Budget walks the middle path

The Union Budget for 2013-14 presented by Finance Minister P. Chidambaram correctly diagnosed the malady but are the remedial measures adequate? The Budget, rather like the curate’s egg, is good in parts.

Macroeconomic Analysis

As against a growth rate of 5 per cent in 2012-13 (CSO Estimate), underlying the Budget is a growth rate of 6.0-6.5 per cent in 2013-14.The ratio of Gross Fiscal Deficit (GFD) to Total Expenditure in 2013-14 is estimated at 32.6 per cent, which leaves the economy vulnerable. Bringing down the Consumer Price Index (CPI) from 10.8 per cent to 5 per cent will require stronger measures. The balance of payments current account deficit (CAD), in 2012-13 of 5 per cent of GDP needs to be brought down to 3 per cent, which requires hard measures. Gross savings have fallen from 36.8 per cent in 2007-08 to 30.8 per cent in 2011-12, which is a result of the government’s policy of reducing incentives for savings.

There has to be a fine balance between the ‘austerity’ needed and the social upheaval it could create. To the credit of the Finance Minister, he has pulled off a Budget which would get broad acceptance.

Viability of Key Budget Estimates

The total expenditure in 2012-13 increased by 9.7 per cent while the projected figure for 2013-14 is 16.4 per cent. The compression of expenditure in 2012-13 would result in a large throw-forward into 2013-14. Again, total revenue increase is projected at 21.6 per cent in 2013-14 as against 16.0 per cent in the previous year. In the upshot, the GFD in 2013-14 could turn out larger than budgeted.

Subsidies are projected to decrease by 10.3 per cent in 2013-14 to Rs 2,31,084 crore. While food subsidies are planned to be increased, the reduction in overall subsidies would be attributed to the reduction of the petroleum subsidy from Rs 96,880 crore in 2012-13 to Rs 65,000 crore in 2013-14.The diesel and kerosene subsidies are well calibrated with a gradual reduction in the subsidy.

In contrast, the LPG subsidy arrangements have been botched. The principle of a uniform non-subsidised price and a Direct Benefit Transfer is commendable.

With nine cylinders at subsidised prices, this involves large payments by consumers for LPG in a year of Rs 1,15,983 crore and payments of subsidies to consumers of Rs 60,732 crore; this can dent the Budget. If, under a modified scheme, there are a series of increases in the uniform price by, say, Rs 50 per cylinder, the cash inflows and outflows would be minimised and the subsidy given only to the target group.

Select Measures

Income Tax : The proposal to provide a Rs 2,000 income tax rebate to incomes in the Rs 2-5 lakh range is sub-optimal. A flat increase in the basic exemption limit by Rs 20,000 would have taken a very large number of tax payers out of the income tax range which would have been a distinct advantage from a tax administration viewpoint.

The surcharge of 10 per cent on incomes of over Rs 1 crore would amount to a 3 per cent increase in taxes for 42,000 tax payers. The reasons why only 42,000 tax payers fall in this range: (i) agricultural incomes are free from income tax (ii) dividends are exempt from income tax and (iii) large undeclared incomes.

Investment Allowance : Investments by manufacturing companies of more than Rs 100 crore in the two years ending March 2015 would be provided a 15 per cent investment allowance, which should be a strong incentive to the corporate sector to step up investments.

Inflation Indexed Bonds : The introduction of such bonds is long overdue and if properly structured would wean savings away from physical assets. It is hoped that such bonds would be introduced early in 2013-14. The government should not be curmudgeonly in providing full inflation indexation of both capital and interest.

If such bonds are issued, it would be reflective of government’s serious intent to curb inflation.

National Bank for Women : It is intended to set up a public sector bank dedicated to women with a capital of Rs 1,000 crore; this would be counter-productive. The new Bank should be a Refinancing agency which would foster credit to women by all public private sector and foreign banks.

The new Bank can also provide assistance to Self-Help Groups by Women as also women co-operative banks.

Gold : If the objective is to reduce gold imports, the government, while replying to the Budget discussions, should declare the intention to set up a Gold Bank and the issue of gold-linked financial instruments to activate domestic idle hoards of gold.

Overall, while the Budget cannot cover all wings of policy, the Finance Minister should unequivocally support the Exim policy to undertake a correction of the CAD and the RBI’s monetary policy to control inflation. There is a need to depreciate the rupee to correct the CAD and tighten monetary policy to fight inflation A strong rupee and a low interest rate regime — cherished objectives of government — would not lead us to Paradise.

Unfortunately, the path to Paradise is through Hell.

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