THE UNION BUDGET 2013: PRAGMATIC OR VERBOSE?

In the morning of the penultimate day of February 2013, the Union Finance Minister Mr.P.Chidambaram presented to an anxious nation and a more anxious world, arguably one of the most anticipated Budgets in recent times. The road towards this Budget was in no way a smoother one for the FM as India was facing one of her toughest times since 1990. Low growth rate (5.5%), high retail inflation (10.79%), high fiscal deficit (5.7% of GDP) and a burgeoning Current Account Deficit (5.4% of GDP) clubbed with a potential threat of a downgrade of India's investment grade sovereign rating to junk by FITCH and S&P had created one of the most difficult pre-Budget situation for any FM in recent times. The political compulsions on the other hand, calling for a populist Budget with a view of the General Elections next year had made it even tougher. It was always going to be a ‘walk on a tight rope’ for the FM as he had to drive the country and its economy slowly, smoothly and steadily out of this difficult time. It will be in this context that the Budget 2013 will go down in the history of India, as it is rightly poised at that turning point which will decide future of India in World Politics.

The Budget – in Nutshell  

The mool mantra of this Budget was “higher growth leading to inclusive and sustainable growth”. For sustainable development, it required increased in all important sectors – Infrastructure, Education, Agriculture, Health Sector and Rural Development. For inclusive growth, it was important to have added attention towards the welfare of Minorities, Women and the SC-ST.

Infrastructure

The 12^th plan has called in for an investment to the tune of $1 trillion for the development of infrastructure in India. While 47% of the investment is envisaged to be shared by Private sector, the Government needed new and innovative instruments to mobilize funds to meet the rest of the investment share. The FM resorted to Infrastructure Debt Fund (IDF) under SEBI, Tax free Bonds, Assistance of World Bank and Asian Development Bank, the Rural Infrastructure Development Fund (RIDF) under NABARD to increase investment in Infrastructure. The FM also proposed to provide Credit enhancement to Infrastructure companies that wish to access the bond market to tap long term funds, through Indian Infrastructure Finance Corporation Ltd.(IIFCL) in order to attract them to bond market. The FM also proposed in the Budget to constitute a Road Regulatory Authority to address the issues of financial stress, enhanced construction risks and contract management issues in the road construction sector. He also proposed for a Cabinet Committee on Investment to monitor investment proposals as well as projects under implementation in the Industrial sector, especially manufacturing. The Budget also provided the Ministry of Rural Development with Rs.8,000 cr. for continuing the development activities in our villages.

Education

The Budget allocated Rs.65,867 cr. for the Ministry of Human Resource and Development for the FY 2013-’14. The FM also allocated Rs.27,258 cr. for Sarv Siksha Abhiyan and Rs.3,983 cr. for the Rashtriya Madhaymik Shiksha Abhiyan. He also allocated Rs.5,284 cr. to various Ministries for providing scholarships to students belonging to SC/ST, OBC, Minorities and girl children. The Budget also provided Rs.13,215 cr. for the Mid Day Meal Scheme. The FM also designed an ambitious project to motivate our youth to voluntarily join skill development programmes. Rs.1,000 cr. was allotted to the National Skill Development Corporation to set curriculum for training youth in different skills and for providing a reward of Rs.10,000 for each candidate who successfully completes the training.

Agriculture

The Budget allocated Rs.27,049 cr. for the Ministry of Agriculture, which was an increase of 22% over the Revised Estimates in the previous year. Of this, Rs.3,415 cr. was provided for Agricultural Research. The FM increased the Agriculture Credit target for the FY 2013-’14 to Rs.7 lakh cr. as compared to the Rs.5.75 lakh cr. in the previous year. He provided Rs.1000 cr. for continuing the Green Revolution happening in the Eastern India. The Rashtriya Krishi Vikas Yojana, the National Food Security Mission and the Integrated Watershed Programme were provided Rs.9,954 cr., Rs.2,250 cr. and Rs.5.387 cr.  respectively. The FM also proposed to open an Indian Institute of Agricultural Bio-technology at Ranchi and a National Livestock Mission in FY 2013-’14.  Rs.5,000 cr. was given to NABARD to finance construction of warehouses, godowns, silos and cold storage to store agricultural produce, both in Public sector and Private sector. The FM also set aside Rs.10,000 cr for the National Food Security Bill, if passed in the Parliament.

Health

The Budget allocated Rs.37,330 cr to the Ministry of Health and Family Welfare, of which Rs.21,239 cr. was given to the National Health Mission. The FM proposed to implement a National Programme for the Health Care of Elderly in 100 selected districts of 21 States and for this Rs.150 cr. was allocated. Rs. 1,069 cr. was allocated for Ayurveda, Unani, Siddha and Homeopathy sector and Rs. 4,727 cr. was given for medical education, training and research. Rs. 1,650 cr. was allocated to start hospitals in the six AIIMS-like institutions.

Minority, SC/ST and Women Welfare

The Budget allocated Rs.41,000 cr. for the SC welfare and Rs.28,500 cr. for the tribal welfare. Rs.3,511 cr. were allocated to the Department of Minority Affairs for the welfare of minorities in India. For women, the Budget 2013 provided two landmark gifts – i) India’s first Women’s Bank in the public sector and ii) the Nirbhaya Fund. The purpose of the Women’s Bank is to lend to women and women-run businesses, to support women SHGs and NHGs, to employ more women and to address the gender related aspects of empowerment and financial inclusion. The Nirbhaya Fund is designed to provide financial assistance to Government as well as non-government organizations that work for the safety and freedom of women in public space.

Defense, Science and Technology

Considering the tensions prevailing Eastern and Western fronts, the Defense allocation was increased to Rs.2,03,672 cr. The Budget also allocated Rs.6,275 cr to the Ministry of Science and Technology, Rs.5,615 cr. to the Department of Space and Rs.5,880 cr to the Department of Atomic Energy.

Finally, the all important Revenue, Finance and Capital

There were some important announcement and landmark proposals regarding the Financial, Capital market and Revenue were there in the Budget. The highlights are given below

• Inflation Indexed bonds will be introduced to protect the savings of people from inflation
• A Standing Council of Experts in the Ministry of Finance will be constituted to analyze the international competitiveness of Indian Financial sector, to periodically examine the transaction costs of doing business in Indian market and to provide inputs to Government for necessary actions.
•  SEBI Act will be amended to strengthen the regulator
• FIIs and FDIs were clearly distinguished. The investments of an investor with a stake of 10% or less in a company will be treated as FIIs and if the stake is more than10%, it will be treated as FDI.
• Insurance companies will be allowed to open branches in Tier-II cities and below, without the prior approval of IRDA
• All towns in India with a population of 10,000 or more will have and office of LIC and an office of at least one public sector general insurance company
• The income tax slabs were not revised
• Assuming 10% inflation, a tax credit of Rs.2000 allotted to every person who has a total income up to Rs. 5 lakh
• 10% surcharge on persons whose taxable income exceeds Rs.1 cr per annum for one FY
• 10% surcharge on domestic companies whose taxable income exceeds Rs.10 cr per annum for one FY
• 5% surcharge on the corporate tax of all Foreign Companies in India for one FY
• 10% surcharge on the dividend distribution tax or tax on distributed income for one FY
• Income tax on payments by the way of royalty and other fees for technical services to non-residents increased from 10% to 25%
• Reduction in the Securities Transaction Tax on Equity futures, MF/ETF redemptions and exchanges
• Commodities Transaction Tax (CTT) on non-agricultural commodities futures contracts
• Direct Tax Code (DTC) to be introduced in the FY 2013-‘14
• Modified GAAR will come in effect from 1/4/2016
• One time ‘Voluntary Compliance Encouragement Scheme’ will be introduced to promote truthful declaration of Service tax dues since 1/10/2007, in which case the interest, penalty and other consequences will be waived

• Mobile phones above Rs.2000, Imported Cars, Imported Bikes, Yachts, Cigarettes, A/C Restaurants, marbles, Setup boxes were taxed more
• Branded apparels, precious stones, leather products, Truck chassis etc were taxed less
• Duty free limit for Gold raised to Rs. 50,000 in case of a male passenger and Rs.1 lakh for female passengers

The Critique

Considering the present socio - economic and political situation, one can give Mr.P.Chidambaram credit for bringing out a good budget.  But then the question to be asked is who is responsible for this present situation. The Economic Survey 2013 point out that India’s economic malaise is as much home-grown as external. The Survey noted that “while India’s recent slowdown is partly rooted in external causes, domestic causes are also important.” It blamed the wrong policies and the policy paralysis of the UPA Government for the present situation Indian economy is in. The survey clearly holds that Pranab Mukherjee’s post-Lehman stimulus was too much and stayed on for too long. Instead of creating additional capacity in economy, we went into a model of stimulus induced consumption led growth. It was this High Inflation low growth model that got India into this present situation.

What we need now was significant investment activity especially from the side of foreign investors. The FM said in his Budget speech, “My greater worry is the Current Account Deficit. The CAD continues to be high mainly because of our excess dependence on oil imports, the high volume of coal imports, our passion for gold and the slowdown in exports…we have to find $75billion to finance the CAD. There are only three ways before us: FDI, FII or External Commercial Borrowing…What we can do is to encourage foreign investment that is consistent with our economic objectives.” But what we managed to do with our Budget was to confuse the foreign investors.

The retrospective changes suggested in Section 90A of the Income Tax Act relating to existing tax relief to foreign investments from countries having a Double Taxation Avoidance Agreement ( DTAA) with India and the proposal stating a tax residency certificate "shall be necessary but not a sufficient condition" to take advantage of double taxation avoidance agreements, created confusions among the foreign investors. Easing the registration process for foreign investors is a facilitator, but the game changer would have been a withholding tax cut across the board, which would have helped the current account deficit and the development of the onshore debt market. The 5% surcharge on the corporate tax of all Foreign Companies in India, also did not go well down with the foreign investors.

Both the Budget speech and the Economic Survey had highlighted that the higher demand for gold is one of the major reason for the increasing CAD. But surprisingly gold was exempted from higher duty, which would have otherwise reduced the demand for gold in the market. The omission of liquor, diamonds and platinum from higher taxes was also quite surprising. The Budget also lacked the vision on how to reduce oil consumption in India. In the Budget speech the FM had stated that “The battle against Inflation must be fought on all fronts”. But the policies in the Budget lacked the vision on how to achieve it.

The announcement of the Nation’s first Women’s Bank was indeed innovative but the question is was it the only way to do it?  Instead of creating a brand new Women’s Bank, we had the option of transforming branches of State Bank or other nationalized banks as women bank which would have reduced the establishment costs and would have help in achieving the same goals. Another worry is how the government is going to find money for all the expenditures announced in the Budget, as there is no was no attempt of widening the tax base in the budget and it will be difficult to finance these expenditures, without hurting the Fiscal deficit, unless the economy develops at a very high and unprecedented rates or we have a higher inflation.

Conclusion

The Union Budget 2013 can be rated as a good work of the FM Mr.P.Chidambaram, considering that it was his first budget as FM in UPA-II government. He was pragmatic in his approach and should be appreciated for not coming out with a populist budget with the General Elections next year in view. But the UPA has no right to claim it as a virtue, since the entire situation is a creation for their ill-governance and policy paralysis. The intent of the Budget was good but it lacks vision on some of the key issues and some of its policies goes self contradicting with its underlined notion. Certain recommendations in the Budget are vague and confusing. The Budget failed in providing a vivid road map to bring the economy out of its major threats i.e. Fiscal Deficit, CAD and Inflation. But at best what it has done is not to worsen the situation. Thus the Union Budget 2013, in spite of the best efforts of the FM, is verbose and nebulous. 

The Quagmire State of Indian Economy - A case of Economic Mismanagement and Policy Paralysis

".. During a recent breakfast with an investor visiting Mumbai from a large western fund, the conversation quickly turned to the question of the moment: what ails India?. “On every indicator we look at, there is a red flag,” he said, before adding with a wry smile: “This country is close to becoming the Greece of Asia.”.. " - James Crabtree, The Financial Times, May 15, 2012.

Ever since the Sovereign Debt Crisis in Europe, it has been difficult times for the Indian Economy. Dr. Kaushik Basu, the Chief Economic Advisor to the Government of India, in a recent interview with journalist Karan Thapar admitted that "Its not a pretty picture". A recent article that came in 'The Economist' said "Farewell to Incredible India" (June 9, 2012). The GDP has fallen to 5.3%, the IIP growth rate has slowed down to 0.1%, Inflation rate still lingering around 9%, the Rupee has fallen to 57 per $, the Unemployment is as high as 9.4%, the Net International liability at $244.8 billion (20% hike), Government borrowing as high as Rs. 53000 Crores, burgeoning Fiscal deficits and the declining FIIs to top it up, the picture is clearly not pretty. But are these the inevitable resultants of the Global Financial turmoil or are there any other possible angles to it?

I wish to discuss on three observations I had made on the recent events in our economy.

One, the prices of petrol was hiked overnight by Rs 8, there by crossing the Rs.70 mark, in the name of decreasing Fiscal deficit to the targeted 5.1% viz reducing subsidies. But on the other hand Government gave Customs duty exemptions on gold and diamonds. We have a 967 tonnes of gold imports in this country and  would mean that the Country is set to lose close to Rs 50000 cr from these tax exemptions. Not just that, if the CAG report has to be believed, Rs 80000 cr revenue was forgone from tax exemptions in corporate sector alone, out of the Rs. 1,60,000 cr tax forgone in the recent budget. Why the Government chose not to tax the Gold - Diamond merchants to help in achieving the Fiscal deficit target, but instead taxed the common man of this country taking money out of his already shrunk pocket? It could only be called as an economic paradox!

Two, at a time when the country was strangled with 9% inflation, last season, India harvested a bumper crop of grain, an all time record of 75 million tonnes. But food grains worth hundreds of crores of Rupees went rotting in the FCI godowns in Rajastan. The Supreme Court of India observed that, “In a country where admittedly people are starving, it is a crime to waste even a single grain” to which our Prime Minister had replied that Supreme Court should not interfere itself in the matter of policy decisions. I wonder what would have prevented The government of India from distributing the excess grains through the Public Distribution System (PDS) at BPL prices which would have brought the inflation rate down?

Three, in a country which has 1/3 of world's poor, where millions survive on less than $2 a day, where 41% population live below poverty line, 40 mn living in slums, 3 mn sex workers, 12.6 mn child labors, 72 mn children without primary education, 2nd largest population of mal-nutritioned children with 4 children dying every min prone to illness, 20 cr sleeping hungry every night, 18000 farmers committing suicides an year and 35% of population living without electricity - the Government of India spend $80 million on Chandrayaan 1 for collecting rock samples and to find traces of water on moon surface! Chandrayaan which was supposedly a two year project, had to be called off after a mere 312 days. I wish had the Government concentrated more on building basic infrastructure, like building more storage facility for food grains, building better roads, providing water supply facilities, rather than going to moon and search for the possibility of water traces, would have helped in the country and its poor majority people in these difficult times.

From the above three observations, it gets pretty clear that for the situation India is in now, the policies of the Government of India is equally responsible along with the unfortunate world economic situation. With no major reforms going on and those promised - The Banking,Pension & Insurance(BPI) Reforms Bill, the FDI in Retail, the Goods and Services Tax (GST), the General Tax Code (GTC) - still on hold, the Government is going through a severe policy paralysis. On top of this, the untimely announcement by the Government of India for the retrospective amendment of tax and General Anti - Avoidance Rule (GAAR) to prevent the entry of money through the Mauritius route, has lead to lack of confidence of investors on India and resulted in the flight of capital from India, which in turn has caused the unprecedented downfall of Rupee. If the words of Dr. Kaushik Basu could be believed then there is no scope for any big ticket policy measures from the UPA-II Government till 2014, which means things could go worse. Thus the dirty picture we are seeing of our Economy in the recent times cannot be solely blamed on the turbulance in the World Economy but is also a case of economic mismanagement and still on going policy paralysis of the UPA-II Government. Its time for the Government to wake up and invoke the 'animal spirits' in the Economy, through strong and credible policy decisions otherwise India's wonder story will be over before we even reach 2020.