Budget 2013 : Prudence trumps Populism

With the country still at risk of a debt downgrade, prudence unsurprisingly dominated the UPA II’s last budget before the 2014 polls, but there was something in it for three crucial constituencies: youth, women and people entering the ranks of the middle class.
Youth got a large allocation for improving skills, a new public sector bank was created for women and the emerging middle-class got breaks on income tax and home loans. And industry, a group that likes Chidambaram, got reason to cheer: for the first time in nearly a quarter of a century, it was given a generous tax break on capital expenditure.
That said, at first flush, there appeared to be little that stood out in the budget, which was predictably panned by the Opposition and welcomed by business leaders. But a joining of the dots revealed a clear pattern to Chidambaram’s thinking: the first priority is growth and investment. Achieve this, and jobs and the ability to spend will follow.
Noting that growth of an economy was correlated to the investment rate, Chidambaram said: “The key to restart the growth engine is to attract more investment both from domestic investors and foreign investors.”
The extent of the task was underlined hours after the budget speech, when data showed that the economy grew at a weak 4.5% in the third quarter, setting the country on course for its worst annual growth in a decade, crimped by poor factory output and patchy monsoons. The Sensex stock benchmark ended 1.5% lower and the rupee fell.
To spur investment, Chidambaram introduced a 15% investment allowance for companies investing Rs.100 crore in plant and machinery, over and above depreciation. And he unveiled other growth-oriented measures like industrial corridors between Chennai and Bengaluru and between Bengaluru and Mumbai. With a view to leaving the emerging middle-class with a little more to spend, Chidambaram offered tax exemptions to those who earn between Rs.2 lakh and Rs.5 lakh a year, a move that will benefit 18 million taxpayers, or about half of the country's tax base.
The measure will, in the final analysis, yield tax-payers a benefit of Rs.3,600 crore.
First-time home buyers will get an additional deduction on interest of Rs.1 lakh for home loans up to Rs.25 lakh.
Chidambaram also increased the excise duty on most sports utility vehicles (SUVs) and customs luxury cars, superbikes and yachts, making these goods costlier but earning the exchequer precious revenue.
The budget was not without a dose of populism.
The minister set aside ample resources to fund a proposed food scheme, which once voted into law, will entitle two out of three Indians to government-subsidised rice and wheat. The scheme will cost an additional Rs.10,000 crore more to the exchequer.
It will be the latest addition to the UPA regime's welfare cupboard, joining the ranks of successful entitlement programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme.
Chidambaram, a 67-year-old lawyer-turned-politician in his third term as finance minister, has had to grapple with the impact of stalled reforms, policy missteps, high inflation and the perennial threat of a downgrade by credit rating agencies.
From a foreign investors' darling to a slowing economy, the deterioration in India's image has been rapid and demoralising.
Foremost among the worries over the economy has been the widening fiscal deficit, or the amount of money the government has to borrow to fund its expenses. Chidambaram pledged a fiscal deficit of 4.8% of GDP in 2013-14, down from 5.2% this fiscal.

The government unveiled new taxes on the rich and large companies to fund higher-than-expected spending for the next fiscal, in a budget that aimed to revive growth amid the country's worst slowdown in a decade ahead of a 2014 election.
Stocks, bond prices and the rupee all fell despite Finance Minister P Chidambaram's vow to cut next year's fiscal deficit to 4.8 per cent of GDP, which some watchers said counted on ambitious revenue assumptions given hefty spending targets.

Chidambaram has staked his reputation on cutting swollen fiscal and current account deficits that have alarmed credit rating agencies and triggered warnings that India's sovereign bonds could be downgraded to 'junk' status.  Chidambaram focused on winning back foreign investors unnerved by proposals of his predecessor, Pranab Mukherjee, to tax merger deals retrospectively and clamp down on tax evasion.
An added surcharge on local firms with incomes of more than Rs.10 crore and a 10 per cent surcharge on individuals with taxable incomes topping Rs.1 crore rupees - a level of earnings currently declared by just 42,800 people - will be put in place for one year.
However, there was little relief for the man on the street and Chidambaram said there was no case to revise either income tax brackets or rates since the current slabs were introduced last year.
He also said that people buying houses would get an additional deduction of Rs.1 lakh on interest payments on their first home loan of up to Rs.25 lakh.

No comments: