Budget 2013: Success of reforms will depend on execution
In the wake of a challenging global macroeconomic environment, the Indian Economy has experienced its worst slowdown in nearly a decade. 2012 has been a challenging year for the economy with low growth, fiscal deficit, expansionary subsidies and worsening current account balance.
In the previous year, the 2011-12 Budget had proposed to amend the 1961 income tax law by introducing retrospective tax adjustments and General Anti-Avoidance Rules (GAAR). These steps were viewed negatively by foreign investors. Subsequent downgrading of the Indian economic outlook from 'stable' to 'negative' by a major rating agency, led to continued downward pressure on the investment climate.
Additionally, as fiscal conditions worsened during the first half of this year, export numbers were revised in light of data discrepancies leading to a widening of the current account deficit. With this backdrop, the Economic Survey 2011-12 ("the Survey") presented on the 27th February provided a candid and objective view of the state of the Indian economy. The Survey acknowledged problem areas and provided inputs on how to address issues such as fiscal deficit, fall in investment demand and importantly economic slowdown.
In light of the findings of the Survey, the Union Budget 2013-14 ("the Budget") was expected to address the key issue of managing growth and reviving investments. The Budget in its own way did just that. Though there were no high profile announcements or big recovery plan outlined, the Finance Minister did not disappoint. He started by acknowledging the concerns in the economy and recognized that proactive steps are needed to promote recovery.
The Budget starts of in a small but important way. It highlights the need for skill formation and job creation. This is important as the Economic Survey has highlighted in a special chapter the importance of demographic dividend in India. Therefore, one cannot ignore that India presents a young vibrant job force ready to take on the world. The Finance Minister acknowledged that the link between policy and welfare is opportunities, education, skills, jobs and income. Especially income is what links with growth which in turn is linked to investments.
He acknowledged the pain points in the economy and recognized that to boost industrial sector growth, proactive actions would be needed. Policy announcements on creating additional industrial corridors and promoting micro, small and medium enterprises through SIDBI are welcome. It is important that policy announcements are backed with strong ground level implementation. It will be interesting to see how this plays out.
A welcome aspect of the Budget relates to the Finance Minister's commitment to the fiscal consolidation plan. Despite the fact that planned expenditure has increased by almost 30 percent from last year, the Finance Minister continued to target fiscal deficit of 4.8 percent in 2013-14. He also announced that fiscal deficit for 2012-13 has been limited to 5.2 percent. The success of this can be attributed to focused measures undertaken in the second half of the year in cutting expenditure. We have seen that in December, there was a current account surplus and this shows that with commitment, fiscal deficit can be brought under control. The Finance Minister needs to be lauded on this.
An area where perhaps more was needed relates to the issue of a burgeoning current account deficit. Export promotion and import substitution are ways to reduce deficit particularly on the trade component. Though the policymakers are trying to curtail imports through targeted measures such as raising the duty slab on gold, export promotion is something which perhaps should have received some attention. The Finance Minister alluded to the foreign trade policy expected next month. One needs to wait and watch how export promotion measures will be announced in the policy and how this overall addresses the issue of current account deficit. Some clarity on this would have been welcome.
The efforts of the Finance Minister to initiate reforms and come out with an optimistic Budget are courageous. While one may consider some of the Budget measures as muted, recent reforms though implemented in a small way have resulted in lifting investor sentiments. The focus of this Budget seems to be similar - action in small unassuming steps.
It is however, important to note that while the Finance Minister has highlighted growth opportunities and calmed sentiments by showing his confidence in bringing the Indian economy out of doldrums, success of any reforms will depend on the implementation process and the commitment shown by all stakeholders.
The author is a Senior Director at Deloitte Touche Tohmatsu India Private Limited.
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