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Chidambaram signals another dream budget in February

FinMin signals to investors in Hong Kong that govt won’t raise taxes, will protect social sector commitments
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First Published: Tue, Jan 22 2013. 02 28 PM IST
Finance minister P. Chidambaram is due to meet with investors in Singapore on Wednesday, and visit Frankfurt and London by the month-end. Photo: AFP
Finance minister P. Chidambaram is due to meet with investors in Singapore on Wednesday, and visit Frankfurt and London by the month-end. Photo: AFP
Updated: Wed, Jan 23 2013. 12 57 AM IST
New Delhi: Finance minister P. Chidambaram has signalled to foreign investors that he’s proposing a please-all budget that won’t raise taxes, regain fiscal balance, and at the same time protect the government’s existing commitments to social sector spending—a critical electoral promise of the Congress.
The minister’s promise of good economics combined with good politics was conveyed to foreign investors in Hong Kong, on the first leg of a series of roadshows to drum up foreign investor sentiment in the Indian economy. He is due to meet with investors in Singapore on Wednesday, and visit Frankfurt and London by the month-end in the final leg of the tour.
“The FM was decidedly more positive. He suggests the fiscal deficit target will be met, taxes will not be raised—the tax regime will be stable, and while policy will and should be biased towards the poor, the budget will offer a lot,” Citigroup, which hosted Chidambaram in Hong Kong in a closed-door meeting with more than 200 investors, said in a research note released on Tuesday.
The note further said that Chidambaram was “very confident” that a downgrade of the country’s sovereign rating will not happen. Both Standard and Poor’s and Fitch Ratings have warned of a rating downgrade if India’s fiscal and economic health do not improve, while Moody’s has recently retained a stable outlook on India’s sovereign rating, reaffirming the lowest investment rating for the country.
Significantly, the government has, ahead of the finance minister’s visit, rolled out a series of policy initiatives that sought to restore confidence in the government’s ability to rein in the fiscal slippage. The measures included an increase in rail fares after a gap of 10 years and the decontrol of diesel prices.
The finance minister expressed hope that the economy will grow at 6.5-7% in the next fiscal year, while it will bounce back to around 8% growth in 2014-15. India’s gross domestic product (GDP) is expected to grow by around 5.5% in the current fiscal. The government has projected the fiscal deficit at 5.3% of GDP in the current fiscal ending 31 March and 4.8% in the next fiscal.
Pronab Sen
, country head, International Growth Centre, and a former principal adviser in the Planning Commission, said a pro-poor budget may mean a change in the pattern of expenditure favouring more spending on social security schemes such as the rural employment guarantee scheme.
“It will put pressure on the fiscal deficit and the government may have to balance it with subsidy cuts, which may again affect the poor,” he added. However, Sen said that in the end, it will be important to see how the whole thing is packaged as pro-poor.
While Sen ruled out any increase in direct taxes, especially corporate tax, he said there was a chance of the finance minister restoring indirect tax rates to pre-crisis levels.
The note by Citigroup added that at the meeting, Chidambaram reflected both clarity and confidence, and set out timelines on a range of policy initiatives, including investments and taxation, and regulations governing foreign institutional investors.
According to the finance minister, the government wants to table the Constitution Amendment Bill for the roll-out of the goods and services tax (GST) in the August session of Parliament and ensure its passage by the winter session in December, reviving hopes of a roll-out in 2014. Chidambaram said a report on the design of GST is expected to be launched on 25 January.
The implementation of GST, a singular tax reform that will economically unify the country, has been delayed due to differences between the Centre and the states over its final design. A crucial meeting of state finance ministers is scheduled on 28-29 January to discuss these issues. A positive outcome could see the finance minister announcing the progress in the budget.
In a bid to boost domestic debt markets, the finance minister said the ceiling for government bond holdings would be raised from $10 billion to $15 billion, with no residual maturity constraint. Similarly, the limit for corporate bonds holdings would be increased from $20 billion to $25 billion. Additionally, the lock-in period for infrastructure bonds would be scrapped by next year.
Chidambaram also hinted at the finance ministry’s inclination towards the sale of select stocks in the Specified Undertaking of the Unit Trust of India to generate fresh non-tax revenues.
Some political parties took strong exception to the finance minister’s reported disclosures to foreign investors.
Gurudas Dasgupta, a Communist Party of India leader and Lok Sabha member, said the announcements by the finance minister in Hong Kong prior to the budget were against parliamentary norms. “This government has put the country on sale to gain the goodwill of foreign investors,” he said.
Anuja contributed to this story.
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First Published: Tue, Jan 22 2013. 02 28 PM IST