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Bold exercise with populism

Elections not being far away, Finance Minister P Chidambaram designed his fiscal exercise for 2013-2014 in a way that should appeal to people in general – by ensuring stability of the tax regime, with little change in rates and tariffs, and yet providing for a large step-up in spending on social development programmes, especially benefitting economically backward sections as well as women.

Chidambaram, in presenting the last full-year budget of the United Progressive Alliance (UPA) government, has adhered to the road-map on fiscal consolidation he had given himself and has lowered fiscal deficit to 5.2 per cent of GDP in the current year while setting the target of reduction at 4.8 per cent of GDP for the new fiscal year.

But he has hugely raised total expenditure by Rs 234.472 crores in the new fiscal year, with the space created, he claimed, by the price corrections (oil products), policy initiatives and reviews of expenditure undertaken during the year since he took over the finance ministry in August last.

The Plan expenditure is estimated at Rs 5,55,322 crore or 33 per cent of total expenditure. Defence expenditure is set at Rs 2.03 lakh crore and the finance minister assured the House that there would be no resource constraint for national security. The only change that the finance minister has made in the direct tax structure is to levy a 10 per cent surcharge on persons with taxable incomes above Rs 1 crore, and the number of assessees in this category is Rs 42,800. This will apply to individuals, HUFs, firms and entities with similar tax status. For domestic companies whose taxable income exceeds Rs 10 crore per year, the surcharge would rise from five to ten per cent, and in the case of foreign companies paying higher rate of corporate tax, the surcharge would increase from two to five per cent.

Chidambaram has extended some relief to tax-payers in the slab Rs 2 lakh to Rs 5 lakh by way of tax credit of Rs 2,000 to offset the inflationary impact. However, the finance minister has estimated an additional revenue of Rs 18,000 crores through the budget – Rs 13,300 crore from direct tax changes, mainly the surcharge for the rich, and Rs 4,700 crores from minor changes in indirect tax, mostly custom. He has left the basic rates untouched, customs at 10 per cent and excise and service tax at 12 per cent each.

Apparently, Chidambaram, in consultation with the prime minister, must have concluded that politically this is no time for any big bang and wiser to take a safer course while still grappling with a constrained economy and large macro-imbalances. But he expressed confidence that India would get out of the trough and resume the march towards higher growth. He himself does not expect any early return to eight per cent growth.

The harsh options inevitable for India at this stage of slowdown brought out in the Economic Survey stand deferred for the present.

Meanwhile, Chidambaram says he would set up a Tax Administration Reforms Commission to review the application of tax policies and tax laws and submit periodic reports that can be implemented to strengthen the capacity of our tax system.

To boost investment, Chidambaram announced a slew of measures including an investment allowance of 15 per cent for a company investing 100 crore or more in plant and machinery during the period 1 April 2013 to 31 March 2015. This allowance would be in addition to the current rates of depreciation.  There will be enormous spill-over benefits to small and medium enterprises, he said. The finance minister also announced proposals to increase resource availability for infrastructure with tax-free bonds etc. To encourage domestic savings, which had fallen sharply over the last two years, an inflation-indexed bond or national securities would be introduced shortly. In the Budget allocations, significant increases have been provided for rural development (46 per cent), education, health, science and technology, skills training and other sectors. Provisions have been made by the finance minister for the needs of some institutions of national importance. Agriculture and rural credit has been given a focus in the Budget and a provision of Rs 10,000 crore has been made for food security under the bill to be introduced in Parliament in the current session. Chidambaram hoped Parliament would pass it as early as possible.

The budget estimates are based on a growth of 17 per cent at current prices. India’s tax-GDP ratio of recent years was one of the lowest for any large developing country and would not garner adequate resources for inclusive and sustainable development, Chidambaram noted, while hoping to reclaim the peak of 11.5 per cent by 2015-2016. The strategy adopted for revival of the economy in the coming year, according to the official fiscal policy statement has the twin objectives of containing government spending to achieve the projected fiscal deficit targets and to carry forward the reforms process to kick start a fresh investment cycle and revive the growth process.

Proactive policy decisions, contained government spending to provide space for private investment, along with reforms to attract capital inflows are expected to be key drivers of growth revival. Accordingly, having made the base corrections on expenditure front, fiscal policy of the government in 2013 is aimed at continuing with the policy thrusts made so far. (IPA)
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