Buffeted by strong headwinds blowing from several directions, Finance Minister P. Chidambaram has had very little room for major new initiatives or ideas while fashioning the Union budget for 2013-14. The exaggerated expectations of many investors — especially those from abroad — could probably never have been met, certainly not at a time when the economy is threatened with macroeconomic instability. And though this budget will be the last full budget of the UPA government, the fact that the general elections are still more than a year away means the Finance Minister has had to squarely balance the competing claims of economics and politics. In the context of the fiscal deficit, the former suggested austerity while the dictates of the latter indicated a loosening of purse strings. The ensuing balancing act explains why there are no headline grabbing revenue or expenditure measures in the budget.

In the event, the budget’s estimate of Plan expenditure for 2013-14 at Rs.5,55,322 crore out of a total expenditure of Rs.16,65,297 crore is 29.4 per cent more than the revised estimate for the current year. Apart from providing sufficient funds for all flagship programmes, his budget lays emphasis on welfare programmes targeted at the youth, Scheduled Castes and Tribes, minorities as well as women and children. The allocation to the Agriculture ministry has been stepped up by nearly 22 per cent of the revised estimate of the current year. The target for agricultural credit has been set at Rs.700,000 crore, sharply higher than the target of Rs.575,000 crore for the current year. The Rs.10,000 crore set aside for implementing the provisions of the proposed National Food Security Bill seems inadequate but this is said to be over and above the normal provision of food subsidy and may also indicate a rollout towards the end of the fiscal year.

With supply-side bottlenecks contributing to the economic slowdown, the budget wisely gives centre stage billing to infrastructure development. A number of institutions will be permitted to raise tax free bonds, up to a total sum of Rs.50,000 crore. Welcome as these and other initiatives are, infrastructure development requires concerted government action and a review of the implementation models, especially public-private partnerships, on which so much faith is reposed. A company investing Rs.100 crore or more in plant and machinery during the next two years will be entitled to deduct an investment allowance of 15 per cent of investment in addition to the current rates of depreciation. This is the only important tax measure in the budget aimed at reviving manufacturing which has been in the doldrums. Specific steps in the budget to incentivise household savings include a re-launch of the failed Rajiv Gandhi Equity Savings Scheme for first-time investors and inflation-indexed instruments. In the past, variable interest savings instruments have not taken off partly due to lack of clarity on the benchmarks. The move to provide home loan borrowers with an additional one lakh rupees deduction from interest subject to certain conditions is promising but greater clarity about its applicability are needed. The financial sector has received a fair share of attention. Public sector banks will be provided sufficient funds to meet the evolving regulatory capital requirements. Comprehensive changes in the rules relating to registration of foreign portfolio investors and other classes of overseas investors are proposed. The ambiguity that exists in defining foreign institutional investment and foreign direct investment is being removed. Foreign institutional investors are being allowed entry in the exchange traded currency derivative segments. These moves underline the importance of foreign capital in the current economic scenario.

Personal taxation has been left largely untouched, though taxpayers in the first bracket of Rs.2 lakhs to Rs.5 lakhs will get a tax credit of Rs.2000. There is disappointment that the limit for eligible deductions under section 80 C of the Income Tax Act has not been raised. The proposed surcharge on “super-rich” taxpayers — defined as those having a taxable income of one crore rupees or more — is a symbolic rather than a revenue gathering measure. With only 42,800 individuals falling in this category, the fiscal impact will be minimal. In the end, this budget will be evaluated on how far it meets the criteria set by the Finance Minister himself. These include (a) containing the fiscal deficit to within 5.3 per cent of the GDP, (b) dealing with the burgeoning current account deficit, and (c) reviving the growth process. The fiscal deficit has been brought down to 5.2 and is slated to go down to 4.8 per cent next year. But the government’s primary deficit — the amount by which total expenditure, excluding interest repayments, exceeds total revenue — will still be high at 1.5 per cent. On tackling the CAD the budget offers little direct help. Even the expected measures to rein in gold imports are absent. Of course export promotion and a revival in manufacturing will aid the balance of payments. But will the budget spur growth? The danger is that growth prospects may get squeezed at both the supply and demand ends. Mr. Chidambaram has compressed demand, preferring to propitiate animal spirits rather than human ones, but not enough to enthuse the corporate sector. The investors whose appetites were whetted by Mr. Chidambaram’s early actions as Finance Minister last year are visibly upset at the absence of a big ‘reform’ bang. If indeed the economy has “bottomed out,” the budget still has enough small bangs to bring some buoyancy. If not, the much anticipated revival may well prove elusive.

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