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Over the past couple of years, Governments around the world have undertaken various fiscal and monetary stimuli in response to the global financial crisis. The Indian government found itself in the same situation – this, coupled with the impact of high oil prices, has inflated the fiscal deficit and effectively undone a lot of the progress made on this count over the past decade. In this context, the fiscal prudence that the government has showcased in the Union Budget this year is an indication that it intends to carve out a reasonable path towards fiscal consolidation, which is the need of the hour. The Finance Minister has resisted populist measures inspite of impending state elections, and exercised restraint albeit with sufficient emphasis on education and the social welfare sectors.
Tax reforms
The government has also demonstrated commitment to the overall tax reform process. The commitment to introduce the Direct Tax Code is welcome. A statement that the areas of divergence with states on the proposed Goods and Services Tax have narrowed is equally welcome, and an early introduction of the GST would further hasten the tax reform process. These reforms not only add to the revenues of the Government via improved compliance, but also improve the overall productivity and cost competitiveness of the economy.
Infrastructure
Stressing the ongoing emphasis on infrastructure, the Finance Minister has increased allocation to tax free bonds and lowered the withholding tax limit for the sector to 5 per cent, which is a definite positive. However, the issues facing this sector lie more on the administrative side of the equation, and pertain to issues such as land acquisition, multiple clearances, labour reforms etc. For the overall growth of the infrastructure sector, the issues pertaining to the Union Budget, while an isolated step in the right direction, would be entirely inadequate and indeed require a more comprehensive overhaul of the administrative regulations and machinery.
Foreign investment
On the FDI side, allowing foreign investment into mutual funds is another step in the right direction – however, the amounts and nature of capital that the country can attract via this route are miniscule compared to the avalanche of FDI that can flow into the country upon opening up of sectors such as insurance, retail, etc and by attracting long term capital such as private equity flows. With the attention of the world on India's emergence as an economic superpower, the country is fortunate to be in a position to attract such capital, and must capture this opportunity by facilitating and enabling these flows.
The one area of concern with the budget is the arithmetic – the budgeted fiscal deficit target of 4.6 per cent for 2011-12 assumes subsidies at levels which are appear unrealistic, especially in light of current levels of crude oil prices. It is possible that the administrative reforms required to enable the government to meet these targets are instituted very soon, for e.g. extension of the NBS scheme for urea, subsidies on LPG and kerosene - both of which found mention in the Finance Minister's speech. If so, this would be a very positive development. In absence of these reforms, meeting the fiscal targets for 2011-12 would appear to be a very uphill task.
(The author is the Managing Director of India Buyout Team, Carlyle India Advisors Pvt. Ltd.)
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