Budget 2013: Political strategy, not economic blueprint

March 6, 2013

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

With the dust settling after Budget 2013, the picture is getting a bit clearer. Opinions on the budget have ranged from praise to outright criticism. The true position lies somewhere in between — depending on one’s political inclination, views on the finance minister and one’s financial interests.

Most agree there is considerable misalignment between diagnosis and prescriptions in the budget. The three biggest problems identified by P. Chidambaram are:
– rising fiscal deficit that needs to be controlled
– high current account deficit and
– declining economic growth rate.

But the solutions proposed in the budget seem to address only the fiscal deficit problem and that too temporarily. While the finance minister has done well to stay within the limit of 5.3 percent, the improbable arithmetic of the budget for FY14 suggests that the fiscal deficit target of 4.8 percent of GDP seems to be a strategy for buying time and a leap of hope.

The economy has to grow about 6.5 percent in FY14 to generate the necessary tax revenues and also have a large enough denominator. This appears to be too optimistic. Too many hurdles remain — economic slowdown may not have bottomed out, little improvement in the investment sentiment, and a weak global economy.

Instead of substantially addressing the high current account deficit or spurring growth, the budget merely pronounced several new or expanded schemes of social spending in line with the UPA government’s political agenda. The budget could be described as a motley collection of small thrusts.

Given that government spending in India is about 15 percent of aggregate demand, some say that the budget cannot really do much to stimulate exports or revive investment. Possibly, Chidambaram has missed an opportunity here. The budget is potentially an instrument that has a huge magnifier effect in two ways:
– it can incentivise or discourage private spending in select sectors
– it can be used to change sentiment

Arguably, sentiment can be changed more quickly than getting investment on the ground, as investment decisions have their own gestation periods and pre-requisite conditions. The India growth story has been hit by policy confusion on many counts, a hostile tax regime, huge delays on clearances and approvals, and a deficit of infrastructure and skill gaps. Any spurt in investments will take 12-18 months to show — even the new 15 percent investment allowance incentive will take time.

The government could have experimented and taken some bold decisions:
– raise import duty on gold for a year to discourage speculative purchases
– short-term boost to exports with a one-year tax break (partially or wholly)
– design voluntary compliance scheme for unpaid service tax in a friendlier manner
– given the current favourable position of global debt markets, the government could have gone for a sovereign bond issue to reduce reliance on fickle-minded FIIs to fund the current account deficit
– raise the exemption limit under Section 80C to induce more savings
– change unfriendly tax administration and environment into one easier to deal with

The lack of big budget measures leads to the conclusion that the government possibly did just enough to stave off a ratings downgrade, and will later consider measures outside the budget on political considerations.

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