Union Budget 2013: 5.3% deficit, tax on rich are 2 certainties

With just a little over an hour to  go before Palaniappan Chidambaram rises to present the budget for 2013-14, the best we can do is try and understand the finance minister’s motivations to figure out what his budget box will contain. The two things that appear to a certainty are this: he will meet his fiscal deficit target of 5.3 percent without doubt; and he will indeed tax the rich. Here’s the reasoning for both. In the run-up to the budget, P Chidambaram has been on a global roadshow assuring investors about how he is preparing a “responsible” budget by curbing subsidies and expenditure. But back home he has been muttering darkly about why the rich must pay more and “inter-generational equity.” He has been talking revenues. [caption id=“attachment_642936” align=“alignleft” width=“380”] There are two ways to placate the poor man’s lobby: one is by throwing a few shekels into his bowl, and the other is to rail against the rich.
AFP[/caption] The foreign audiences he is really addressing are, first, the rating agencies, who have threatened a downgrade, and foreign institutional investors (FIIs), without whose capital flows the rupee would hit 60 to the dollar in no time. At home, Chidambaram has to please two constituencies: first, Sonia Gandhi and the Congress party, and second, the broader electoral constituency that the party must placate to salvage enough seats to again form a government in 2014. Chidambaram’s dilemma is this: how do you prove you are “responsible” to the raters and still be “irresponsible” enough to woo his boss without upsetting either constituency. His strategy, as it has unfolded, tells us how he has squared the circle. First, he has focused on the 5.3 percent budget deficit target and drawn a line in sand around it. He has repeatedly done this primarily because he knows he can achieve it this year. This will mollify the rating agencies. Second, he also knows that he has no leeway to spend. Beyond token allocations to food security or other freebies, he can’t satisfy his pro-poor constituency. This is why he has been talking about taxes on the rich. There are two ways to placate the poor man’s lobby: one is by throwing a few shekels into his bowl, and the other is to rail against the rich. If you can’t help the poor since you don’t have the money, shout at the rich. It works well in politics. This is why one should expect a small hike in taxes on the rich by either imposing a higher surcharge on the upper income brackets, or by taxing so-called luxury goods. Or both.