Budget 2013 does have some words of wisdom

March 2, 2013

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

The finance minister had a tough job in hand with this being the government’s last budget before elections due in 2014. P. Chidambaram had to focus on fiscal consolidation while walking a tightrope between populism and pragmatism.

In my previous column, I had written about the issues he needs to address. Here’s a look at how Budget 2013 fared on these counts.

The budget has assumed a nominal GDP growth of 13.5 percent (the economic survey pegged real GDP growth in the range of 6.1 to 6.7 percent). It has projected a fiscal deficit of 4.8 percent for FY14 and estimated the current year fiscal deficit at 5.2 percent. The revenue deficit has been forecast at 3.3 percent of GDP.

Corporate tax collections are budgeted to increase by 17 percent; excise to grow by 18 percent, driven by rationalization of rates to converge to a peak rate of 12 percent; and service tax collections to grow 36 percent — with the help of an amnesty scheme.

Though the budget has made some provision for revenue sharing with states on the Goods & Services Tax (GST), it was markedly silent on the progress of both GST and the Direct Tax Code.

Non-tax revenue assumes an ambitious PSU disinvestment target of 400 billion rupees (only 240 billion rupees achieved so far in FY13), sale of other government holdings (158 billion rupees) and telecom spectrum and licence sales (408 billion rupees). Gross government borrowing has also gone up but net borrowings seem to be more realistic.

By not making any significant changes to the tax structure, the government has demonstrated both continuity and stability in its outlook. On expected lines, wealthy individuals (with taxable income above 10 million rupees, estimated to be around 42,800) and profitable corporates (with taxable income exceeding 100 million rupees) have been taxed higher with a surcharge of 10 percent for one year. A service charge has been imposed on air-conditioned dining. Excise duty has been increased on cigarettes, SUVs and mobile phones. Commodity transaction tax on non-agricultural produce has been levied at the same rate as in equity futures.

On the expenditure front, non-Plan spending shows a moderate growth of 10.8 percent despite a 25 percent increase in capital outlay for defence, but factors in a 10 percent reduction in subsidies (mostly oil). The Direct Benefit Transfer scheme would be broad-based with improved geographical coverage.

Total Plan expenditure shows a growth of nearly 30 percent (over revised estimates for FY13) and accounts for nearly a third of overall expenditure. Most existing social welfare schemes for education, rural road development and other sectors have been well funded. Increased government expenditure would thus mitigate fear of any slowdown in rural consumption and could even spur growth.

The need for sustained FII and FDI inflows to bridge the expected $75 billion current account deficit has been highlighted.  KYC procedures for different classes of foreign investors would be streamlined and simplified. It has been reiterated that the implementation of General Anti-Avoidance Rules  (GAAR) would be deferred until FY16, infusing confidence among foreign investors.

Ambiguity over the sufficiency of tax residency certificates for avoiding double taxation caused some concern. This is understandable but the finance minister’s clarification does provide assurance of a status quo until any revision.

No near-term strategy seems to have been put in place for addressing the ballooning current account deficit. But the public-private partnership in exploration of domestic coal and shale gas initiatives are a welcome step to ease medium- to long-term dependency on coal imports. The initiative to reskill 50 million people in the Twelfth Plan period, including 9 million in 2013-14, is a positive step — not only enhancing employment prospects but also aiding productivity levels, which in turn could act as a catalyst for export competitiveness.

The common man benefits from the incentive provided for ownership of the first home in the form of tax deduction on interest payment towards mortgage. A tax credit of 2000 rupees for persons with income up to 500,000 rupees puts more money in the hands of many taxpayers. Widening the scope of tax-free infrastructure bonds, inflation-indexed bonds and National Security Certificates are some of the proposed financial saving instruments for channelizing household savings. Setting up a PSU women’s bank to cater to gender-sensitive financial needs is also a positive step.

Overall, the budget seems to be pragmatic and balanced. It also seems to be non-controversial and will thus ensure smooth passage in both houses of parliament. The finance minister has definitely interlaced it with his words of wisdom (WOW). The budget does have the wow factor but it remains to be seen if this is only the wisdom of words and whether the government will put it into action. The next 12 months would reveal the truth.

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