Union Budget 2011: Pranab to do a tightrope walk

The big question on everyone’s mind as Monday, Budget Day, dawned - will the Finance Minister deliver a populist budget, with tax relief and sops to leave more money in the hands of consumers to help ease the burden of inflation? And how does he plan to bring down food prices?
Pranab Mukherjee's sixth Budget comes in the backdrop of high inflation, tight liquidity and rising current account deficit. Unsustainable subsidies and a sense of policy paralysis as far as major reforms are concerned have been a drag on the economy. Mukherjee has the difficult task of putting the economy back on track as well as keep the masses or the aam aadmi happy.
The Budget is expected to focus on taming inflation and improving governance and the Finance Minister may announce an amnesty scheme to bring back black money. This Budget is also expected to take forward the reform agenda, push reforms in agriculture and outline a roadmap for Goods and Services Tax and Direct Tax Code.

Inflation has remained stubbornly high throughout the year. Rising inflation has reduced purchasing power and also offset the hike in the tax exemption limit announced in the last Budget. Analysts expect another tax exemption hike this year, which is likely to be in line with the Direct Taxes Code. The DTC, which aims to simplify income tax structure, has been cleared by the Cabinet in August, 2010. According to the DTC, income up to Rs. 2 lakh will be tax-free, Rs. 2-5 lakh would be taxed at 10 per cent, Rs. 5-10 lakh would be taxed at 20 per cent and income over Rs. 10 lakh would attract 30 per cent tax.

To compensate for the shortfall in revenue through direct tax, the Finance Minister may hike the service tax by 2 per cent. This would fetch anywhere between Rs. 12,000 and Rs. 15,000 crore more, analysts have said. A hike in excise duty by similar margin is also expected. The government had cut back excise duty from 14 per cent to 8 per cent as part of the fiscal stimulus to allow companies to tide over recession.

To bring down the fiscal deficit to the desired level (5.5 per cent), the government has to prepare roadmap to tackle the subsidy burden. Subsidies are likely to touch Rs. 1 lakh crore this fiscal. Rising crude has meant an inflated subsidy bill for the government. Analysts say the Finance Minister might restructuring the oil duty. Currently, the custom duty on crude is 5 per cent. The excise duty on petrol is Rs. 14.3 per litre and Rs. 4.65 on diesel. The government also charges Rs. 1 per litre cess on diesel and petrol.

The Finance Minister is likely to increase the allocation for social schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). Economists also hope that the government would act to plug the leakages in schemes like Mahatma Gandhi National Rural Employment Guarantee Scheme.

Finally, the finance minister has to strike a balance between revenue receipts and expenditure, given there won't be any 3G windfall like last fiscal. In 2010, the government added Rs. 67,719 crore to its kitty in the form of 3G auction. The Budget is likely to bring clarity on that front as well.

So what can we expect from the Pranab Mukherjee’s Budget?

• FM may give relief on personal income tax to ease inflation burden

• Inflation, governance deficit, corruption overriding concerns

• Address worries over ballooning subsidy bill for food and fuel

• Duties may be raised as economic stimulus is fully rolled back

• Focus on agriculture reforms, effective warehousing and distribution

• Priority to be given to expanding investments in farm sector

• Detailed roadmap on GST, Direct Tax Code likely

• Amnesty scheme for voluntary disclosure of tax may be announced



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