BackA Budget of short term measures, no grand design
The budget is at best, a sincere bid to stave off threats of a possible downgrade by rating agencies and, at worst, an exercise of ad hocism
Premium(Chidambaram started his budget speech with the right note—flagging the government’s concerns over the high fiscal deficit and the even higher current account deficit—but the budget has not done anything concrete to address these concerns. )
Gushing over finance minister P. Chidambaram’s budget, K.V. Kamath, non-executive chairman of ICICI Bank Ltd and Infosys Ltd, told a TV station on Thursday immediately after Chidambaram finished reading his speech that the fact that nobody made any noise during the budget presentation is a proof of its quality. Former finance minister Yashwant Sinha, on another TV channel, had a different explanation for the absence of noise. “There was no uproar in Parliament because the budget is insipid," he said. These are two extreme reactions and, perhaps, the truth lies in between them.
This is not a budget of grand vision and imagination. At best, it is a sincere attempt to stave off the threats of a possible downgrade by global rating agencies ahead of the next general election and, at worst, an exercise of ad hocism. The Sensex, BSE’s benchmark equity index, lost 460 points from the day’s high and the prices of 10-year government bonds dropped and yields rose.
To Chidambaram’s credit, the fiscal deficit for 2012-13 is being kept at 5.2% of gross domestic product (GDP) and that of fiscal 2014 at 4.8% of GDP, in accordance with his commitments made to foreign investors during his road shows ahead of the budget. Is it a credible target? It could be, as even if he falls short of revenue collection, he will be able to contain fiscal deficit at this level, with a cushion being kept in the form of a close to 30% growth in Plan expenditure. Common sense says in the backdrop of an around 13.5% nominal GDP growth, a budget that aims at fiscal consolidation doesn’t need to aspire for such a high growth in Plan expenditure, but it is being done to create a space for achieving the fiscal deficit target. As a last resort, the government can always curb Plan expenditure—something which it has done this year—to meet the target.
Chidambaram started his budget speech with the right note—flagging the government’s concerns over the high fiscal deficit and the even higher current account deficit—but the budget has not done anything concrete to address these concerns. It also doesn’t offer much to lift the sagging economy. In fact, there are only a couple of growth drivers in the budget, and both of a modest scale. One, higher tax benefit for first-time home buyers and, two, investment allowance for companies investing ₹ 100 crore or more. While the first-time home buyers, for loans up to ₹ 25 lakh, will enjoy an additional ₹ 1 lakh tax benefit (in addition to ₹ 1.5 lakh) on interest payment, companies investing ₹ 100 crore or more in plant and machinery between fiscals 2014 and 2015 will get 15% investment allowance in addition to the current rates of depreciation.
Barring these two, most other budget proposals have addressed the issues of women, youth, tribals, minority communities, farmers and spending on health, education, and other welfare schemes—politically sensitive and in sync with a typical election year budget, even though there is no high-impact poll promise like the farm loan waiver of 2008.
Chidambaram has done a lot of tinkering with direct and indirect taxes, ranging from a one-year surcharge on the super rich to paring securities transaction tax on equities and introducing commodities transaction tax to higher tax on royalty payment and higher excise duty on cigarettes and luxury cars and yachts; but the revenue generation from all these will be less than the expected rise in its dividend income from the Reserve Bank of India next year. It expects to earn ₹ 44,000 crore by divesting the government’s stakes in state-run companies and ₹ 40,000 crore from the sale of radio spectrum in 2014. Of the two, divestment targets seem to be more achievable at this point.
The bulk of the fiscal deficit will be bridged through market borrowing. Even though the net market borrowing next year is pegged at ₹ 4.84 trillion, the gross borrowing at ₹ 6.29 trillion is much higher than current fiscal’s ₹ 5.57 trillion and the market’s expectation. This includes redemption of bonds worth ₹ 95,000 in 2014 and buy-back of ₹ 50,000 crore worth of bonds that will be ready for redemption in 2015. In fact, ₹ 1.7 trillion worth of government bonds will be ready for redemption in 2015 and the plan is to buy back part of it to ease the pressure next year. This means, the government will continue to remain the biggest borrower, pushing out the private sector from the banking system. This is not good news for the Reserve Bank of India in managing its monetary policy.
Indeed, the budget has estimated less subsidy for oil as subsidized cooking gas supply has been capped and diesel price is being revised periodically but, overall, the budget has attempted to cobble up a string of short-term measures with an overarching theme of containing the fiscal deficit. It could have been done differently by pushing for reforms. But that could have been too much to expect from a budget presented a year ahead of polls. It’s par for the course and, yet, disappointing because Chidambaram has authored it. His track record as finance minister since he took over the assignment in August last year had raised expectations.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
