Budget 2013: Getting the wow factor back

February 14, 2013

(Any opinions expressed here are those of the author and are not of Reuters)

Gone are the days when Indians used to wait for the budget in February to buy new things. In the 1990s, capital market investors also waited with bated breath for the annual budget to spell out tax and policy measures that affected the fortunes of sectors and companies.

But over the years, the budget lost its wow factor, becoming more of a ritual presentation of the government’s finances, resource allocation, fundraising and spending. This is because most taxes have been rationalized (although some scope still exists) by successive governments and different ministries announce various policy measures throughout the year.

This time around, Budget 2013 is generating a lot of interest. It will be viewed closely by global rating agencies, international investors, the general public and the corporate world.

The finance minister’s compulsion is quite palpable. On one hand, P. Chidambaram needs to keep voters happy ahead of elections due in 2014, and on the other he needs to address the twin deficits — fiscal and current account.

The Congress-led government wants to move ahead on the path of fiscal consolidation, setting a target deficit of 5.3 percent of GDP for the current year and 4.8 percent for FY14, eventually bringing it down to 3 percent in five years.

For this, it may have to cut down on its plan expenditure in coming years without compromising on growth, education, infrastructure development and defence. It may have to further reduce its subsidy (food, petroleum, fertiliser) bill through successful implementation of direct transfers using Aadhaar. The Feb. 28 budget may bring in more government welfare schemes for the poor under Aadhaar and thus expand its scope.

To increase revenues, the government needs to bring in more services under the tax net in the budget. It should further rationalise its indirect tax structure by bringing the levies closer to a median 12 percent and removing certain exemptions. These steps could then lead to quicker implementation of the Goods and Services Tax (GST), paving the way for border-less movement of produce within India. The budget should also spell out compensation of GST revenue loss to states as this would enable speedier implementation. On the income tax front, one can expect some form of taxing the rich and reducing the burden on the middle class through a combination of lowering tax rates, enhancing exemption limits and higher concessions on savings. These could raise the tax-to-GDP ratio (currently at 10 percent) to higher levels as seen in BRICs and other emerging markets.

For the past few years, household savings (as a percent of GDP) have been falling and financial savings are giving way to real estate and gold investments. This is a matter of concern for the government as these savings are among primary funding sources for capital formation and infrastructure development in the economy.

The increase of import duty on gold by 2 percent is one step that has been taken. Any further budget measures will have a positive effect on the markets. The Rajiv Gandhi Equity Savings Scheme (RGESS) is one area where enhancing or doing away with the income limit of up to a million rupees would encourage investors.

India’s exports are still a miniscule portion of global trade (less than 2 percent). Despite a depreciating currency providing a competitive edge in the last two years, the momentum of exports has decelerated. It can be partly attributed to the global economic slowdown but it is also a function of labour productivity when it comes to manufacturing exports.

Easing credit norms and removing infrastructure bottlenecks in the budget would encourage exporters of products and services. Budgetary allocation for improving overall productivity through effective pricing and utilization of resources (mining, land and agriculture output), education and training would be among the ones closely watched. Reducing the import burden is an arduous task as it is more a function of global commodity prices.

One way of bridging the current account deficit is through FII and FDI fund flows. In the budget, one would look for further cues to maintain and attract short-term FII flows and measures to boost long-term flows.

As for the common man, he would continue to look for affordable housing amidst rising land prices, food security in the context of high inflation, lowering of income tax rates for more discretionary spends and incentives for saving for the future.

If the finance minister is able to chart out a roadmap for India’s growth by limiting borrowing and wasteful expenditure, enhancing revenue through innovative taxes, infusing business confidence and generating more jobs, he would be credited with delivering a pragmatic and balanced budget.

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