Budget 2012 balances reality with hope

It was never going to be an easy Budget. Corporates and the markets were looking for policy changes to jump-start the languishing corporate investment cycle and growth, and meaningful fiscal consolidation, specifically in limiting the runaway rise in subsidies.

But, the political uncertainties after the state elections and the events related to the railway Budget may have made the government cautious about taking politically sensitive measures. Given these constraints, the government did a commendable balancing act that provides for credible but perhaps a bit less ambitious fiscal consolidation with measured policy changes.

The fiscal deficit target of 5.1% of GDP looks feasible although it requires the government to follow up with increases in retail petroleum prices and a well thought out disinvestment plan. The estimated revenue from the sale of spectrum may become a challenge if capital markets do not ease sufficiently in the coming months.

The tax revenue growth estimates appear reasonable given the increases in the excise and services tax rates and the broadening of the service tax base. The increase in income-tax exemption limit should, together with the changes in tax brackets, help buoy household income and provide some relief to the middle class.

The increased allocation for capital expenditure should send a strong signal that the government is serious about infrastructure investment and this should also help boost growth.

The budget also proposed a number of measures that should help ease the funding constraints facing Indian corporates. India's banking system needs to expand its capital base to meet both Basel III requirements as well as provide adequate credit to finance growth. Providing funds in the Budget to augment public sector banks' capital is a prudent move.

Lowering the withholding tax on external commercial borrowings, allowing airlines, low-cost housing to access ECBs for rupee expenditure, removing restrictions on where venture capital firms can invest, doubling allocation for tax-free infrastructure bonds, and allowing QFIIs into corporate bond market are important steps to increase availability of funds.


Kalpana Morparia
CEO, JP Morgan