Budget 2013: A rather ambitious budget

March 5, 2013

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

Rating agencies have left India’s sovereign rating unchanged after the 2013 Budget. A rating downgrade would mean India getting junk status which is certainly not something one would want when the current account deficit is widening.

Of course, despite our proud finance minister not admitting to letting rating agencies dictate his budget, I am relieved that the nearest and sweetest low-hanging fruit fell into his lap.

In the post-liberalisation years, I have often wondered about the diminishing relevance of the budget. India’s macro-economic challenges stem almost entirely from structural imbalances and none of these can be addressed in the budget, which is at best a summary of the fiscal impact of initiatives driven by numerous ministries. The poor finance minister bears the brunt of the limelight.

The budget has remained subtly faithful to the Congress-led government’s electoral plank of welfare-based spending and also adopting an aggressive growth posture. The markets suffered from their habitual over-expectation and corrected.

However, the embarrassment of having to rush a clarification on the Mauritius tax treaty could have been avoided knowing well its sensitivity in the current account deficit context; especially when about 40 percent of our foreign portfolios come through this route.

One cannot deny that welfare schemes are necessary because it would be disastrous to let extreme hunger and poverty to exist while another part of our country is conspicuously prosperous.

In hindsight, we seem to have squandered the fiscal windfall resulting from the 2004-08 global liquidity boom. The government could have calibrated its welfare spending across its term and even pushed its luck with the Mauritian treaty to plug the gaps which are allowing our current account deficit weakness to be so blatantly exploited. This way, they could have served both electoral interests and good economics.

Coming back to Budget 2013, it has provided for bigger allocation to rural consumption oriented expenditure. It has also promoted new investment through a 15 percent allowance. The additional tax break for first home owners is a positive. The allocation of 90 billion rupees for states indicates Chidambaram’s commitment to implementing the Goods and Services Tax.

Overall, the finance minister deserves to be commended on his ability to have communicated stability for FIIs both in terms of transaction norms and tax rates.

Expectedly, urban voters have been left to struggle with inflation and negative real return on investments and income. Of course, all the right noises have been made on children, women, job creation and the need to expedite projects.

The ‘tax on the rich’, while helping promote the government’s pro-poor image, merely serves to highlight the inability to do anything substantial and genuinely expand the tax net, combined with our helplessness in having to penalise only those who cannot hide their income. Chidambaram’s statement that only 42,800 individuals in the country declare an income of 10 million rupees and above cries out for attention.

One cannot help wondering who has been buying all that expensive real estate, automobiles and services. No purpose will be served by taxing yachts, cigars and mobiles unless the Direct Taxes Code is expected to deliver this change.

Chidambaram deserves credit for meeting the 5.2 percent 2012/13 fiscal deficit, albeit in an unplanned manner. Whatever else it proves, it surely indicates his resolve to address this challenge. He may well be correct on the ambitious 4.8 percent target he has accepted for 2003/14; even though by his own admission he may not have revealed his plans.

Budget expenditure has substantially increased, subsidies have not come down and development allocations are also up. This is being largely financed through higher taxes, non-tax revenue and disinvestment.

However, as in every budget, expenditure is almost a certainty while income rises are hope and optimism. It is not usually prudent to spend in anticipation. Therefore, this budget will only be as good as its assumptions and only time will tell us how good they are. It concerns me when I see that nominal GDP growth for 2013/14 has been assumed at 13.4 percent against an estimated 11.7 percent in 2012/13. At assumed inflation of 7 percent, real GDP growth should be 6.4 percent.

Higher government borrowing may limit the RBI’s policy space and crowd private borrowers out. Of course, there will be the usual challenges to inflation forecasts: oil prices, monsoons and exchange impact of current account deficit weakness especially with the euro zone acting up once again.

Moreover, with Q3 2012/13 at about 4.5 percent this seems rather ambitious. This also leads us to question the assumed 19 percent rise in gross tax collections. Hopefully, it will not mean more demands and refunds being held back. I say this because there seems to be nothing in the budget which is as drastic.

Chidambaram deserves praise for balancing the accounts and presenting the proposals in a practical manner. One hopes that the principle of conservatism established in accounting was better adhered to.

The finance minister has admitted that the real action has to be outside the budget. Therefore, I would rather treat it as a document of noble intentions based on the assumption that the government will follow through with actions to tackle structural imbalances. Hopefully, we will see a shift from consumption to investment.

Finally, a word of sympathy for the mutual industry which was royally ignored when the insurance industry was permitted to accept the know-your-customer conducted by banks, which may well be a precursor to being permitted to broker insurance policies.

Investors in debt funds also lost the 12.5 percent DDT benefit making short-term bank deposits look that much better. However, debt fund investments beyond one year will continue to remain vastly more attractive when they earn long-term capital gains.

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