Budget 2013: An opportunity missed

March 1, 2013

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

Industry leaders have hailed Budget 2013 saying that this is the best Finance Minister P. Chidambaram could have done under the circumstances. Opposition leaders have slammed the budget. Each had their own compulsions but I feel the truth lies somewhere in between.

It was no doubt a very fine tightrope walk but I would give Chidambaram full points for not yielding to temptation and taking populist measures ahead of elections due in 2014. At the same time, the finance minister should have concentrated on measures which may not have cost the exchequer much, but would have compensated by improving sentiment. Like they say, the “best things in life are free”.

Chidambaram emphasized the importance of foreign fund flows in his budget speech, noting that India needs $75 billion to meet its current account deficit.

But he did not announce a much anticipated cut in withholding tax, throwing a googly instead with confusion over tax residency certificates and opening up a grey area like last year’s General Anti-Avoidance Rules. [On Friday, the finance ministry said it would not question the validity of tax residency certificates]

With the slowdown in the economy, especially the latest quarter where GDP growth has fallen to 4.5 percent, was it prudent to burden corporates with an ‘affluence surcharge’? A savvy finance minister like Chidambaram should have realized that penny-pinching measures would have an effect on sentiment, which in turn could have far-reaching consequences on market health.

Buoyant markets offer the easiest ways to raise the capital required to kick-start the economy and the budget is an instrument available to incumbent finance ministers.

One of the direct measures for equity markets was the reduction of securities transaction tax on futures trading. The finance minister should have given concessions for delivery transactions, apart from short-term capital gains. The drop in revenue would have been marginal but it might have vastly boosted sentiment.

No stand-alone concessions will persuade anyone to invest unless the investor is convinced he would get appropriate returns and this can happen only if sentiment is revived.

Industry-specific announcements fell far short of expectations, especially in the infrastructure and capital goods segment which could have been a tool to rouse the economy and generate employment.

Setting up a road sector regulator is positive news but it depends on the speed of implementation and the regulator’s powers. After plugging the fuel subsidy, the government is readying to open another bottomless pit in the garb of food security.

Overall, I would say that the finance minister has to a certain extent succeeded in belling the cat but the clapper seems to be missing. It’s an opportunity missed, especially from the point of view of the markets.

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