Two factors have combined to make P. Chidambaram’s eighth Union Budget bereft of surprises and shocks. The general elections being just a little over a year away, making radical proposals politically unviable, is the first, while a difficult fiscal situation is the other. With the Economic Survey also setting the growth expectations for 2013-143 at 6 per cent or thereabouts – by no means a dismal rate given the global scenario – the Finance Minister may have had an added reason to not tinker with things too much. There is nothing much in the latest Budget that may contribute to an investment revival, key to restoring growth to the 8 per cent levels of the last decade. One positive proposal, no doubt, is allowing firms to claim a 15 per cent deduction on investments of Rs 100 crore or more in plant and machinery before March 31, 2015, which they can set off against their profits for computing tax. This is aimed at kick-starting investments by incentivising corporates to set up new units or expand capacities within the next two years. But whether they will take the bait is another thing. Tax incentives can work, at best, at the margin in unleashing the ‘animal spirits’ of entrepreneurs. There is a bigger ecosystem that needs to be in place, which is lacking in the current policy environment.
The Budget has, moreover, doubled the surcharge on taxes that companies will pay both on earnings as well as the dividends they distribute. That certainly is a dampener for sentiment and may not serve the cause of investment, which, by Chidambaram’s own admission, is ultimately “an act of faith”. Viewed from that perspective, the higher surcharge has possibly offset many of the other market-friendly proposals: These include the cut in securities transaction tax rates, streamlining of registration procedures for foreign institutional investors, permitting insurance companies and pension/provident funds to buy and sell debt instruments traded on stock exchanges (which will impart more liquidity to the country’s under-developed debt market), widening the scope of the Rajiv Gandhi Equity Savings Scheme, and giving an additional Rs 1 lakh interest deduction to first-time home loan takers.
So is there something one can really commend the Budget for? Well, it should be appreciated for not being populist, which most last full-fledged Budgets before elections tend to be. Although some of the revenue projections are ambitious (a 16.9 per cent growth in corporate tax collections, Rs 55,814 crore receipts from disinvestment and Rs 40,847 crore from spectrum), just as the subsidies on food and fertiliser seem underprovided (relative to the requirements of the proposed Food Security legislation and no urea price hike being announced), Chidambaram’s overall fiscal targets for 2013-14 seem credible. The fact that fiscal consolidation is back on track and the Government has managed to put a leash on its expenditures is something the global rating agencies may well factor in. While there are many things that the Budget could have done to promote investments or reduce the tax burden of the ‘aam aadmi’– a relief of Rs 2,000 for only those with annual incomes below Rs 5 lakh is hardly compensation for accumulated inflation – one would still give it some points for focusing on macroeconomic stability, which is a prerequisite for long-term growth.