New Delhi: Today’s Budget is one of the biggest challenges of Pranab Mukherjee’s long political career and the Finance Minister set the tone for it when he described the year gone by as a "year of recovery interrupted." He began with listing grim ground realities – the global economic scenario, the battle with double digit inflation and said it was time for tough decisions. Here are the highlights of this fiscal’s financial budget.

• Service tax raised from 10 percent to 12 percent

• Income tax exemption limit raised to Rs.2 lakh to provide relief of Rs.2,000 for assessees in this category; Rs.2 Lacs – 5 Lacs 10% , Rs.5 Lacs – 10 Lacs 20% and 30% tax on income over Rs.10 lakh.

• Deduction of up to Rs.10,000 from interest from savings bank accounts.

• No change in corporate taxes but measures to enable them better access funds

• Witholding tax on external commercial borrowings reduced from 20 percent to five percent for power, airlines, roads, bridges, affordable houses and fertiliser sectors.

• Defence to get Rs.1.93 lakh crore during 2012-13.

• National Skill Development Fund allocated Rs.1,000 crore.

• Four thousand residential quarters to be constructed for paramilitary forces with an allocation of Rs.1,185 crore.

• National Population Register to be completed in two years.

• Number of proactive steps taken on black money (stashed away abroad); information has started flowing in, prosecution to be initiated; White Paper in current session.

• Allocation of Rs.200 crore for research on climate change.

• Irrigation and water resource company to be operationalised.

• National mission on food processing to be started in cooperation with state governments.

• Integrated Child Development Scheme to be strengthened and restructured with allocation of Rs.15,850 crore.

• Allocation of Rs.14,000 crore for rural water supply and sanitation.

• Infusion of Rs.15,888 crore in public sector banks, regional rural banks and NABARD in 2012-13.

• Infrastructure will require Rs.50 lakh crore in 12th Plan, half of this from the private sector.

• Completion of highway projects 44 percent higher than in previous fiscal.

• External commercial borrowing of up to $1 billion permitted for airline sector.

• External commercial borrowing permitted to low-cost housing sector.

• From 2012-13, full subsidies for providing food security; in other sectors to the extent the economy can bear this.

• Hope to raise Rs.30,000 crore from disinvestments.

• New equity savings scheme to provide for income tax deduction of 50 percent for those who invest Rs.50,000 in equity and whose annual income is less than Rs.10 lakh.

• Corporate market reforms to be initiated.

• Bills on micro-finance institutions, national land bank and public debt management among those to be introduced in 2012-13.

• Addressing malnutrition, black money and corruption in public life among five priorities in year ahead.

• India’s inflation structural, driven largely by agricultural constraints.

• Current account deficit 3.6 percent in 2011-12; this put pressure on exchange rate.

• Growth in 2012-13 estimated at 7.6 percent; expect inflation to be lower.

• Better monitoring of expenditure on government schemes.

• Fiscal 2011-12 year of recovery interrupted; reality turned out to be different.

• GDP growth in 2011-12 estimated at 6.9 percent; had to battle double digit inflation for two years.

• Good news: agriculture and services continued to perform well; economy is now turning around; recovery in core sectors.

• Now at juncture where it is necessary to take hard decisions; have to accelerate pace of reforms.

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Survey Pegs GDP Growth At 6.9% in 2011-12
Outlook Brighter for Next Fiscals

Indian economy is estimated to grow by 6.9% in 2011-12 mainly due to weakening industrial growth. This indicates a slowdown compared not just to the previous two years, when the economy grew by 8.4%, but also from 2003 to 2011, except 2008-9 economic downturn, when the growth rate was 6.7 percent. The Economic Survey 2011-12, presented by the Finance Minister, Sh Pranab Mukherjee in the Lok Sabha, however predicts 7.6% GDP growth in 2012-13 and 8.6% in 2013-14. With agriculture and services continuing to perform well, the slowdown can be attributed almost entirely to weakening industrial growth. The services sector continues to be a star performer as its share in GDP has climbed from 58% in 2010-11 to 59% in 2011-12 with a growth rate of 9.4%. Similarly, agriculture and allied sectors are estimated to achieve a growth rate of 2.5% in 2011-12 with foodgrains production likely to cross 250.42 million tonnes owing to increase in the production of rice in some States. The industrial sector has performed poorly, retreating to a 27% share of the GDP. Overall growth during April-December 2011 reached 3.6% compared to 8.3% in the corresponding period of the previous year.

The Survey points out that inflation as measured by the wholesale price index (WPI) was high during most of the current fiscal year, though by year end there has been a clear slowdown in price rise. Food inflation, in particular, has come down significantly, with most of the remaining WPI inflation being driven by non-food manufacturing products. Monetary policy was tightened by the Reserve Bank of India (RBI) to control inflation and curb inflationary expectations. The growth rate of investment in the economy is estimated to have registered a significant decline during the current year. The year witnessed a sharp increase in interest rates that resulted in higher costs of borrowings; and other rising costs affecting profitability and, thereby, internal accruals that could be used to finance investment.

But despite the low growth figure of 6.9%, India remains one of the fastest growing economies of the world as all major countries including the fast growing emerging economies are seeing a significant slowdown. The global economic environment which was tenuous at best throughout the year, turned sharply adverse in September, 2011, owing to the turmoil in the euro-zone countries and questions about others, reflected in sharp ratings downgrades of sovereign debt in most major advanced countries. While a large part of the reason for the slowing of the Indian economy can be attributed to global factors, domestic factors also played role. Among these are the tightening of monetary policy owing to high and persistent headline inflation and slowing investment and industrial activity. However, for the Indian economy, the outlook for growth and price stability at this juncture looks more promising. There are signs from some high frequency indicators that the weakness in economic activity has bottomed out and a gradual upswing is imminent.

The Economic Survey expects the growth rate of real GDP to pick up to 7.6% in 2012-13 and faster beyond that. The main reason for a gradual recovery is the decline in overall investment rate. Gross capital formation during the third quarter of 2011-12 as a ratio of GDP was at 30%, down from 32% one year ago. As fiscal consolidation gets back to track, savings and capital formation should begin to rise; moreover, with the easing of inflationary pressures in the months to come, there could be a reduction in policy rates by RBI, which should encourage investment activity and have a positive impact on growth. Preliminary calculations suggest that the growth rate of GDP in 2013-14 will be 8.6%. These projections are based on assumptions regarding factors like normal monsoons, reasonably stable international prices, particularly oil prices, and global growth somewhere between where it now stands and 0.5% higher .The Global economy remains quite fragile and concerted efforts will be needed through G-20 and other forums to restore stability and renewed growth, including addressing the sovereign debt crisis, financial regulation, growth and job creation efforts and energy security.

The Economic Survey suggests that the progressive deregulation of interest rates on savings accounts will help raise financial savings and improve transmission of monetary policy. Other key areas include the deepening of domestic financial markets, especially corporate bond market and attracting longer-term inflows from abroad. Efforts at attracting dedicated infrastructure funds have begun. India’s foreign trade performance will remain a key driver of growth. During the first half of 2011-12, India’s export growth was a high 40.5%, but has been decelerating since. Imports have growth rapidly, by 30.4% during 2011-12 (April-December). Similarly, country’s Balance of Payments has widened to $ 32.8 billion in the first half of 2011-12, compared to $29.6 billion during the corresponding period of 2010-11. The foreign exchange reserves increased from US $ 279 billion at end March 2010 to US $ 305 billion at end March 2011. Reserves varied from an all-time peak of US$ 322.2 billion at end August, 2011 and a low of US $ 292.8 billion at end-January, 2012.

The Survey recognizes that sustainable development and climate change are becoming central areas of global concern and India too is equally concerned and engaged constructively in global negotiations. Climate change challenges ahead are large and India is doing more than its fair share in reducing its energy-intensity of growth. India is now much more closely integrated with the world economy as its share of trade to GDP of goods and services has tripled between 1990-2010. At the same time, the extent of financial integration, measured by flows of capital as a share of GDP, has also increased dramatically and the role of India in the world economy has commensurately expanded, along with the other major members of emerging markets.

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Highlights:

* Railways must attract 10 percent of the Rs 20 lakh crore government expects to spend on infrastructure during 12th Plan

* Railways expect gross budgetary support of Rs 2.5 lakh crore during 12th Plan.

* Collective challenge to formulate viable funding mechanism for modernisation.

* Railways should contribute 2 percent of GDP from the present 1 percent.

*487 approved projects at various levels of execution

*Market borrowing through IRFC at Rs 50,000 cr needed in 2012

*Modernize rolling stock via fresh purchases of wagons, engines

*Plan to upgrade 19,000 kms of tracks in 5 years

*To create 1000 stations through PPP route in 5 years

*Station development org to be funded via PPP

*Delhi-Kolkata travel time to be brought down to 14 hours from 17 hours

*Facilitate running of longer and heavier freight trains

*To introduce double decker container trains

*Total cost of signalling for five years is Rs 35,000 crores

*17 gauge conversion projects will be completed in FY 12-13

*825 kms of gauge conversion projects to be completed

*Rs 6872 crore allocated under the new line plan

*Development of major stations to create 50,000 jobs

*New lines to be laid in under-developed parts

*Plan to enhance GPS use in railways

*To complete over 45 new lines in FY13, stretching over 700 kms

*Rs 1102 crores for passenger amenities in FY 13 as compared to Rs 700 cr in previous year

*To set up elevated suburban corridors in Navi Mumbai. Working on PPP for elevated Churchgate-Virar corridor

*New lines to be set up for Kolkata Metro

*Railways to take up linking of Agartala to Akura in Bangladesh.

*31 projects of over 5,000 km being implemented with the support of state governments.

*All meter gauge, narrow gauge sections to be made broad gauge, except heritage lines, by end of 12th Five Year Plan.

*725 km of new line completed in the current year, Rs 6,725 crore for new lines, says Trivedi.

*14 new rail line survey to be taken up in 2012-13.

*Budgetary support pegged at Rs 25,000 crore for the coming year as against projected requirement of Rs 45,000 crore.

*Logistics Corporation will be created for providing logistics solutions for rail users.

Earlier before leaving for Parliament, Trivedi told reporters, "The budget is going to be very good for the country and the common man. I have to make sure that Indian Railways is solid like gold."

"The railways are one of the most important infrastructure. Without the railways growing, India’s GDP cannot grow," the minister added.

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Indranil Sen Gupta, Economic Times 25/1/2012

source: http://articles.economictimes.indiatimes.com/2012-01-25/news/30662952_1_forex-reserves-monetary-policy-policy-rates

We welcome the Reserve Bank of India’s growing focus on protecting growth from fighting inflation. Monetary policy should change in three ways. First , policy rates need to cycle down to support growth. Second, RBI needs to reduce the money market liquidity deficit to ease pressure on lending rates instead of adding to it.

Finally, we expect RBI to rebuild forex reserves instead of strengthening the rupee to fight imported inflation. We are relieved to see governor Subbarao signal a possible rate cut in March. In fact, growth is flashing red lights: loan demand has fallen to 17% from 21.4% in March 2011 and December GDP growth will likely slip to 6-6 .5% levels.

After all, India is perhaps the only economy in the world in which lending rates have pierced their 2008-peak . What about inflation? We agree with RBI that the present relief could be temporary . In fact, we expect inflation to rebound in mid-2012 after the government hikes coal, oil and power prices.

Flagellating ourselves by killing India’s growth, however, will not pull down global oil prices. Not surprisingly, every other BRIC central bank has been easing already. We are quite confident that core inflation (ie, inflation adjusted for weather, oil and metal price shocks) will come off. With growth falling below the economy’s potential of 8%, corporates are losing pricing power.

Can we get past the mid-year rebound in inflation? One way could be to hike oil prices on Budget day itself. Sure, this will push up inflation by about 100 bps to 8% by March 2012 from our base case. Yet, markets will then see inflation falling straight to 5.5% in March 2013. This will also allow RBI to steadily cut rates without fearing a rebound in inflation.

We are happy that RBI cut CRR by 50 bps to bring down money market liquidity deficit to ease pressure on rates. In fact, we hope that it later buys more government paper via OMOs to bring the money market liquidity deficit to its targeted Rs 60,000 crore from Rs 1,50,000 crore now.

After all, monetary growth, at 16.5%, is running below the optimal 17.5% levels consistent with 8% growth. Finally, we expect RBI to revert to building up forex reserves as insurance cover . After all, the import cover (ie: months of imports that forex reserves can fund) has fallen to 7.7 months, the least since 1997.

We appreciate that RBI could not buy forex reserves because it was trying to fend off imported inflation with a strong rupee at a time of high current account deficit. But, the recent crisis has shown that high forex reserves help as markets respect the fact that the Reserve Bank carries a big stick. The RBI must, at the earliest opportunity, recoup the $45 billion it has sold since 2008.

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Source: Franklin Templeton Mutual Fund

At its third quarter review of the FY12 monetary policy today, RBI has announced the following changes –

• Monetary Measures:
  • Reduced Cash Reserve Ratio (CRR) by 50 bps to 5.50%
  • Repo rate has been maintained at 8.50%
  • Consequently the Reverse Repo rate and the Marginal Standing Facility rate stand unchanged at 7.50% and 9.50% respectively
• Policy move in line with expectations – central bank adopts cautious stance, given upside risks to inflation and high fiscal deficit.
• The CRR cut will inject about Rs.32,000 crore liquidity in the system and help reduce ongoing liquidity stress amidst high government borrowing and slowdown in capital flows.
• Has revised GDP growth projections downwards to 7.0% from 7.6% earlier, factoring in the sluggish investment activity and global uncertainties. Expects GDP growth to be relatively stronger in FY13.
• Has retained WPI projections for March 2012 at 7% – the recent moderation in inflation is primarily due to drop in prices of seasonal food items and high base effect. Upside risks to inflation persist from elevated global crude oil prices, weak rupee and fiscal situation.
• Non-food credit growth forecasts revised downwards to 16% from 18%, given lower demand for credit.
• Looking ahead, the bank has indicated liquidity management will be a priority for the bank in the current environment. A reversal in monetary policy cycle will depend on sustainable decline in inflation and policy actions to contain fiscal deficit.

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