Budget steers clear of populism

The Budget 2013-14 has been described by some observers as ‘flat’ and a ‘non event’, presumably because it does not provide any tax relief to the middle class or announce any big-bang spending programme. The stock market did not cheer the Budget.

This is partly because there were no specific announcements to address macroeconomic concerns. However, one needs to take note of the fact that a number of measures had already been announced to restore confidence in the past six months. Nonetheless, a few measures were announced in the Budget which will give a boost to investment.

Promoting Investment

Notable among them is the investment allowance for new high value investments. Any company investing more than Rs 100 crore in plant and machinery during the period April 1, 2013 to March 31, 2015 will be entitled to deduct an investment allowance of 15 per cent of the investment in addition to the permissible depreciation.

In a bid to reduce to reduce our dependence on imported coal, the Finance Minister has mooted the possibility of devising PPP policy framework with Coal India Limited as one of the partners. The Budget has encouraged well-functioning units in the MSME category to graduate to the ‘large industry’ category, by extending non-tax benefits for three years after they grow out of this category. Further, in a bid to promote innovation, funds provided to technology incubators located within academic institutions will qualify as CSR expenditure.

The Budget is as much a statement of estimated sources of revenue and expenditure as it is a document outlining the policy impetus to set the macroeconomy in order. As it has been well documented in the recent commentary on Indian economy and much before the release of the Economic Survey 2012-13, fiscal consolidation, reviving the investor sentiment and jump-starting investment, augmenting financial savings, and bringing down the CAD to sustainable levels are challenges that the Budget needed to address.

Fiscal Consolidation

As far as fiscal consolidation is concerned, the FM has marginally exceeded the fiscal deficit (FD) target for 2012-13, but this was something which had already been communicated to the markets. The central government intends to spend 14.6 per cent and mobilise 9.8 per cent of GDP as revenue, leading to a deficit of 4.8 per cent for 2013-14. The 2012-13 Budget had estimated revenue and expenditure to the tune of 9.7 per cent and 14.8 per cent, leading to a deficit of 5.1 per cent, but the revised estimates (RE) for 2012-13 put these figures at 9.1 per cent and 14.3 per cent, leading to a deficit of 5.2 per cent.

The Finance Minister had committed to keep the fiscal deficit within 5.3 per cent and he has been able to do so by compressing expenditure by 0.5 per cent. However, revenues have fallen short by 0.6 per cent because of the growth slowdown. The RE reveals that Plan expenditure has fallen by 17.6 per cent and the non-Plan expenditure has been 3.3 per cent more than what was estimated in the Budget 2012-13. The increase in Plan expenditure by 29.4 per cent in the 2013-14 budget should be seen in that light.

Financial Savings

The fall in financial savings of households is attributed to the high and persistent inflation, which has rendered the returns from bank deposits very low or negative in some maturity brackets. In this context, the FM’s plan to introduce inflation-indexed NSC or a bond in consultation with RBI is a necessary intervention and should be taken up with earnest.

The Budget has provided Rs. 5,000 crore to NABARD to finance construction for warehousing with a window to panchayats to finance construction of godowns. This is a meaningful step as lack of storage facilities has aggravated the perilous price scenario for agricultural products in the recent times.

Financial Inclusion

While the focus in the past decade has been to promote financial inclusion by expanding the reach of banking, this budget has expanded the scope of financial inclusion to embrace insurance. For instance, insurance companies have been empowered to open branches in Tier-II cities and below without prior approval of IRDA based on KYC norms of banks. Further, public sector insurance companies, both in the life and general segments, have been mandated to have an office in towns having a minimum population of 10,000.

The announcement to extend the directed lending of agriculture at 7 per cent to the private sector banks augurs well from both inclusive and level playing field perspective.

Scope for Monetary Easing

The Economic Survey for 2012-13 has painted a relatively optimistic picture for 2013-14 by projecting growth in the range of 6.1-6.7 per cent. After growth tanked to 5 per cent in 2012-13, the government expects the nominal GDP to grow by 13.4 per cent. The Budget however, does not specify the composition of the nominal GDP. If we consider the real GDP growth to be in the range of what has been stated in the Economic Survey, then inflation has been projected in the range of 6.7-7.3 per cent.

With such high inflation rates, the scope for aggressive monetary easing to revive investment appears limited. The surcharge on income tax for the ‘super rich’ should be seen in the light of committed expenditures at one end and slowing growth at the other.

A rebound of exports and continuity in foreign investments inflows are needed for addressing the growing CAD. The issue of CAD, however, has been left to the foreign trade policy which will be reviewed in the next month.

Increased allocation for the different ministries and sectors of the economy provided in the Budget need not be a bad idea and can be considered as a necessity, keeping in view the larger objective of inclusive growth. Overall, the Budget has refrained from being utterly populist in a pre-election year.

(The author is Professor in Economics and Associate Dean, Xavier Institute of Management, Bhubaneswar. The views are personal.)

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