While presenting the last Budget before the 2014 election, the Finance Minister claimed that there was no room for gloom and pessimism. The months preceding the Budget witnessed a sharp reduction in industrial growth and confidence in India as an investment destination. Notwithstanding the kind words of British Prime Minister David Cameron, the cruel truth was that nobody believed the India growth story any more. It would be no exaggeration to say that there is more infrastructure development in China in one month than what happens in India in one year.
The Railway and Union Budgets for 2013-14 have demonstrated that this government is unwilling to take hard decisions and prefers to continue on the easy, populist track.
The two questions that need to be answered are: does the Budget have anything that will attract much needed foreign direct investment? Has the Budget done anything that will encourage Indian entrepreneurs to set up large industries that alone will generate employment? Sadly, their answers are in the negative. Thus, there is thus gloom for 2013-14 and, if the present trend continues, doom in the long term.
Domestic investment
In the background of last year’s disastrous budget, the Finance Minister had a golden opportunity of sending the right signals to foreign and domestic investors. Unfortunately, there is nothing in this Budget that will attract much needed large foreign investments. There is no clarification or assurance that our tax laws will remain stable, investor-friendly and not be amended retrospectively just to overrule a decision in favour of the assessee. On the other hand, certain unnecessary amendments will now give room to the department to question tax benefits not only to investments via the Mauritius route but from other countries as well. Barring a special deduction on new industries where the asset value exceeds Rs.100 crore, there is nothing to encourage domestic investment in the manufacturing sector.
The uncertainty on goods and services tax (GST) continues and there is minor tinkering with indirect taxes. There is not a word about the effect of the overlapping of service tax and VAT that often leads to double taxation.
The most astonishing proposal in this hour of crisis is the proposal to set up a “Tax Administration Reform Commission to review application of tax policies and tax laws.” Do we require another commission to tell the Finance Minister what to do? The only purpose it can serve is that any difficult or inconvenient decision can now be indefinitely postponed by referring it to this commission.
At the end of the day, there is nothing to indicate any change in India’s unfriendly tax landscape.
Like god, the devil is in the details. Paragraph 11 of the Budget speech, which deals with current account deficit (CAD), is perhaps the most important part of the Budget. The CAD, according to the Finance Minister, has arisen mainly “on account of excessive dependence on oil imports, high value of coal imports, our passion for gold and the slow down in exports.” He cautions that the country would require $75 billion this year, and perhaps next year, to finance this deficit which can be done only in three ways: (i) foreign direct investments (FDI), (ii) foreign institutional investments (FII) and (iii) external commercial borrowing. We thus require Rs.4,00,000 crore per year or Rs.35,000 crore per month to bridge the CAD. Sadly, with no major incentive to attract either FDI or FII, the government will have to inevitably depend on external commercial borrowings, which will only further fuel the expenditure on interest.
Government expenditure
The major failure of this Budget is the refusal to check the runaway increase in government expenditure. Despite the acknowledged fact that The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has been a disaster, the Finance Minister has not reduced the allocation to this wasteful project. Around two lakh crore has now been spent on this flagship scheme but there is hardly any community asset to show in return. The same amount spent on roads, the railways and other infrastructure would have transformed the face of India over the last eight years.
On the other hand, there is an allocation of Rs.10,000 crore to the Food Security Bill, a project that will most certainly destroy the nation’s financial security. This shows that the Central government will continue to indulge in populist schemes regardless of their financial consequences. It is unwise to be happy with a fiscal deficit that is less than six per cent. What is worrisome is that no attempt has been made to stop or reduce this haemorrhaging of the economy. And the States are not far behind in ever-increasing expenditure on free power, rice at Re.1 per kg and so on. The nation will slowly but surely spend itself to bankruptcy.
Abraham Lincoln: remarked: “If we could first know where we are and whither we are going, we could better judge what to do and how to do it.” The tragedy is that we know where we are and what we ought to do but year after year after year we choose to be on an endless vacation from reality. The Finance Minister ended his speech with this brilliant quotation from Swami Vivekananda:
“All the strength and succour you want is within yourself.
Therefore make your own future.”
If we fail to provide the right investment climate and continue the path of fiscal profligacy, India will soon have neither the strength nor the succour to make any kind of future.
(Arvind P. Datar is a senior advocate of the Madras High Court.)
