Thursday, February 28, 2013

Budget 2013-14: Hopes Belied & an Opportunity Lost?

A lot was expected from Finance Minister Mr. P. Chidambaram, who had taken over the reigns as FM in September last and worked to improve India’s fiscal imbalances with great zeal and vigour. He travelled extensively convincing rating agencies and global investors that he would spare no effort at maintaining, if not improving upon, India’s sovereign rating by reducing the Fiscal Deficit and improving GDP. What built expectations was that he succeeded in reducing Fiscal Deficit to a level of 5.3% of GDP and efficiently cleared several major policy hurdles like FDI investment in Retail, Airlines & Media, partial decontrol of fuel subsidies.

India Inc. and investors were sure that he was the right man to steer India’s economy, through the troubled waters it had landed in, due to widening fiscal deficit and current account deficit, slowing growth, falling profits, high inflation and a weakening currency. He had shown his displeasure at the RBI’s reluctance to start softening interest rates to promote industrial growth, even at the risk of a higher inflation rate. He was possibly the only Cabinet Minister who was working hard to do the job he had been chosen for and had the support and blessings of the Prime Minister, Dr. Manmohan Singh and the President of the Congress, Mrs. Sonia Gandhi.

What was expected from him was to tackle the rising Current Account Deficit (CAD) on a priority which could be done through making India more attractive for foreign investors and probably reintroducing a one-time amnesty scheme for Indians to bring back their undeclared funds stashed abroad. Not only would this have bridged our ever-widening CAD, but, also helped in strengthening the falling Indian Rupee. India being a nett importer with a current monthly trade deficit of close to US$ 20 billion, largely on account of Crude and Gold imports, has a lot more to gain by a strengthening currency. Fall in exports could have been set off by corresponding export incentives. However, the Budget failed to address this issue, which I find its biggest failing.

Apart from that, the Budget had a bit for everyone.  The FM has chipped away carefully to sculpt a perfect statue from a block which wasn’t ready to be sculpted yet.  The final result is one which does not appease one with an eye for art (in this case the economy), but, to the untrained eye passes as a masterpiece!

Coming back to the Budget, the FM started his speech by stating his goal as one that led the economy to a higher growth path by inclusive growth and development. With that setting the tone, every minute segment of India’s vast demographics was covered, from the Scheduled Castes & tribes, minorities, students, children & farmers to working women, widows, micro, small and medium industry. He even announced 1000 crore for a Women’s Bank to be launched by a PSU soon, with women managing it and specifically catering to the needs of women as clients!

The Budget provides for a 30% increase in Plan Expenditure, after having cut down the previous year’s Budgeted Expenditure by 20%. However, no complaints here, as the Fiscal Deficit has to be kept in control and the FM has assured that the target for this shall be 4.8% of GDP as against the 5.2% which was achieved in the previous year after large cuts in plan expenditure and much fiscal prudence. This however, was a number that the FM had made public at his several investor meets abroad earlier and hence was in line with expectations. Similarly the Revenue Deficit is to come down to 3.3% from 3.9% in the previous year. The FM certainly needs to be congratulated on both.

The Financial Sector got its share of sops, with PSU Banks being promised capital infusion of Rs. 12,517 crore by March 2013 and an additional capital infusion of Rs.14,000 crore in 2013-14. The FM decided to remove complexity of categorization of FDI and FII in line with globally accepted norms of classifying over 10% control in an Indian Company as FDI, while less than 10% would be looked at as FII investment. Interestingly, FII’s have now been allowed to participate in the currency derivatives segment and can offer Corporate Bonds and Government Securities as collateral exposure.

Start-ups and SME’s can rejoice once they read the fine print of the Budget proposals, as they are now allowed to List on the SME Exchange without coming out with an IPO, which can follow subsequently. Apart from this a provision is being made by the MCA to identify Educational Institutes contributions to whose Incubation Centres would qualify for benefits under Corporate Social Responsibility. The FM also recognized that the MSME sector did not want to grow beyond the specified levels as they stood to lose benefits, and in order to help them grow, has allowed such benefits to continue up to 3 years beyond their crossing those specified levels. 

Coming to Industry, the FM has encouraged the formation of Infrastructure Debt Funds and proposes to let IIFCL with support from ADB, to provide the much needed funding to Infrastructure companies. He proposes to raise 50,000 crore through Tax-Free Bonds in 2013-14, which would be used towards developing India’s fragile infrastructure. Apart from this the usual plans for road development were announced across the country with a specific mention of the North East.

The one Big Change that industry can look forward to is the reintroduction of Investment Allowance, which is now set at 15% for investment in new plant and machinery in excess of 100 crores. This allowance is over and above the regular depreciation benefits. With any hope, consumption-led-growth coupled with easier finance could convince industry to invest more in plant & machinery, thereby leading to a recovery for the struggling capital goods manufacturers.

The FM went easy on the middle class by leaving Tax Slabs and rates unchanged. In fact he made things slightly easier for them by allowing a 2,000 tax credit to individuals with income upto 5 lakhs. A further rebate of 1 lakh on interest was offered to those seeking new Housing Loans. To encourage first time investors in entering Capital Markets, RGESS was extended to investments made over 3 years from 1 year earlier and participants income level increased to 12 lakhs from 10 lakhs earlier.

However, to raise funds for all this, the rich and super-rich were made to bear additional taxes in the form of a Surcharge of 10% on Income Tax for the 42,800 individuals/HUFs/Firms whose taxable income was in excess of 1 crore. Surcharge was increased from 5% to 10% on Corporates with taxable income in excess of 10 crores. Further, the Surcharge on Dividend Distribution Tax also stands increased to 10% from 5%.  A new TDS of 1% has been imposed on all change in title of Land deeds in excess of 50 lakhs, except for agricultural land.

Commodities Transaction Tax (in line with STT) of 0.01% has been imposed on trading in all commodities apart from agricultural commodities. Duty on mobile phones priced above Rs.2,000 has been increased to 6% from the currently prevailing 1%. Imported high end cars (& yachts) will now attract an import duty of 100% as against the existing 75%. Locally manufactured SUVs will now attract an Excise Duty of 30% against the existing 27%. Smokers were penalized once again with an increase of 18% in specific excise duty. Apart from that, all air-conditioned restaurants would now fall under the ambit of Service Tax and not only those with Liquor Licences, as was the norm earlier.

The fact that the FM could manage this deft balancing act without resorting to an all round increase in Income and Service Tax, Excise Duty while keeping the peak rate on imports at 10% is commendable. It was a tough act for any FM and on that score Mr. Chidambaram does deserve praise at attempting a balanced budget that stays focused on Fiscal Consolidation while restoring Macroeconomic credibility with the international community.     

1 comment:

  1. Incidentally Indian Stock Markets gave a massive thumbs down to P.Chidambaram's Balanced Budget by closing below 5700 NIFTY for the first time since Nov 26th, 2012 on record turnover of 4.39 lakh crore i.e. US$ 79.8 billion.