Millennium Post

What will Budget 2013-14 hold for India

In a ‘business as usual’ fashion, the UPA government’s pre-budget discussions, that are now on, are mainly designed to keep up pretentions that this time-honoured consultative process would have great relevance for the budget strategy in 2013-14. Faithfully, agriculturists are called first for the Finance Minister to have the benefit of their wisdom, followed by labour leaders and next, as a concession lately, to the social sector activists. Follow economists, proposing a wide range of policy changes, tax and non-tax, and then the bankers with some sensible suggestions on savings. Now the plate is bulging with ideas for Finance Minister P Chidambaram to pick and choose from. But he has his own sense of direction and a road map for fiscal consolidation, the highest priority being to establish credibility, confounding the sceptics on his holding down deficit to 5.3 per cent of GDP.

Perhaps, a group of consumers may also be called in, as an even-handed gesture, though it would be a treacherous ground with the total unconcern for high inflation for years which has played havoc with the livelihood of millions of poor and low- income sections outside the public sector. And last but not the least, the pride of place in this hardy annual goes to business and industry. For, business confidence and investor sentiment is fundamental to growth, more so for the neo-liberal UPA’s growth trajectory.

But in the four months since the government declared the end of its policy paralysis with a slew of reforms and claims to have changed business sentiment - the worst is over’ - corporates are still to be won over to revive domestic investment. Sitting on cash hoards, some still look for opportunities abroad and meanwhile, await for the government to get  into action mode to overcome the inordinate delays in project clearances and reducing supply side constraints. Here, the Finance Minister, with all solicitude to investors, agrees a number of hurdles to investment are still to be removed and are being attended to.

The Finance Minister, like the Prime Minister, has all along held that the growth slowdown is ‘mainly due to external factors’, which is now being overcome by the government’s bold moves thus far, which have turned the market sentiment positive. He sees ‘mixed signals’ on the economic front, satisfactory direct tax collections though indirect tax revenue has fallen short of expectations.

2012 has ended on a gloomy note with a widening of the current account deficit to 4.6 per cent in the first half (as high as 5.4 per cent in July-September quarter over the 4.2 per cent in previous quarter), attributable to rise in gold imports, decline in domestic savings and continuing growth slowdown coupled with high inflation. Data point to fall in investment demand and moderation in consumption which, according to RBI, have increased the risks to macroeconomic stability.

In this situation, what kind of budget for 2013-14 will Chidambaram present to the Parliament at the end of February? There is neither room for blatant populism, of the type he resorted to in 2008, when fiscal conditions were favourable, nor for any radical shifts in taxation and other structural policies at a time of political uncertainties ahead of 2014 elections.

Chidambaram may assume a modest 6 to 6.5 per cent GDP growth in real terms in fiscal 2014 but even growth of this order, against the depressing background, would be a tough task and would need above all political will and policy-makers getting their act together.

His two objectives would be firstly, to carry forward fiscal consolidation in terms of the road map he had chalked out, under which fiscal deficit has to be pegged at 4.8 per cent of GDP in 2013-14 - a strong correction from 5.3 per cent, if fulfilled in the current financial year. Secondly, the fiscal measures he would unfold would reflect a guarded approach on both taxing and spending policies.

Measures to curb the growing demand for gold, with its implications for external account, would have a central place in the forthcoming budget, if not acted upon earlier. Efforts are likely to be focused on raising larger tax revenue with some changes in the present tax structure, as both the Direct Tax Code and the countrywide Goods and Services Tax (GST) may stand deferred until completion of the processes of finalisation, the latter involving the states, and issues of compensation are settled. This matter has also been included in the terms of reference of the 14th Finance Commission headed by Dr Y Venugopala Reddy, former Governor of RBI.

But in the forthcoming budget, the expectations are for a marginal rise in personal tax exemption limit and some readjustment of slabs for higher income groups to raise additional revenue, a possible introduction of an inheritance tax and reversion to taxing dividends in the hands of investors.

To promote savings and by way of balancing the burden from some inevitable new indirect levies on the consumer, the Finance Minister may accept some of the suggestions of bankers such as raising the limit of TDS on bank deposits.

The major thrust of the budget would be to move further toward generating greater confidence for investors by laying out the steps, some already under way, in several directions, and also providing a set of business incentives to hasten investment revival. (IPA)
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