Indian Union Budget 2011 – Post Budget Analysis (Part 2)

March 3, 2011

Even though there has not been any specific step taken to tackle the inflation with these tax changes, the impact of higher inflation will be reduced. The major impact on all these policy changes will be by of the crude oil price volatility.

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These are some of the generic changes that are bound to make an impact on the economy for the coming year. Now, how do they actually make the impact? Firstly the 9% odd growth rate can be achieved by taking care of the Consumption and Investment portions of the National Income Accounting equation. To put it bluntly, the economy is bound to prosper by rising domestic consumer demand which would demand higher industrial production. This would be backed up with higher investments. As a result, the government has now permitted FII?s to invest in Mutual Funds, which will go a long way in improving the capital inflows and liquidity in the Stock Market. Though the lock in period has been reduced to 3 years (In terms of Infrastructure), the government still needs to be proactive in encouraging FII inflows to boost the economy. The levies for FDI’s also don’t seem to be working.

The Ad Valorem duties for Cement are going to hurt companies who are already struggling with rising input prices and fluctuating demand. This would in turn be passed to the consumer. The overall sentiment for Oil and Gas companies remained somber as no major reforms were announced in the face of the Middle East Crisis and Supply Shocks. This would in turn affect the automotive industry.

But the full exemption from SAD (Special Additional Duty) and concessional CVD (Counter Veiling Duty)@5% to further the cause of environment safeguarding (emphasis on hydrogen fuel cell technology) and bring up promotional policies for the

development of specialized sectors will be benefiting few companies which are operational in these areas. Also, the definition of CKD (Completely knocked down) vehicles is changed so as to include even the two wheelers which were earlier included in concessional import duty which might have an impact on “on road” prices of vehicles. The increase in duty for Iron Ore exports will help in catering to the local domestic demand which would benefit the manufacturing sector.

While the Finance Minister has tried to focus on reforms, all that has been done is a few amendments in terms of the financial regulatory framework. There are certain key areas that seem to have been left out (Hopefully not intentionally).

  • Firstly Multi-Brand Retail needs to be encouraged. Counting 2-3 years down the line, Multi Brand Retail can combat inflation, strengthen the supply chain and help control rising food prices with greater transparency. However, this boils down to the implementation problem as the some of the State governments have vehemently opposed the plan while others have embraced it.
  • Secondly, the MAT tax has been implemented which would adversely affect the IT majors which were enjoying a tax holiday. This would impact prospective business growth and productivity levels.
  • Thirdly, in terms of implementation, another area that needs attention is the GST which would serve as an umbrella tax in turn wiping out the price distortion and irregular taxing regime that’s being followed as of now. It’s slated to be implemented by April 2012. This would require greater involvement by the government to resolve the co-ordination problem between the opposition and wandering states.

Another area for concern is the Government Debt to GDP ratio which is projected to reach 68.7% by 2013-2014. Keeping the true GDP perspective in mind, the government should target a Debt to GDP ratio below 60% in order to function in a healthy macro environment. Keeping these issues in perspective, the Government also needs to implement better governance, stricter regulations and transparency to tame the government deficit that has crept in lately leading to scams.

Basically what does this Budget mean for me as a Student? Well, Branded clothes are bound to be more expensive with the hike in excise duty, so would be Hotels & Restaurants in the Premium segment, Health Care along with Air Travel costing higher from Rs. 50 – 250. Basically lean is in along with judicious spending!

The above Guest article was written by Club Ecobizz. IBS, Hyderabad

 

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