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.