IMPACT OF BUDGET 2011-12 ON INFLATION AND GDP

INFLATION

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate the annualized percentage change in a general price index(normally the Consumer Price Index) over time

INFLATION BASED ON WPI

INFLATION RATES

BUDGET WILL FUEL INFLATION: YASHWANT SINHA Inflation which acts as a GDP deflator has been a major concern. One major hurdle that the Economy has faced is with respect to inflation which is estimated at 9.4 per cent for the current financial year. Former union finance minister Yashwant Sinha said budget 2011-12 will have an inflationary effect instead of controlling prices.

There are some proposals in the budget which are inflationary. Rise in prices of cement, coal and steel will have a cascading effect. Subsidy figures in this budget show that the government is planning to raise petrol and diesel prices. It will also have an inflationary effect. Monetary policy measures taken expected to further moderate inflation in coming months.

"The common man has to face the price rise. Grocery bill is rising the common man will suffer," he stated. Food price is an issue of supply side. If the government does not take steps to contain inflation then the traders will hoard food grains more and more, leading to more inflation," he said. On the black money issue, the BJP leader said he was expecting strong measures from union Finance Minister Pranab Mukherjee to tackle the menace but in the budget he did not mention any tough steps.

Growth vs. Inflation  India has sustained a high growth rate since liberalization of the economy after the dream budget of1997 which rationalized taxes and was followed up by the FEMA in 1999. However, it is now time to introspect and find out the cost attached to such high growth. Sustained inflation has meant that we have zero to negative real interest rates in our country funding the high growth we see. In fact, over the past 5 years, there have been two occasions where real GDP growth has been outpaced by the rate of inflation. With both demand and supply side pressures acting up, especially after unrest inthe Middle East, it would be hard for the Government to keep long term inflation in check withoutensuring food security either through imports or increasing farm productivity.

GROSS DOMESTIC PRODUCT(GDP)

Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. It is often considered an indicator of a country's standard of living. Gross domestic product is related to national accounts, a subject in macroeconomics.

CALCULATION OF GDP
GDP IS CALCULATED BY: Y = C + I + G + (X M)  GDP (Y)  Consumption (C),  Investment (I),  Government Spending (G) and  Net Exports (X - M).

IMPACT ON GDP

The Economic Survey 2010-11 estimates the Gross Domestic Product (GDP) for the current year to be at 8.6 per cent compared to 7.2 per cent in 2009-10. The bright side is that gross fiscal deficit of the Central Government for the current year has been reduced considerably and stands at 5.1 per cent of GDP for 2010 and has been pegged at 4.6 percent in the coming fiscal year. Agriculture: In 2010-11, the sector is estimated to have grown at 7 per cent, which is higher than the negative 0.2 per cent growth witnessed in the last fiscal year.

Fiscal Deficit kept at 4.6 per cent of GDP for 2011-12. Fiscal Deficit to be progressively reduced to 3.5 per cent by 2013-14. Effective Revenue Deficit estimated at 2.3 per cent of GDP in the Revised Estimates for 2010-11 and 1.8 per cent for 2011-12. Central Government debt estimated at 44.2 per cent of GDP for 2011-12 as against 52.5 per cent recommened by the 13th Finance Commission. Fiscal Deficit brought down from 5.5 per cent in BE 2010-11 to 5.1 per cent of GDP in RE 201011.

HOPE TO TAKE SHARE OF MANUFACTURING TO 25% OF GDP: FINANCE MINISTER

A day after announcing the Union Budget, Finance Minister Pranab Mukherjee said he hopes to take share of manufacturing sector to 25% of the GDP. The government has set itself an ambitious target for fiscal consolidation. Mukherjee said the fiscal deficit target was kept with a realistic view on revenue buoyancy. India need not be apprehensive about 4.6% fiscal deficit, he said.

On the issue of high oil prices, Mukherjee said, adjustments in duty structure will be made if required. I have considered volatility of oil prices. To prepare the ground for the introduction of the Goods & Services Tax (GST), Finance Minister Pranab Mukherjee proposed to prune the excise duty exemption list by levying a nominal central excise duty of 1% on 130 items currently enjoying exemption.

Summation of India Union Budget 2010-2011 Fiscal deficit for the FY 2011 is estimated at 5.5% 18.9% growth rate registered by manufacturing industry in 2009 Indian Economy is expected to register a 10% GDP growth in the coming years A 7.2% economic growth is estimated to be registered in the current fiscal The future years are expected to witness gradual segmentation of incentives Direct Tax Code and General Sales Tax to be launched in April 2011 A supreme level Fiscal Stability and Development Council to be established by the central government Issue of additional banking licenses by the Reserve Bank of India to private players and non-banking financial organizations 6 months extension of the refund term for farmer loans up to June 30th 2011 Undertaking of the introductory development activities for Delhi-Mumbai industrial corridor Rs 25000 crores increase by the government via Disinvestment route Setting up of Technology advisory group under the governance of Nandan Nilekani Allocation of Rs 1900 crore for UID authority Allocation of Rs 147,000 crore for Defence

India Union Budget 2010-2011 Direct Tax Proposals Implementation of Direct tax code from April 1, 2011 Introduction of a simplified 2 page Saral 2 form by Indian Income Tax department for FY 2010-11 Loss of Rs 26,000 cr from the initiation of Direct Tax plans and profits of Rs 45,000 from the implementation of Indirect Tax proposals Corporate Tax to continue at the same rate 3% increase in Minimum Alternate Tax from the previous 15% to 18% on book gains Reduction of 10% additional tax on domestic firms to 7.5% Demand for account assessment of professionals with more than Rs 15 lakh of earnings.

India Union Budget 2010-2011 Indirect Tax Proposals Service Tax rates to remain constant at 10% in an attempt to include more services under the tax code Increase in the tariff on smoking and non-smoking tobacco commodities 2% increase in Central Excise tariff from the previous 8% to the proposed 10% Total excise tax exemption on electric cars Central Customs tariff to remain constant at 10% Excise tariff of Rs 1 per litre on diesel and petrol Service Tax exemption on News agencies Limited reduction in the excise tariff on cement Service Tax exemption on farming seeds Hike in the customs tariff on gold and platinum exports from the previous Rs 200 to the proposed Rs 300 Hike in Import tax on silver metal to Rs 1500 on every kg

India Union Budget 2010-2011 Individual Tax Proposals Individuals earning upto Rs 1.60 lakh will not be levied under Income Tax laws. Individuals earning from Rs 5 lakh to Rs 8 lakhs will be charged at 10% Individuals earning above Rs 8 lakh will be taxed at 30% Tax exemption limit remains constant for Women and Senior Citizens at Rs. 1, 90,000 and Rs. 2, 40,000 respectively. Additional deduction of Rs 20,000 will be accessible for making investment in Infrastructure bonds

MEMBERS Pragadeeshwaran Rajesh Saravanakumar Sylvasther Vijaya Prabakaran Yasmintaj

Thank U