One
of the overarching vision in this year’s Union Budget is fiscal prudence. At
first glance, Union Budget for FY2013-14 looks unattractive. However, a closer
look does reveal that the Finance Minister has indeed walked a tight rope
considering the precarious maco-economic scenario we are in. While the
government has made resolute efforts to arrest fiscal slippages and announced
some bold policy measures in the recent past, growth continues to slow
alarmingly; the current account deficit remains unsustainably high; the
investment cycle is showing no signs of revival; and inflation, despite some
moderation, remains well above RBI’s comfort zone. In fact, the latest GDP
figures for Q3 (at 4.5%) is no less than a horror tale. However, one should
feel relieved that the budget has not been exceptionally populist. Despite a
reasonably sensible budget with stable tax, stock markets were left confused
over the retrospective changes suggested in Section 90A of the Income Tax Act
relating to existing tax relief to foreign investments from countries having a
Double Taxation Avoidance Agreement (DTAA) with India. Following an uproar, it
was later clarified that TRC (tax residency certificate) will be accepted as sufficient
evidence of residence including investors routing money through Mauritius to
claim tax benefits under DTAA. In fact, there is a possibility that the
offending sentence “not sufficient “could be dropped altogether when the
finance bill is debated in the Parliament.
Finance
minister P. Chidambaram’s target of lowering the fiscal deficit to 4.8% of
gross domestic product (GDP) in the next financial year is based on assumptions
of robust growth in tax receipts and compression of the subsidy Bill, but
experts are a little apprehensive about his arithmetic calculations, since the
calculation is based on the premise that large money could be raised through
spectrum auction (which looks difficult) and divestment. He should be applauded
for containing the fiscal deficit for the current year to 5.2% of GDP, a tad
lower than his own revised target of 5.3%. He achieved this reduction by brutally
cutting plan expenditure meant for developmental projects by Rs.91,838 crore. Finance
minister however failed to curb non-plan expenditure, which includes defence
expenditure, interest payments and salaries, which rose by Rs.31,738 crore and
thus received some kudos from comrades. Despite his valiant efforts, Revenue
deficit, or the difference between current expenditure and current receipts, as
a portion of GDP has actually risen in 2012-13 to 3.9% from the budget estimate
of 3.4%. In 2013-14, Chidambaram is targeting a revenue deficit of 3.3% of GDP.
Although, there has not been significant populist measure to jeopardize Govt.’s fiscal consolidation plans but equally impressive is the political salience of the budget. Chidambaram passed over on the chance to spend his way to the next general election in this budget, like he did in 2009 with the Rs.60,000-70,000 crore farm loan waiver probably because of the weak economy, which would otherwise have crumbled out of the populist measures. Yet, he managed to appeal to the Congress party’s traditional constituencies—poor, minorities, scheduled castes and scheduled tribes—by leaving spending on them untouched, and also appealed to the party’s emerging constituencies such as young people and women.
Where the FM intend to keep squeezing? Where has the FM increased spending?
Finance Minister also expressed his serious concerns over burgeoning current account deficit and placed it at a higher priority than fiscal deficit. He was also critical of the declining savings and investment rate in the country. The announcement of an additional investment allowance of 15% for capex of Rs 1billion or more during FY14-15 for the corporate sector is a major boost to them. To boost the infrastructure sector, funds have been created but just the 2 years window is a extreamly impractical capex phase & FM should consider it extending to 5 years for getting any serious capex commitment from India Inc. However, a lot remains to be done on the reforms front to carry on the show. On the personal income tax front, there have been no change in tax slabs and at the same time tax credit of Rs 2000 will be distributed between income slab of Rs 2-5 lakh. At the same time he could have done a little more on this front considering “aam admi” is under the brunt of heavy inflation. Taxing the super rich (income over Rs 1 crore) with a 10% surcharge can again be considered a prudent decision. There are 35 million total tax payers and roughly 42,800 tax payers who are super rich. Thus, it is almost clear that in a country with population of 122 crore, the tax network is very thinly penetrated and there is rampant practice of tax evasion. More clarity on GST and DTC is however still required and implementation of it seems to be a herculean task in the near future.
Freezing social-sector spending?
Overall,
given the limitations, there were very few steps that the Finance Minister
could have taken to impress each and everyone. In fact, the theme of the budget
was “responsible” and the minister has lived upto the expectations. But more
could have been done because the current Finance Minister understands the
economy much better in any given condition. It is prudent to see fiscal prudence
even on announcing populist measure such as food security bill or allocation funds
to MGNREGS programmes. The planned expenditure has budgeted to grow 29% while
the revenue receipts have been budgeted to grow 21%. The figures look optimistic,
considering that much has not been done to boost tax revenues while maintaining
expenditure to GDP at almost constant levels. The fiscal deficit for the
current year has been restrained at 5.2% but it has been largely done by
scaling down the planned expenditure in the last half of the fiscal year. However,
with the election drawing near Government finances may come under strain and pressure
to boost government expenditure will mount. Thus, there’s every chance that
Finance Minister’ planned expenditure might go haywire for FY13-14 and stance
on fiscal consolidation and prudence will be really tested then. Besides, the
subsidies (fuels, fertilizers and food) have been pegged lower by 11% at Rs
220,971 crore with oil subsidies projected at Rs 65,000 crore for 2013-14
against the revised estimate of Rs 96,880 crore in 2012-13 fiscal. However, these
optimistic calculations largely depend on the partial decontrol of diesel and
under-recoveries which again depends the global crude oil prices. Further,
Govt. also expects to garner around Rs 56,000 crore in total from divestment
and ~Rs 40,000 crore from telecom auctions, which are very optimistic
projections and doesn’t look practical to materialize. These are the potential
risks which might throw Mr. Chidambaram’s fiscal consolidation plan out of the
blocks. However, given the latest GDP figures, we can only rely on RBI that the
easing of the interest rates will continue and be more aggressive in the coming
quarters.
BUDGET STATISTICS
