The Union Budget 2010-11

Summary

This Forum of Free Enterprise booklet, edited by Sunil S. Bhandare and sponsored by the Shailesh Kapadia Memorial Trust, pairs two articles on the Union Budget for 2010-11. Bhandare’s Introduction sets the scene against a ‘fortuitous backdrop’ of economic turnaround — 7.2% real GDP growth, double-digit industrial resurgence, a rising Sensex and returning capital flows — while flagging formidable risks of high food inflation, unsustainable deficits and rising indebtedness, and identifying five forces (agricultural resurgence, rural development, infrastructure thrust, social-sector spending, and tax reform via the Direct Tax Code and GST) driving the Finance Minister’s bid for a virtuous cycle. The first article, by the chartered accountant Prof. Kanu H. Doshi, examines the implications of the direct-tax changes; the second, by financial analyst Divya Vasantharajan, reads the budget’s sectoral impact on the capital market. Together they offer expert, cautiously optimistic appraisals from a free-enterprise standpoint.

Essays

The Budget is for Khas Admi

By Prof. Kanu H. Doshi*

Prof. Kanu H. Doshi argues that the 2010-11 budget, presented by Finance Minister Pranab Mukherjee on 26 February, is ‘for Khas Admi’ — the taxpaying investor — rather than the ‘Aam Admi’, because for the first time the Union Budget was designed to address the middle class by substantially scaling up the income-tax slabs so taxpayers keep a larger after-tax income. He details the revised slabs (basic exemption unchanged at Rs.1,60,000 but the rate bands widened so income up to Rs.5 lakh is taxed at 10% and the 30% rate applies only above Rs.8 lakh), tabulating tax savings rising to about Rs.51,500 at higher incomes. He works through a series of direct-tax amendments — enlarged Section 35AD capital-expenditure deductions for new hotels, raised Section 44AB tax-audit turnover thresholds (to Rs.60 lakh for business and Rs.15 lakh for profession), the gift-taxation clause under Section 56(2)(vii), increased TDS threshold limits across sections 194B-194J, and a higher Section 271B audit-failure penalty — and reads in them a clear intent to introduce the Direct Tax Code and GST from April 2011. His conclusion holds that the budget ‘will go a long way in encouraging savings and spending’, with consumer spending from tax savings exerting a multiplier effect and the capital market set to stay bullish amid heavy PSU disinvestment.

• Frames the budget as ‘for Khas Admi’ — the taxpaying investor and middle class — for the first time designed to leave taxpayers with larger after-tax income.
• Basic exemption held at Rs.1,60,000 but slabs widened: 10% up to Rs.5 lakh, 30% only above Rs.8 lakh; tax savings up to ~Rs.51,500.
• Details Section 35AD (new hotels), Section 44AB audit thresholds (Rs.60 lakh / Rs.15 lakh), Section 56(2)(vii) gift taxation, and raised TDS limits.
• Reads clear signals toward the Direct Tax Code and GST from April 2011.
• Concludes the budget encourages savings and spending with a multiplier effect and a bullish capital market amid Rs.40,000 crore PSU disinvestment.

Impact on the capital Market

By Miss Divya Vasantharajan*

Divya Vasantharajan reads the budget’s impact on the capital market, opening with the global financial crisis and India’s relative resilience: Foreign Institutional Investments aggregated $23 billion to 10 March 2010, lifting the Sensex from 9,000 to 17,500 by May 2010. She surveys the budget sector by sector — agriculture and agro-industries (credit-period extension but neglected core issues, with corporate/contract farming on the AMUL model offered as a path), textiles (forex losses but reviving demand), banks and financial institutions (Indian banks weathered the crisis well, new private-bank licences signalled, PSU banks as major MBA recruiters), energy/power/oil and gas (India importing ~70% of consumption, NELP and the Kirit Parikh fuel-pricing committee), infrastructure and engineering goods (Rs.1,735 billion FY2011 allocation), auto components (the ‘silver lining’ of 2009 with record sales), steel, IT and telecom, and pharmaceuticals. Her conclusion draws the lesson that India’s once-feared youthful population has become the economy’s growth driver, and that with ‘some of the most brilliant minds at the helm of our polity and bureaucracy’ India can pursue the ‘coveted double-digit growth’.

• Opens with India’s relative resilience to the global crisis: FII inflows of $23 billion lifting the Sensex from 9,000 to 17,500 by May 2010.
• Surveys sectoral impact: agriculture/agro (contract farming on the AMUL model), textiles, banks (new private licences, resilient PSU banks).
• Covers energy/oil and gas (~70% import dependence, NELP, the Kirit Parikh fuel-pricing committee), infrastructure (Rs.1,735 billion allocation), auto, steel.
• Notes IT/telecom gains indirectly and via a lower MAT/surcharge mix, and pharma’s reliance on the US market.
• Concludes India’s youthful population is now the growth driver, positioning the country for double-digit growth.

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