negative impact on the
sector as earlier, cement companies used to pay 10%
Excise on MRP (For Price exceeding Rs 190/50 Kg bag) ,
whereas now it will be 10% on ad valorem, which is 10%
on ex-factory price plus Rs. 160 per MT. Though a
negative but most companies increase Cement prices
so overall impact Neutral.

Higher allocation on Infrastructure projects Enhanced construction activity to positively impact the
and increase in investment in flagship sector as a whole.
progams like Bharat Nirmaan, JNNURM.

FMCG - Positive

Announcement Impact

No change in Excise Duty.
Positive: Against the general expectation that FM might
raise the Excise duty, FM kept the duty unchanged which
is good for the FMCG industry already reeling under high
costs for Agri and other commodities. No hike in Excise
for Cigarettes is a big surprise for ITC & Godfrey
Phillips

Reduction in Income Taxes. FM increased Move shall provide uniform tax relief of Rs 2,000 and
the Personal Income Tax Exemption limit marginally contribute to higher spending, leading to gains
for Individual taxpayers from Rs 1.6 Lakhs for all the FMCG companies. Modestly Positive for
to Rs 1.8 Lakhs. companies like HUL, Dabur, Marico

Higher allocation to Rural Development Government has decided to index the wage rates notified
through MNREGA. under the MGNREGA to the Consumer Price Index for
Agricultural Labour. Increase in the disposable income in
the Rural areas of the country will increase consumption,
specifically of the Consumer goods. Positive for
companies like HUL, Dabur, Marico

Infrastructure & Construction - Positive

Announcement Impact

FM increased the Planned allocation to the Spending for the different Infrastructure projects across
sector to Rs 2.14 Lakh Crore. This is an the length and breadth of the country will be increased by
increase of 23.3% over 2010-11. the same amount, creating higher opportunity for Infra and
Construction companies. (L&T, Nagarjuna
Constructions, IVRCL, IRB, JP Associates)

IIFCL is expected to achieve a disbursement Positive for all companies involved in the Infrastructure
target of Rs 20,000 crore by March 31, 2011 and construction companies in the country.
and Rs 25,000 crore by March 31, 2012.

Proposed Tax-free bonds of Rs 30,000 Will enhance the flow of funds to the infrastructure sector.
Crore for the enhancement of infrastructure
in railways, ports, housing, and highways.

FII limit for investment in corporate bonds, Will enhance the flow of funds to the infrastructure sector.
(residual maturity of over five years) was
raised by an additional limit of $20 Bln
raising the total limit available to FIIs for
investment in corporate bonds to $40 Bln.

IT & ITES - Marginally Negative

 Announcement Impact

Rate of tax on services retained at 10%. Against expectation of a marginal increase in the Service
Tax, the FM maintained the rate at 10%. Good for all the
companies in the Service Sector.

Exemption of Tax under STPI and Export As against demand from the IT/ITES industry for extension
Oriented Units ends in FY 11. of STPI, which offers tax exemption to export oriented
units on profits under Section 10A and Section 10B of the
Income Tax Act; FM had put brakes on the same. Negative
for all the IT and ITes companies in the Sector.

Increase in MAT. Rate of Minimum Negative for companies deriving Tax benefits from any
Alternate Tax (MAT) increased from the kind of Export oriented setup.
current rate of 18% to 18.5% of book
profits. MAT to be imposed on SEZ.

Oil and Gas - Neutral

Announcement Impact

FM indicated that the Government will pay Good for both the Upstream and the PSU Oil and Gas
the Oil and Gas subsidy in Cash rather than companies as with the subsidy payable in Cash, GoI
Bonds; as was the practice till previous year. would like to put a cap on Ouflows indirectly encouraging
Market linked fuel prices.

Increase in MAT from 18% to 18.5% to Increase in MAT to 18.5% will be marginally negatively
negatively impact profits. for Upstream and Refining companies specifically
Reliance Industries, Essar Oil and Cairn during their Tax
holiday term.

Fm left the Customs duty on crude oil OMC’s have demanded for a reduction in Customs and
unchanged at 5% and that on petrol and Excise duty to contain the impact of spurt in global crude
diesel untouched at 7.5%. oil prices that have touched a two year high of $110 per
barrel. The move is Negative for OMC’s as they are
already losing about Rs 2.25 a litre on Petrol and Rs 10.74
 on Diesel. Increase in Petrol prices will hurt consumers.

Announced Rs. 20,000 Crore ($4.4 billion) Tough the move is good for OMC’s selling fuel at below
cash subsidy to for selling fuel at below market rate; overall subsidy is way lower than market
market rates in 2011-12. expectation and considering the recent surge in Crude oil
prices internationally.

Capital Goods/Power - Positive

Announcement Impact

Increase in MAT from 18% to 18.5% to Increase in MAT to 18.5% will be marginally negatively
negatively impact profits. for Power Generation Companies enjoying Tax Benefits.

Exemption of excise duty for equipments Will be positive for companies like BHEL, L&T, BGR
used in UMPP Energy as will help in reducing the competitiveness
against Chinese and other manufacturers.

Excise duty exemption for power cables Positive for domestic Power Cable manufacturers like
manufacturers used for the power generation Finolex Cables
facility in existing mega or UMPP.

Other Highlights of the Budget

Subsidies
• Government is actively considering extension of the Nutrient Based Subsidy (NBS) regime to
cover Urea.
• Government to move towards direct transfer of Cash-subsidy to people living below poverty line
for better delivery of Kerosene, LPG and fertilizers. Task force set up to work out the modalities
for the proposed system.

Divestment
 • Following the overwhelming response to public issues of Central Public Sector Undertakings, it
has been targeted that GoI will raise Rs 40,000 Crore through disinvestment in FY 12.
• FM reiterated that the Government is committed to retain at least 51% ownership and
management control of the Central Public Sector Undertakings.

Foreign Direct Investment

• Discussions are underway to further liberalize the FDI policy, nothing concrete announced in the
Budget.

Financial Sector Reforms

• To process of financial sector reforms further, various legislations proposed in 2011-12.
• Amendments proposed to the Banking Regulation Act in the context of additional Banking
licenses to private sector players.

Agriculture
• To focus on removal of production and distribution bottlenecks for items like fruits and
vegetables, milk, meat, poultry and fish to be the focus of attention this year.
• FM enhanced the allocation under Rashtriya Krishi Vikas Yojana (RKVY) increased from Rs
6,755 Crore last year to Rs 7,860 Crore in FY 12.
• For bringing Green Revolution to Eastern Region it allocated Rs 400 Crore to improve rice based
cropping system in the region.
• to continuing with the Pulses program, FM proposed for the development of 60,000 pulses
villages in rainfed areas and allocated Rs 300 Crore for the same.
• For promoting Oil Palm production in the country, he allocated Rs 300 Crore to bring more than
60,000 hectares under oil palm plantations. He insisted that the aforesaid initiative is anticipated
to yield about 3 Lakh MT of palm oil annually in five years.
• Allocated Rs 300 Crore for implementation of vegetable initiative to provide quality vegetable at
competitive prices.
• Allocated Rs 300 Crore to promote higher production of Bajra, Jowar, Ragi and other millets,
which are highly nutritious and have several medicinal properties.
• also allocated Rs 300 Crore each for programs like National Mission for Protein Supplement,
Accelerated Fodder Development Programme and National Mission for Sustainable Agriculture.
• Expected Credit flow for farmers raised from Rs 3,75,000 Crore to Rs 4,75,000 Crore in 2011-12.
• Interest subvention proposed to be enhanced from 2% to 3% for providing short-term crop loans
to farmers who repay their crop loan on time.
• Capital base of NABARD to be strengthened by Rs 3,000 Crore in phased manner in view of
enhanced target for flow of agriculture credit.
• .Rs 10,000 crore to be contributed to NABARD’s Short-term Rural Credit fund for 2011-12.

Education
• Rs 21,000 Crore allocated for Sarva Shiksha Abhiyan which is 40% higher than allocated in
Budget for 2010-11.
• Pre-matric scholarship scheme to be introduced for needy SC/ST students studying in classes IX
and X.
 • Connectivity to all 1,500 institutions of Higher Learning and Research through optical fiber
backbone to be provided by March, 2012.

Direct Taxes

Personal Income Tax

FM proposed the new Personal Income Tax structure for FY 11.

Income Tax Rate

Up to Rs. 1,80,000 Nil
Rs. 1,80,001 to Rs. 5,00,000 10%
Rs. 5,00,001 to Rs. 8,00,000 20%
Above Rs. 8,00,000 30%

FM proposed to enhance the exemption limit for the general category of individual taxpayers from
Rs1,60,000 to Rs1,80,000 this year. This measure will provide a uniform tax relief of Rs 2,000 to every
taxpayer of this category. There is no change in the Tax structure for Women. He also lowered the age
limit for senior citizens to 60 years from 65 years and also increased the I-T exemption limit to Rs 2.50
Lakh from Rs 2.40 Lakh. Moreover, for senior citizen aged 80 years and above, the income-tax
exemption limit has been raised to Rs 5 Lakh.

Corporate Taxes
• Surcharge on domestic companies reduced from 7.5% to 5%
• Minimum Alternate Tax (MAT) increased to 18.5% from 18%
• MAT to be levied on developers as well as units operating in Special Economic Zones (SEZs)
• Tax on dividends received by an Indian company from its foreign subsidiary reduced to 15%
• Benefit of investment linked deduction extended to businesses engaged in the production of
fertilisers.
• Investment linked deduction to businesses developing affordable housing.
• Weighted deduction on payments made to National Laboratories, Universities and Institutes of
Technology to be enhanced to 200%.
• System of collection of information from foreign tax jurisdictions to be strengthened.

The overall proposals on Direct taxes are estimated to result in a revenue loss of Rs. 11,500 Crore
for the year.

Indirect Taxes

• Reduction in number of exemptions in Central Excise rate structure.

• Nominal Central Excise Duty of 1%imposed on 130 items entering in the tax net.
• Lower rate of Central Excise Duty enhanced from 4% to 5%.
• Optional levy on branded garments or made up proposed to be converted into a mandatory levy at
unified rate of 10%.
• Peak rate of Custom Duty held at its current level.
Agriculture and Related Sectors
• Scope of exemptions from Excise Duty enlarged to include equipments needed for storage and
warehouse facilities on agricultural produce.
• Basic Custom Duty reduced for specified agricultural machinery from 5% to 2.5%.
• Basic Custom Duty reduced on micro-irrigation equipment from 7.5% to 5%.

Manufacturing Sector
• Basic Custom Duty reduced for various items to encourage domestic value addition vis-à-vis
imports, to remove duty inversion and anomalies and to provide a level playing field to the
domestic industry.
• Rate of Export Duty for all types of iron ore enhanced and unified at 20%ad valorem. Full
exemption from Export Duty to iron ore pellets.
• Cash dispensers fully exempt from basic Customs Duty.

Other Proposals
• Concessional basic Custom Duty of 5%and CVD of 5%available to newspaper establishments for
high speed printing presses extended to mailroom equipment.
• Relief measures proposed for raw pistachio, bamboo for agarbatti, lactose for the manufacture of
homoeopathic medicines, sanitary napkins, baby and adult diapers.

Proposals relating to Customs and Central Excise estimated to result in a net revenue gain of Rs
7,300 Crore.

Service Tax

• Hotel accommodation in excess of Rs 1,000 per day and service provided by air conditioned
restaurants that have license to serve liquor added as new services for levying Service Tax.
• Tax on all services provided by hospitals with 25 or more beds with facility of central air
conditioning.
• Service Tax on air travel both domestic and international raised.
• Services provided by life insurance companies in the area of investment and some more legal
services proposed to be brought into tax net.
• All individual and sole proprietor tax payers with a turn over upto Rs 60 Lakh freed from the
formalities of audit.

Proposals relating to Service Tax estimated to result in net revenue gain of Rs 4,000 Crore. Taking
into account the concessions being given in the tax proposals and measures taken to mobilize
additional resources, the Net revenue Loss is estimated to be Rs 200 Crore for the year.
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