Budget 2013: Visible impetus on growth

March 1, 2013

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

Finance Minister P. Chidambaram presented the annual budget at a time when India’s economy is going through a challenging period. India faces the four-pronged problem of high fiscal deficit, an unacceptably high current account deficit, declining growth and lower savings.

The high interest rate regime is helping neither industrial growth nor infrastructure investments. Considering the weak growth situation all over the world, a visible impetus on growth was expected in Budget 2013.

In his speech, Chidambaram emphasized the need for growth and announced measures to boost the manufacturing sector and infrastructure investments. The key announcement was the introduction of investment allowance of 15 percent for capital expenses above a billion rupees.

In the infrastructure sector, roads were an area of focus. The announcement of a regulatory authority and setting up 3,000 km of new road projects in the first six months of the next fiscal year is a welcome step. There is additional allocation of over 200 billion rupees for rural roads alone. This should also help related sectors such as construction, cement, steel and commercial vehicles.

While there was clear focus on renewable energy, urban infra, ports, water and sanitation, it was unfortunate that thermal power and the coal sector did not seem to get its due attention in the budget.

The additional tax exemption of 100,000 rupees provided for the first homes of people should encourage investments in the affordable housing sector. Similarly, liberalization of the Rajiv Gandhi Equity Savings Scheme (RGESS) should encourage investments in mutual funds and stock markets, moving the focus from gold which is having an adverse impact on the current account deficit.

Several announcements have also been made for the insurance sector. Insurance companies will now be able to expand quickly, as they do not need the regulator’s permission to open new branches in smaller cities. By allowing banks to become insurance brokers, Chidambaram has ensured the sector will get access to a vast customer base of banks.

Initiatives for the education sector should encourage investment in building skills. Similarly, the impetus on rural development is also noteworthy considering the importance of agriculture in India’s economy and the near stagnation in agricultural output.

Paying out 90 billion rupees to the states should set the ball rolling for faster implementation of the Goods and Services Tax. There have not been substantial changes in direct or indirect taxes. One might argue against additional taxes on the rich, but given the fiscal situation, it’s a small one-time price to pay.

Budget 2013 demonstrates the government’s determination to bring about fiscal consolidation.

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