Live Mint : rajeshkumar :Thu, Feb 28 2013. 08 33 PM IST
The FM’s intervention in direct tax will lead to additional revenue of Rs.13,300 crore
In the given global and domestic economic set up, Budget 2013-14 was supposed to be different—a budget that would have helped the Indian economy resume its high growth path. However, at the end of the day, it did not live up to the expectation and ended up being more of the same. In the beginning, finance minister P. Chidambaram rightly raised the issues confronting the Indian economy, such as high fiscal deficit, high current account deficit and high inflation. However, the over 12,000-word speech by the minister did not help the markets understand how these issues will be addressed.
The Economic Survey 2012-13 underlined the fact that strong fiscal stimulus by the government after the financial crisis led to strong growth and higher consumption. However, due to constraints on the supply side, inflation went up. Consequent tightening of the monetary policy by the Reserve Bank of India led to a slowdown in the economy. Differently put, higher government expenditure was the root of the problem.
Further, higher inflation led to lower savings rates, which without adequate reduction in the investment rate resulted in higher current account deficit. Therefore, in order to address a range of anomalies, it was needed that government contained its expenditure in a meaningful way.
It must be noted that the post-crisis expansion in the balance sheet of the government was also a consequence of implementation of the Sixth Pay Commission and increase in spending on social sector schemes such as Mahatma Gandhi National Rural Employment Guarantee Act, which could not and cannot be withdrawn. Therefore, extra adjustments were needed on other fronts but that did not happen in the preceding years. This year, to his credit, Chidambaram managed to restrict the fiscal deficit to 5.2% of the gross domestic product (GDP) and projected it to be at 4.8% of the GDP in the next financial year. However, numbers once again may require large adjustments.
No visible attempt has been made in terms of containing non-plan expenditure and numbers projected for the next fiscal leave a large scope for slippages. For example, petroleum subsidies in the Budget estimate (BE) is projected at Rs.65,000 crore in FY14 against the revised estimate (RE) of Rs.96,879 crore in FY13. The food subsidy BE is expected to go up by only Rs.5,000 crore over the RE despite the likely implementation of the Food Security Act. Similarly, slippages can happen on the revenue side like it did in the current year.
The Budget calculation assumes a nominal GDP growth of 13.4%. Assuming inflation at 6.5%, it translates into a real GDP growth of closer to 7%, which is a little ambitious in the given circumstances. Therefore, the government’s finances will remain a focus area as the economy will continue fight inflation and find ways to fund current account deficit.
Even in terms of signalling, the Budget does not change much that will improve investment climate and boost growth. On the contrary, the finance minister decided to hike the surcharge on corporate profits and dividends for a year. This gives an impression of stopgap measures and was a clear deviation from the required continuity.
Interestingly, the FM’s intervention in direct tax will lead to additional revenue of Rs.13,300 crore, which the finance minister could have easily saved on the expenditure side.
At the end of day, despite building hype and anticipation, for investors, market watchers, economists, and people at large, it was just “another day in the life of a nation”.
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