Comments on the Union Budget 2013-14 CHARAN D. WADHVA <cdwadhva@gmail.

com The Union Budget 2013 presented by the Finance Minster Mr. P. Chidambaram to the Parliament of India on February 28, 2013 can be described as a smart budget. It makes a commendable effort at striking a balance between the immediate and urgent economic policy imperatives of a sluggish economy and the political necessities of a pre-election year budget without tilting towards excessive populism. This budget was formulated in the backdrop of falling growth rate in the last three years (with 5.0 per cent growth in 2012-13 the lowest growth recorded in the last decade); continuing stubborn inflation at uncomfortably high rate during the last two years; and unsustainable high twin deficits, namely central governments fiscal deficit and the Current Account deficit both deficits recording levels of over 5.0 per cent of GDP in 2012-13 bringing India to the edge of downgrading its credit rating. This scenario brings similarities with the 1991 economic crisis which compelled India to launch open market economy reforms with one major difference of currently comfortable foreign exchange reserves of around $ 300 billion. The main drivers of the current lower growth rate have been the visibly falling saving and investment rates and foreign investment inflows under adverse investment climate. Continuing weak global economic conditions with gloomy prospects of revival of growth especially in the Euro-zone have made the task of revival of high growth in India more difficult. Internal weaknesses in governance reflected in the policy paralysis on economic reforms; numerous corruption scams and bureaucratic delays in clearing investment proposals especially in the infrastructure sectors led to sharp reduction in new investments by entrepreneurs slowed growth worsening economic crisis. This budget has signaled strong resolve of the government to take visible steps towards damage control in the crisis ridden economy and try to instill confidence by announcing several measures to improve investor confidence both among Indian and foreign investors and promote savings for accelerating the growth rate of the Indian economy. The Finance Minister has taken measures this year itself to contain the central fiscal deficit at 5.2 per cent of the GDP (compared to his promise of limiting it to 5.3 per cent this financial year) and promised to keep the fiscal deficit target at 4.8 per cent for the year 2013-14. Some measures have also been taken to reduce the high current account deficit by curbing gold imports through higher import duty and introducing gold linked investment products next year. Savings have been encouraged through the introduction of inflation indexed bonds and higher permitted level of raising tax free long term infrastructure bonds. The budget has provided for the introduction of investment allowance at 15 per cent for new corporate investments above Rs. 100 crore. Government expenditure and also market borrowings by the government will be reduced to increase the space for higher private sector borrowings for productive activities. Foreign investment even by the financial investment institutions will be encouraged by redefining FIIs investing more than 10 per cent of their funds in the equity market. Higher foreign direct investment inflows through liberalized procedures will also help in reducing the current account deficit. Inflation is expected to fall to 6.0 per cent level by the end of March 2013 giving room to the Reserve Bank of India to reduce the key interest rates leading to lowering of borrowing costs for investment by corporations and spurring growth. Encouraging schemes have been announced for strengthening the small and medium enterprises by letting them retain the benefits of small and medium industry status for three years after they graduate to higher 1

level in terms of assets and sales. Several measures have also been announced for strengthening and better regulation of the financial sector and the capital market. More prominently, UPA-II government has signaled its resolve in this budget to substantially raise expenditure on social sectors. An initial provision of Rs 10,000 crore has been made in this budget for the much awaited new flagship scheme of Food Security. Substantial increases in allocations have been made for agriculture; rural development; and most infrastructure sectors including power; roads; etc.; and in major social sectors benefitting the common man including education and health sectors. National Skill development Council has been funded well for reaping the demographic dividend. The housing and construction sectors have been given additional tax relief. Those taking home loans will get additional tax deduction of Rs, 1 lakh for income tax purpose. The budget also shows gender sensitivity. For raising resources to reduce the fiscal deficit, additional revenues from both direct and indirect taxes will be generated. Surcharge will be levied for one year (2013-14) on the Super rich individual tax payers and very large corporations. In order to curb black money transactions in the real estate sector, TDS at 1 per cent rate for properties above a certain value will be levied. Disivestment program will also be carried out at a higher target level during the coming year 2013-14. On the negative side, several opportunities have been missed for converting current economic crisis to launch some big bang reforms. Even the implementation of the Goods and Services Tax and the Direct Tax Code have been deferred to next financial year due to unresolved issues. No new scheme of bonds for Non Resident Indians and Persons of Indian Origin has found place in this budget. The stock market in India has given thumbs down first reaction to the Union Budget 2013 due to certain provisions of this budget as being seen as business unfriendly for selected sectors. The Corporate sector on the whole has welcomed this growth oriented and responsible budget. Despite the intentions of the Finance Minister presenting a growth and social sectors oriented budget, it is doubtful if the growth rate of the Indian economy will reach the projected 6.1 to 6.7 per cent rate during 2013-14. This is due to the time lag effect of investment intentions fructifying in actual investments and further in actual increase in output given that the governance systems and implementation efficiency are unlikely to be adequately improved in just one year, namely, 2013-14. There are still serious question marks on the realization of the targeted fiscal deficit in 2013-14 as government expenditure may not be actually reduced as planned and targets for additional revenue generation through disinvestment program and auctioning of the telecom spectrum may not be realized. There are also doubts on reigning food inflation and wage inflation and the monthly planned increase in diesel prices to cut the fuel subsidy boldly put into operation all acting as levers for injecting cost push inflation in the economy. The uncertainty of the results of the 2014 general elections in the formation of the new government will also have some delaying effects on the investment intentions for promoting growth through the much awaited new generation of economic reforms. In conclusion, the Union Budget 2013 is pragmatic; growth and social sector oriented within the serious resource crunch facing the government and without much hope of improvement in global economy. Of course, we can always wish that more could have been done on the reforms front in this budget. 2