If Palaniappan Chidambaram’s eighth budgethas not set the markets on fire, it can be easily explained: his first goal was to avoid doing damage to investor confidence, which is what his predecessor managed to do. And unlike his own 2008 budget, which set the stage for the economy’s long-term slide and made inflation intractable, Budget 2013-14 has taken the middle path of low ambition and low risk.
There is thus nothing in it to excite anybody, not even his own party. He has delivered on his promise of providing a “responsible” budget, which the markets misunderstood to mean something that will send the adrenalin pumping. That was not on, and the FM restrained himself from any dose of excess populism.
If the markets are moping right now, with the Sensex and Nifty heading south, it’s because Chidambaram has already given them enough room for optimism before the budget. The markets wanted more of the same, but he could not oblige.
A lo-calorie budget is not meant to energise anybody. It is meant to get the fat down.
Before we rush to condole those left out of accessing the meagre basket of goodies, it is worth summarising the core proposals made in the budget. Chidambaram has raised Rs 18,000 crore of additional revenue through direct and indirect taxes, the former mostly by taxing companies more. Excise and customs remain more or less the same, with no changes in base rates.
The concessions, both to populism and the middle classes, are minor: there is a token Rs 10,000 crore additional provision for Sonia Gandhi’s Food Security Bill, some very small personal income tax reliefs, and an additional deduction of Rs 1 lakh for interest paid on first home loans (over and above existing Rs 1.5 lakh). Plus there are promises on new savings instruments sold through post offices that will be inflation-indexed. But these will not be more than sideshows to the main avenues currently available for savings.
On the corporate side, while the surcharge on income-tax is up from 5 to 10 percent for companies with taxable incomes above Rs 10 crore, this blow is balanced by giving manufacturing companies that invest more than Rs 100 crore in plant and machinery over the next two years (2013-15) a 15 percent investment allowance.
To be fair to Chidambaram, his only real promise was to deliver a 5.3 percent fiscal deficit this year and to stick to prudence next year. He has cut the 2012-13 deficit to 5.2 percent, and stayed with 4.8 percent in 2013-14.
The story lies in how he has achieved this miracle. Basically, what he did was to stamp hard on all capital expenditure in the last quarter of 2012-13, which is why the plan expenditure is down by 18 percent from the budget estimate of Rs 5.21 lakh crore to Rs 4.29 lakh crore. He has stashed the savings away for a better splurge in 2013-14, with plan expenses up to Rs 5.55 lakh crore, a near 30 percent jump.
This is good for near-term growth, for it means that the government will start spending from 1 April, pushing investments in the economy.
But where Chidambaram’s numbers start to look shaky is, as usual, in his assumptions.
The budget assumes a GDP growth of 13.4 percent – which is almost the same as in 2012-13, where the government came a cropper. The Economic Survey put out GDP figures of 6.1-6.7 percent, and if we assume average inflation of 6 percent in 2013-14, we will end up with a GDP growth projection in the range of 12.5 percent, or thereabouts.
Thus 13.4 percent is a bit of a stretch, even given the higher outlays for plan expenditure next year. Unless, inflation rips again – which cannot be ruled out.
More doubtful are the figures for revenue growth. The budget projects a sharp 21 percent growth in revenues, aided by a 33 percent rise in non-tax revenues. Capital receipts, which include earnings from disinvestment and spectrum sales, are more than double, up from Rs 24,000 crore this year to Rs 55,814 crore. The core tax revenue is the slowest-growing part at 19 percent.
Put another way, Chidambaram is budgeting for a 21 percent growth in overall revenues (tax and non-tax) on the back of 13.4 percent growth in GDP.
Also unrealistic is the meagre 4 percent growth shown in gross borrowings at Rs 5,42,499 crore. This could mean that a lot of the redemptions of existing loans will be paid out of the cash he has stashed away since December by not allowing ministries to spend, but this number will need more detailed scrutiny.
But for the ordinary man on the street, Budget 2013-14 is unexciting because there is very little in it for him.
Chidambaram’s concessions to middle class taxpayers and the capital markets are mere tokenism. There is no increase in the basic tax exemption limit, but taxpayers with incomes upto Rs 5 lakh get token tax credits of Rs 2,000 each.
The super rich, those 42,000-and-odd people who declare incomes above Rs 1 crore, will face an additional surcharge of 10 percent. Property buyers (for properties valued at more than Rs 50 lakh) will have to deduct one percent TDS from what they pay to sellers. The rich will also have to pay more for buying SUVs (30 percent excise).
It will irritate, but it’s not quite a deal-breaker for the rich.
More neutral between rich and not-so-rich is the surcharge on the dividend distribution tax, which is up from 5 to 10 percent for next year. Sin taxes on cigarettes are also up.
While the securities transaction tax (STT) is cut for equity derivatives, mutual funds and exchange-traded funds, it is now applicable to the non-food commodity futures.
The Rajiv Gandhi Equity Savings Scheme, a flop show in its first avatar, is being pumped with steroids by raising the income limit for first-time investors from Rs 10 lakh to Rs 12 lakh. The scheme is supposed to be liberalised, but it is still colourless. Rajiv Gandhi would hardly want to be associated with this loser.
The budget’s real weakness is that it is not decisive enough in any direction.
Chidambaram’s budget is safe and sensible for the kind of times we are living in. It has not lived up to expectations primarily because the FM wanted to be safe rather than sorry. His risk-taking instincts were not in evidence today. He wants to live to fight another day.