Budget (06-07) Analysis

I am not in particularly good mood today so don’t blame me if that reflects in the analysis of Budget of Government of India for Financial year 2006-2007.

Overall tone

Pretty generic budget without focus on anything specific. There is something for every sector. May be the economy is doing so well that no particular thrust is needed for any one sector and could be done with attention across sectors. This is always evident in the 3rd or 4th budgets of any government. The first budget start with bold steps and becomes populist by the 5th year.

GDP growth is expected to be 8% for 2005-06 and government aims to raise it to 10%

Social Sector

There has been increase in allocation for social sector spending and pension for destitute has been increased. Funds have been allocated for poverty alleviation, rural employment, healthcare and education. Considering the track record of the spending in these sectors, I was expecting something innovative from our Harvard educated minister. But same old story, money will go into some black hole. There is no focus on implementation and accountability of schemes for which funds are allocated. Why does the government not understand that real problem is not lack of funds but lack of available funds being utilized properly?

Taxation

There has been no change in personal income tax or corporate tax. The limit of 10,000Rs in Pension funds has been increased upto 100,000. But the budget does not say anything about the Pension regulatory bill which has been hanging fire since years. Without it, any focus on pension fund does not make sense.

Fringe benefit tax has been modified. I had put forward my suggestion in one newspaper for removing it for superannuation fund. This has been accepted in part and contribution per employee upto 100,000Rs has been kept out of FBT.

One good thing in this section was bringing constituency allowance of MPs and MLAs under Income tax. I was also expecting abolition of 'MP local area development fund' which has proved to be the cesspool of corruption.

Service Tax

Since its inception this tax has been the favourite with successive finance ministers. They have either increased the rate or increased the coverage of services or even both. Present budget has done both. I, in particular don’t like brining ATM operations under this net, considering the fact that ATM operations in India hasn’t yet reached the maturity stage.

Infrastructure development

The minister has promised to get the 'north-south' corridor completed by 2008 and 96% of Golden quadrilateral by June, 2006. Considering the myriad land acquisition and contract issues with the 'north-south' corridor, I am skeptical about the deadline being met.

Finance minister has talked about increasing the power generating capacity by 15,000 MW by 2007. Coal is major fuel for our power plants and the least growth as pointed by Economic survey was in Mining sector. So how will the power generating capacity increase? I am not sure if FM has put forward any FDI or privatization proposal for mining sector.

Finance minister has also promised to encourage investment in refineries and pipelines.

Stock market

The Securities transaction tax (STT) has been increased across the board by 25%. This was largely expected, considering the fact that when he had originally proposed it last year it was higher.

Indian mutual funds are now allowed to invest upto 2bn US dollars abroad. Finance minister is happy with the maturity of our stock market, this being reflected in raising the FII investment limit to 2bn US dollars in government debts.

Farm sector

FM has talked about farm sector growth rate to be 2.3%. The 2002-07 five year plan had envisaged an agricultural growth rate of 4%. Thus government does not seem to put focus in this regard. No concrete steps for food processing industries has been proposed as of now.

(This is my primary analysis and I will do detailed analysis later.)