New Delhi: At first glance, Budget 2013 seems workmanlike, an array of seemingly interconnected incremental initiatives lacking an overarching vision.
A closer look, and a minor exercise in connecting the dots, however, does present a surprising big picture—a budget for the ballot that, almost counter-intuitively, does not overload an already burdened exchequer, nor put off investors who are typically allergic to populist measures.
Indeed, finance minister P. Chidambaram seems to have worked with a simple maxim in mind: if you can’t do good, then, at the least, do no harm (marketmen surprised by the return of uncertainty surrounding investments routed through Mauritius may disagree, but we will deal with that in a bit).
Instead of the customary flourishes India and the world has come to expect of Chidambaram and which would have instantly drawn attention, critical or otherwise, Budget 2013 makes several incremental policy adjustments. That makes it difficult to appreciate, but also equally difficult to criticize.
In the run-up to the budget, it was clear that Chidambaram would have to address two issues, and that it would take all his considerable skill to do so. One, he had to deal with the macroeconomic threats: on the external sector due to a sharp slippage in the country’s trade account and a possible downgrade by international rating agencies; and on the domestic side by a sharp deceleration in growth to a decade’s low even as inflation threatened to return to double digits. On Thursday, the challenges posed by the domestic side of the equation were once again highlighted when the government released GDP (gross domestic product) data for the quarter ended 31 December—a growth of 4.5%.
Two, the finance minister had to create political opportunity for the Congress party that had been at the receiving end of a flurry of allegations of corruption in high office and mismanagement of the economy even as it had to face up to a resurgent Bharatiya Janata Party under the prospective leadership of Gujarat chief minister Narendra Modi.
By adhering to the fiscal targets—he actually improved upon it in 2012-13 by pegging the fiscal deficit or gross borrowings at 5.2% of GDP as opposed to the target of 5.3%—and committing to a deficit of 4.8% in 2013-14, he has heeded to the warning issued by international rating agencies. On Thursday evening, Standard and Poor’s kept India’s rating unchanged and said the budget was along expected lines in terms of its focus on curbing the fiscal deficit in the medium term.
The Reserve Bank of India should be pleased with his effort too, that is if it buys the finance minister’s fiscal arithmetic. It may even be forced to oblige with another rate cut.
To be sure, the arithmetic underlying the budget is dodgy irrespective of how passionately the minister defends them. Simply put, the math will likely not hold up because its underlying assumptions are shaky, but also because the exchequer is stretched and will be unable to deal with any of the macroeconomic shocks that may emerge if the monsoon proves elusive, a fresh global meltdown occurs, or if there is another oil shock.
And, to be sure, the do-no-harm mantra is at odds with measures that make it more expensive for multinational companies to withdraw their profits (although this may be an indirect signal to them to reinvest in India); together with errors of omission regarding clarifications on the rules for tax avoidance sent the stock markets into a tizzy.
Still, the math, and the intent behind it, is impressive.
Equally impressive is the political salience of the budget. Chidambaram passed over on the chance to spend his way to the next general election in this budget, like he did in 2009 with the Rs.60,000-70,000 crore farm loan waiver. Yet, he managed to appeal to the Congress party’s traditional constituencies—poor, minorities, scheduled castes and scheduled tribes—by leaving spending on them untouched, and also appealed to the party’s emerging constituencies such as young people and women.
Meanwhile, he stayed true to the message of inclusiveness that his party president, Sonia Gandhi, has made her own since 2004, by specifically singling out the super rich and subjecting them to fresh taxes.
Interestingly, Chidambaram seems to have tried to shift the onus of spending outside the budget—to entrepreneurs and a new breed of consumers who are just beginning to consume. At one level, he has done this by signalling that the cash transfer scheme will be expanded. The Congress has already adopted this scheme as its own and will look to harvest the goodwill it will generate (once it gets beyond operational issues).
At another, the finance minister has focused part of his giveaways on small and medium enterprises—a big employer always short of formal credit lines. He has also incentivized funding of new businesses by bringing incubators attached to colleges under the scope of the proposed rules that require companies to park 2% of their net profits for corporate social responsibility.
Chidambaram has also ensured there is some more cash in the hands of those at the entry level of the workforce by giving them some income-tax relief; more importantly, he has bought affordable housing, especially in tier-II towns, within their grasp by making loans of Rs.25 lakh effectively interest free for the first year. In India, a home remains the ultimate aspiration and the Congress will obviously hope it can reap the rewards of helping people realize their dream. An increased demand for housing will provide a fillip to the labour- and capital-intensive construction business.
If there was a harsh message in the budget, it was reserved for the so-called super rich. Not only did the finance minister levy a surcharge on those earning more than Rs.1 crore, he also made luxury consumer goods such as SUVs, yachts and cigars costlier. The wealthy are likely to brush off the burden, but it is the political mileage that will accrue to the Congress party that is far more significant, especially in its core constituency, the aam aadmi, or the common man.
This conclusion is reinforced by the fact that Chidambaram chose to skip the opportunity to raise the peak excise tariff rates to 14%, which would have brought it in line with the goods and services tax structure that is being proposed; the obvious reason being that in an election year, the surest way to put off voters is to stoke another round of inflation through indirect tax levies, which, by their very nature, hurt the poor the most.
In conclusion, by calibrating spending, Chidambaram has protected his own books. At the same time, by targeting new political constituencies, he has served up a distraction that will help him gloss over the fact that the government has done little to walk the talk on several of its promises, such as the one on health. The underlying arithmetic suggests that Chidambaram is either underestimating the subsidy payout or that he will, later in the year, effect another round of increase in the prices of diesel and petrol—since the inflationary potential of this is staggered (unlike last year when then finance minister Pranab Mukherjee went in for a savage increase in indirect tax levies), it is unlikely to cause any immediate political damage.
Chidambaram’s eighth effort as a finance minister brings together several little initiatives. Such efforts often don’t work out, but he has managed to avoid this by cleverly weaving a plausible ideology around the budget. It is now for the Congress party to make the best use of it at the hustings.
Chidambaram has, after all, presented it with a budget it can go to the polls with.