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Budget 2013: The spirit is willing, but the fisc is weak

Despite an expenditure spurt, finance minister keeps fiscal deficit in check and cuts welfare schemes.

Growth ought to be highest goal right now, finance minister P Chidambaram declared at the outset of his Budget speech on Thursday and sought to find commonality between the two apparently dichotomous objectives he proposed to achieve ? relentless fiscal correction and largesse to the electorate ahead of an election year. Relying on a nominal GDP growth estimate of 13.4%, a 10% surcharge on both the ?relatively prosperous? individuals and corporates and an aggressive disinvestment agenda, Chidambaram proposed the 2012-14 Budget size at R16.65 lakh crore, 16.3% higher than the revised estimate (RE) of this year, which saw a 4% expenditure compression.

What this means is as a percentage of the GDP, government expenditure is set to rise again ? to 14.6% ? after declining steadily from the 2009-10 peak of 15.9% to 14.3% in 2012-13. The economic growth the minister assumed came into question later in the day though, with the Central Statistical Office saying third quarter GDP growth was a disconcerting 4.5%.

The finance minister obviously thinks the economy is bottoming out and at least from the first quarter of next fiscal, growth would pick up. Several incentives announced in the Budget to stimulate the investment cycle, he hopes, could help accelerate the growth momentum during the course of next year. While Prime Minister Manmohan Singh said the Budget laid the road map for investments, the Opposition called it ?lacklustre? and ?unimaginative?.

The Budget pegged the fiscal deficit at 5.2% for this year and 4.8% in 2013-14, despite the higher-than-expected hike in allocations for most flagship schemes. To square up, the minister also hinged on a 10% reduction in spending on subsidies next year to R23,1084 crore (a 30% cut in oil subsidies thanks to diesel price deregulation is under way). The proposed reduction is strictly not that big, given that the revised estimate for this year is 36% higher than the budgeted level and the Direct Benefit Transfer scheme would be ?rolled out fully? next year (the minister hasn?t said what all would be covered under DBT, though.)

Chidambaram vowed to support the food security Bill ? expected to be the UPA?s chief poll plank in 2014 ? but provided just R10,000 crore as additional food subsidy outlay for next year, as against an extra R50,000 crore sought by the food ministry. There could be higher disbursal for food subsidy towards the later half of next year.

While most flagship schemes have been funded ? outlay for the rural employment guarantee scheme was raised to R80,194 crore from R55,000 crore ? a significant expenditure control move was the reduction in the number of centrally-sponsored schemes from 173 to 70. Pertinently, the Plan expenditure would see a big increase of 29% to R555,322 crore in 2013-14 and it would be 33% of total expenditure next year. Total Budget support for the Central Plan has been fixed at R41,9068 crore, up 32% over the revised estimate of 2012-13 but just 7% over the budget estimate.

Net market borrowings in 2013-14 were estimated at R4.84 lakh crore out of the gross market borrowing of R6.29 lakh crore. The figure was substantially above market expectations, impacting banking stocks over fears of liquidity concerns (state-run banks will get R14,000 crore capital in 2013-14). The Sensex closed 290.87 points lower, dipping below the 19,000 mark.

Analysts, however, said the fears were exaggerated, given the likely higher level of repayments by the government. Yield on the benchmark 10-year bond rose 7 basis points to 7.87%.

Chidambaram backed his call for growth with measures to promote savings in financial instruments, boost capital markets and easing foreign investors\’ access to equity and debt markets. The minister promised to spur investments through pricing and regulatory reforms in coal, road and oil & gas sectors. Citing the alarming rise in coal imports and the pressure it exerts on the current account along with high oil and gold imports, the minister said a public-private partnership (PPP) policy framework with Coal India as a partner was being devised. This signals the government\’s intent to let private players in commercial coal mining even as privatisation through legislative sanction is politically difficult.

A recurring theme was the special concern over women\’s issues; Chidambaram even announced India\’s first women\’s bank with an initial capital of Rs 1,000 crore.

Setting a target to award 30,000 km of new road projects in the first half of 2013-14, Chidambaram said the sector which has seen huge slippages in recent months would have a regulator soon.

The minister said future exploration contracts would be based on revenue-sharing as opposed to the existing profit-sharing model. This would allow the government to get a predetermined share of revenue from production contracts regardless of the producer\’s cost recovery. The minister also signalled a shale gas policy and promised that uncertainties over gas price would be removed soon ? A positive for Reliance Industries, which operates the KG-D6 gas block, and other potential investors.

Saying that the high current account deficit was his biggest worry ($75 billion likely needed to finance deficit in 2012-13 and 2013-14, Chidambaram proposed a transaction tax of 0.01% (Rs 10 for transaction worth Rs one lakh) on futures trading of non-farm commodities including gold. This is expected to treble the hedging cost of these items but could curb speculation in gold trade. However, Chidambaram said trading in commodity derivatives would not be considered speculative and hence the tax would be allowed as deduction if the income from such transaction forms part of the business income.

As for individual taxpayers, except some 42,800 with taxable income above Rs 1 crore who will have to pay 10% surcharge (tax on tax), the Budget doesn\’t bring any big change. The tax slabs and rates haven\’t been changed and the one other significant change is that first-time home buyers will get an additional deduction of interest of Rs 1 lakh for home loans above Rs 25 lakh and Rs 1.50 lakh for home loans up to Rs 25 lakh. This will be over and above the current Rs 1 lakh allowed for self-occupation.

For big domestic corporates, the surcharge hike from 5% to 10% would push effective tax rate from 32.5% to 34%. But there are some positives as well, like the 15% deduction of cost on plant and machinery exceeding Rs 100 crore.

Gross tax receipts as a percentage of GDP which reached a high of 11.9% in 2007-08 is estimated at 10.4% in 2012-13 (RE) and 10.9% (BE) in 2013-14. Chidambaram\’s tax proposals on the direct tax front would yield him an additional Rs 13,300 crore and those on the indirect tax front, Rs 4,700 crore.

As for non-debt capital receipts, disinvestment receipts are projected at Rs 55,814 crore as against Rs 24,000 crore in 2012-13 against the Budget estimate of Rs 30,000 crore.

Quite a few proposals are aimed at deepening the capital markets and promoting savings in financial instruments. FIIs have been allowed to hedge their rupee exposure in India through exchange-traded derivatives and use their investment in corporate bonds and gilts as collateral to meet margin requirements. Inflation-indexed bonds are on cards. Insurance and provident funds have allowed to trade directly in debt changes and designated depository participants will now be free to register FIIs, their sub-accounts and QFIs.

Foreign investors using the Mauritius route were concerned, a fear which was allayed by the finance minister later in the day.

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First published on: 01-03-2013 at 09:01 IST
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