National Budget FY2010-2011: A Critical Analysis Dr. M. Mizanur Rahman Economist and Researcher
Introduction • This is a budget for 150 million people of a country having US$ 100 billion GDP at current price, US$684 Per capita income and US$750 GNI • This is the 39th national budget of the country and the 11th of the Awami League government which has been presented on 10th June 2010 using visual aid which is appreciated; • This budget is important as if FY2009-10 has been the year of preparation; FY2010-11 will be the year of delivery.So, this budget should have taken into account the targets set by the government in their election manifesto. • To me, the budget has a lot of good side but might have a lot more things to do
Objectives • Highlight the budget presented by the F.M. for FY2010-11; • Critically analyze the overall budget; • Compare the budget with some other budgets presented in different recent years; • Draw some suggestions which might be helpful to make the budget more realistic.
Sector-wise Distribution of Total Expenditure (Non Development and Development)
Targeted GDP Growth • Attaining a significant performance in the agricultural sector will be a major challenge. Specially 3.8% growth can be challenging and may be unreachable when agricultural subsidy has been reduced and natural disaster is a common phenomenon. • Expectation of a performance of 6.8% in service sector in FY11 may be difficult to attain. • Lagged impact of Global Financial Crisis adversely affected the industrial sector in FY10, particularly manufacturing sector. Gas and electricity crisis has brought down the industrial production time almost half of the actual production time. So, 9% growth would be difficult to attain. • Therefore, 6.7 per cent growth rate is too ambitious to achieve
GDP Growth Rate Source: http://www.indexmundi.com/bangladesh/inflation_rate_(consumer_prices).html
Inflation Target • Because of large deficit budget and imposing different new tax, this budget can fuel inflation. Besides, in the international market fuel and other essential commodities prices are going up which also will push the inflation up. So, keeping the inflation with in 6.5% can be difficult. • The following measures can help to control the price of essential goods: • Widening the area of food security programme • Continuation of zero customs duty rate on commodities such as rice, wheat, onion, pulse and edible oil, seeds, fertilizer, medicine and cotton • Reduction of import duty from 12% to 5% on milk powder and withdrawal of 5% regulatory duty on milk powder • To reduce the inflationary pressure CRR and SLR of scheduled banks have been reduced by 0.5%
Inflation Rate Source: http://www.indexmundi.com/bangladesh/inflation_rate_(consumer_prices).html
Annual Development Program (ADP) • ADP of FY11has been targeted at Tk.38,500 crore. • 26.3% higher than ADP FY10 and 35.1% higher than RADP FY10 (in reality this could even be (50.1) % higher than expected actual expenditure for FY10) • Project aid component of the new ADP is targeted at 40.0% (42.1% in the original ADP of FY10),while the local currency share will be 60.0% (57.9% in ADP of FY10)
Value Added Tax (VAT) • Positive measures • Enhancement of annual turnover threshold to Tk 60 lacs from Tk 40 lacs to enjoy turnover rate of 4% will encourage SME business • VAT exemption on waste paper at import stage will help keep the newsprint prices low • Tax free import of all types of medical equipments and wheel chairs for sick and paralysed travelers is a noble measure • Negative impact • Increasing VAT rate from truncated to actual (15%) on services provided by dockyard, advertising agency, printing press, courier service, consultancy and supervisory firms, audit and accounting firm will increase the company cost • VAT at the rate of 4.5% will be imposed on private university and English medium school is apprehended to increase the cost of education since this tax burden will ultimately be shifted to the guardians of students
Income Tax • Personal • Level of tax free income and all tax slabs remain unchanged in the budget for the last three consecutive years, which should have been raised • Corporate • Corporate tax structures and incentives remain unchanged, which should have been reduced • Tax holiday • Tax holiday for industries engaged in manufacturing solar panel, energy saving bulb will reduce energy consumption.
Income Tax • Tax rebate • Assistance to schools and colleges under MPO for improving computer and English education and on donations made to conduct camps for voluntary sterilisation will be considered as CSR and will be eligible for tax rebate, which will help improve the quality of these schools and colleges. • Concessionary tax imposition • At 10% on income of a company earned from trading of shares of listed companies in any stock exchange • At 5% on income of sponsor shareholders or directors of a company listed with any sock exchange • At 3% on the premium value of shares of companies being sold at a premium value • This will help expand the tax collection effort of the government as a large section of people engaged in this section remain out of tax net
Tax Administration Measures • Measures to increase the tax net and collection include: • E-filing of income tax returns on a limited basis; • Installment of tax calculator software on the website of NBR; • Restructuring of manpower and other facilities of income tax department; • Motivational programme for taxpayers of income tax and VAT; • Introduction of tax card for highest taxpayers; • Initiation of e-VAT software; • Reforms in judicial process for easy settlement of VAT related cases; • Reforms in VAT administration including setting up more VAT offices, setting up VAT offices in each upazilla.
Deficit Financing • Budget deficit (excl. grants) has been estimated at Tk 39,323 crore (5.0% of the GDP) for FY11 (Tk 31,039 crore in revised budget of FY10, 4.5% of GDP). • Share of domestic financing will be 60.2%: • Tk 25,680 crore (66.2%) of the domestic financing will be from the banking system (Tk 8,661 crore or 50.0% in revised budget of FY09). • Tk 8,000 crore (33.8/%) will be from non-bank instrument (Tk 8,664 or 50.0% in revised budget of FY09). • Share of foreign financing will be 39.8% in FY11 (43.1% in the revised budget of FY09). • There is a conscious effort to reduce non-bank borrowing • Implications: • High interest rate on NSD certificates will be contained. • However, crowding out impact on private borrowing from banks should be monitored
Agriculture • Total allocation for agriculture and allied sectors (crop, livestock, fisheries, forestry, land, and water resources): Tk 20769 crore (6.1% higher than RB-FY2009-10, 26.5% higher than budget FY2009- 10). • Allocation for Ministry of Agriculture: Tk 6738 crore • (0.6% higher than RB-FY2009-10 and 12.25% higher than budget FY2009-10) • 3.4 % less than that of FY2008-09 • Allocation for Ministry of Livestock and Fisheries: Tk 859 crore • (18.5% higher than RB-FY2009-10 and 1.3% higher than budget FY2009-10) 69.1 % higher than that of FY2008-09 • Total Allocation for Ministry of Water Resources: Tk 11,409 crore • (6.0% higher than RB-FY2009-10 and 20.3% higher than budget FY2009-10 19.4 % higher than that of FY2008-09
Agriculture • ADP allocation for Agriculture: Tk 2495.11 crore (6.48% of the total ADP allocation) (38.51% higher than RADP of FY2009-10 and 47.0% higher than ADP FY2009-10) 34.0 % higher than that of FY2008-09 • Subsidy for Fertilisers and Inputs • Allocated Tk. 4,000 crore as subsidy for fertiliser and agricultural inputs (11.1% higher than in FY2009-10 budget and 19.2% lower than the revised budget of FY2009-10).
Power and Energy • The power and energy sector got approval of total 99 projects under the ADP allocation. The plan proposes to add 837 km of power grid lines, 17 sub-stations and more than 15000 km of distribution lines over the next three years. • Power Tariff & Subsidy: • Budget proposed to increase the power tariff by 20-30% over the next two to three years. If the existing tariff rate prevails about Tk.3,800 crore as subsidy for the FY2010-11 will be required. • System Loss: • The budget proposal mentioned about minimizing existing system loss by undertaking some renovation and upgradation of power distribution and transmission systems but failed to identify any specific target for reducing system loss by a certain percentage by FY2010-11. • Tax Incentives: • The budget has provided tax incentives for energy saving light, safety or relief valve for LPG, submerge welding flux, etc.
Investment • Total investment target of 26.4% of GDP in FY2010-11 (24.6% in FY10) by doubling growth of investment (from 12.2% to 22.5%) appears to be challenging since major role to be played by ADP. • Poor state of ADP implementation in major infrastructure related ministries during FY2010 has raised concerns as regards higher utilisation of fund under these ministries in the FY2011 • PPP implementation is crucial Issues related to business enabling environment but no guide line has been drawn yet
Private Public Partnership (PPP) • Budget allocated Tk. 3 billion to private Public Partnership program which share 2.2 per cent of the total budget. In last year budget it was Tk. 2 billion which remain mostly unutilized. So, increasing allocation in this sector may not be justified. • Although, some positive steps in order to translate the PPP agenda has already been taken This program may not be that feasible as objectives, administration and salary structure of private and public office are quite different
SME • A target of Tk 23,995 crore for 2010 (Jan.-Dec.) as SME loans to be disbursed by banks and financial institutions • Expanded limit for turnover tax up to Tk. 60 lakh (from Tk. 40 lakh); revision of VAT at very low fixed rate for small businessmen: Will positively contribute to SMEs • Reduction of import duty of several industrial raw materials particularly used in chemical and electronics industries likely to reduce cost of production and improve competitiveness.
ICT • Total allocation under Min. of Science Technology and ICTis Tk. 450 crore which is 19.1% higher over RADP of FY10) and 40.5% higher over development budget • Exemption of duty could be extended to computer networking parts • Should be taken initiative for 2nd sub-marine cable for uninterrupted and faster internet connection with the world
Labour and Skills Development • Allocation to ministry of labour and employment (Tk.72 crore) is only 4.35% higher than previous allocation. • Overseas Employment and Remittance • Allocation for Ministry of Expatriates Welfare and Overseas Employment: TK 224 crore (37% higher) where in ADP TK 85 Crore (98% higher) • The government has approved the Expatriate Welfare Bank Bill 2010 to provide financial assistance to overseas jobseekers.
Export Promotion and Diversification • Total Allocation for Commerce Ministry: TK185 Crore which is 35 % higher compared to last year and in ADP Tk123 Crore which is 69 % higher • Stimulus Packages in FY 10 • First Package (April, 2009): Tk. 3420 Crore was allocated. In the budget for FY2009-10 this package was further replenished by Tk. 2400 Crore. • Stimulus Packages in FY 2010-11: TK 2000 Crore has been proposed
Infrastructure and Communication • Total Allocation for Transport and Communication : TK8843 Crore (6.7 % of total Budget ) which is 29 % higher compared to last year • Transportation (Roads and Railways): Total allocation : TK 6613 (4.7 % of total budget) which is 12.6 % higher compared to last year • Allocation in ADP: TK 3402 (9 % of ADP) which is 12.3 % higher than last year • Climate Change and Environment • The government has proposed an allocation of Tk. 700 crore in the FY2010-11 budget (as in last year’s allocation of Tk. 700 crore, however only Tk. 319 crore was disbursed in the first 10 months of FY2009-10) • There is need for developing strong monitoring and evaluation mechanism for ensuring better utilization of climate funds;
Rural Development • One House One Farm project: Tk. 1,197 crore for five years (July 2009 to June 2014) with an allocation of Tk. 68 crore for FY2009-10. Revised allocation is Tk. 8 crore. Expenditure up to 9th June Tk. 7 crore. • Rural Infrastructure: Proposed construction of cyclone shelters, rural hat-bazars and aforestation along 18,600 km roads. • Budget speech mentioned that local government institutions (Union Parishad and upazila parishad) have not been able to function properly. • Zila parishads should be restructured to turn them into strong local government institutions. • Regional Development • The Budget has allocated Tk 70 crore for skill development. Under this program 30 new Technical Training Centers and 5 new Marine Technology Institutes in 35 districts will be established. • Regional Cultural Centres will be established under a programme titled Development of Indigenous Culture which has allocation of Tk 100 crore.
Social Sector • Education • Highest budgetary allocation at 13.9% (Dev. + Non-Dev): 13.5% higher than the revised budget of FY10 • Health • Allocation for FY11: Tk. 8,149 crore (16.7% higher than FY10 allocation) • Social Safety Net • Total allocation Tk. 19,497 crore (14.98% of total budget; it was 15.22% in FY10) • Cash Allowance: Widening of coverage and allowances for various schemes is praiseworthy Employment Generation Schemes EGHP: Tk. 1,000 crore allocated for FY11 (expanded for 16 to 64 districts during Phase II in FY10) • Gender • Gender Equity Expenditure is 25.9% of total Budget; 4.4% of GDP