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Straight from the Specialists

Budget 2013: Time for a responsible budget

February 23, 2013

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

Finance Minister P. Chidambaram has promised a “responsible” budget this time around. According to Webster’s dictionary, “responsibility” is associated with a legal or moral accountability, reliability, trustworthiness in relation with some burden.

What would this possibly mean for the budget’s key stakeholders — business, the middle class, investors and voters?

The UPA government has made welfare spending its primary electoral plank, which was activated a year before the financial crisis of 2008/09. Considering that election fever will take over by the middle of the year, let’s hope Budget 2013 will demonstrate responsibility when dealing with electoral interests.

Hopefully, the budget will not yield to the populist pro-poor call to revert to levying estate duty and wealth tax which will take us back to the time when capital was shoved underground. One would rather examine alternatives:

Assuming we will not gather the political courage to expand the tax net to include agricultural assets and income, one option could be to aggressively recover tax arrears — estimated at about 2.5 percent of GDP.

Dividends are currently tax free in the hands of the receiver as otherwise it will lead to double taxation since corporate profits are already taxed. They should be treated like any income derived from investments such as banks deposits. Then dividends will be taxed in the hands of the recipient and also allowed as a deductible element of corporate profits.

This would result in net worth and equity prices going up, which can be realised through the sale of shares. This can be offset by subjecting all capital gains, short-term or long-term, to tax at marginal rates applicable to the seller. Needless to say, the dividend distribution tax will be rendered obsolete.

Household savings have slumped from 15.4 percent of GDP in 2007/08, 13.6 percent in 2010-11 and now estimated to be about 12 percent. Returns on financial assets have not kept pace with rampant consumer inflation; pushing investors away from financial to physical assets — mainly gold and real estate.

We could adopt a uniform policy to exempt all income coming from investments from tax as long as the investment is not withdrawn. This will significantly address the need to provide real returns to investors.

This should also partly wean investors away from the yellow metal, which can be further helped by a ban on lending against gold. This should accentuate illiquidity, gold’s inherent drawback.

India’s growth rate of 5 percent is the lowest since 2002/03 and has combined with consumer inflation to attack our economic roots. Along with depletion in household savings, low corporate investment and an adverse current account deficit (CAD) are the main causes of our current economic situation.

While investment in India suffers, outward FDI has surged to $112 billion from $1.7 billion in 2000 — nearly 60 percent of inward FDI. On the other hand, rupee corporate borrowings are down and foreign currency loans are higher. Therefore, while gold imports have indeed risen, they may not be the sole cause for our CAD-related miseries.

Credit is due to the finance minister for swiftly setting about averting a ‘downgrade’ by saying the right things and initiating steps which may have arrested fiscal depletion. Hopefully, the budget will prove its responsibility to the salaried and middle class who even today wake up in a cold sweat when they recollect marginal tax rates of 90 percent of the 1980s. Unfortunately, in our country “taxing the rich” has invariably meant taxing those whose income is not hidden.

Overall, Budget 2013 has to assure investors that:

- India can provide a stable tax regime.

- We can get our act together on critical legislation such as the Goods and Services Tax which is estimated to push growth by up to 1.5 percent.

- We can move away from the plethora of exemptions and deductions and arrive at a single composite tax rate

- We can provide a realistic road map for fiscal consolidation.

Therefore, a responsible budget may have to be different, courageous and not merely tinkering at the periphery.  It has to be one which puts broader national interests ahead of electoral politics.

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