Much dust has settled since the presentation of the Union Budget 2013-14. Many people belonging to the middle class have expressed their disappointment with it as there was nothing in the Budget for them. Most people expected the exemption limit of income tax to be raised to Rs 3 lakh but the slabs have remained unchanged. The surcharge of 10 per cent on the super-rich is quite acceptable except that the numbers seem too small at 42,800! Tapping the black money circulating in the economy and broadening the tax base, however, have not been attempted in the Budget. There were no signals given for reducing corruption which seems to be growing by the day, or address other serious issues of rising inequalities, increase in unemployment and rising food prices.
For the common woman (Finance Minister P. Chidambaram used the word "she"), the home loan scheme by way of deduction of interest of Rs 100,000 for a loan of Rs 25 lakh may have thrilled a few first-time home owners. More realistically, many would find it difficult to buy a nice flat for Rs 25 lakh in a metro city.
No big ticket items were announced because the fact remains that this was not a ’normal’ Budget and it is the last Budget before the elections in 2014. It had to be ’corrective’ in nature and indicative of the government’s future policies. Certain populist elements with an eye on the polls were interwoven in the Finance Minister’s Budget speech.
The one big thing that has been averted by the government is a credit rating downgrade by international credit rating agencies. The fiscal deficit has been contained at 5.2 per cent of the GDP. This was done in a very clever way and it has largely gone unnoticed that capital expenditure has been cut quite drastically. The total Plan spending is 18 per cent short of what Pranab Mukherjee, a former Finance Minister, had budgeted for. Next year’s Budget will see a smaller fiscal deficit at 4.8 per cent. Yet all key ministries have got more money and that shows that the government is concerned about poverty alleviation and development. But the same ministries, especially rural development, agriculture and water resources, have large unutilised funds from last year. So why give them so much more?
The latest Economic Survey, on the other hand, gives a realistic picture of the economy. It points out clearly the dangers implicit in the general economic slowdown and the high current account deficit (CAD) that India is facing. It is not just the big imports of gold, oil and coal that are contributing to widening of the CAD but also slow export growth. The wayout is to boost export growth and there seems to be a faint likelihood that demand for Indian exports will pick up soon. Even service exports have declined in the last one year from 8.2 per cent to 6.6 per cent.
To finance the CAD, India will also require massive foreign exchange inflows in the form of FDI and FIIs. Though remittances from abroad have been high, we will still need $75 bn to finance it. The Survey points out that FDI has been slowing down from $15.7 bn to $12.8 bn but FII inflows, which have been rather erratic in the past, have been increasing of late. They were at $9.9 bn in the last quarter of the current fiscal. It would, however, be risky to bank on them to finance the CAD as they keep floating between countries and park the funds in whichever county the returns are the best.
Borrowing from abroad has been through ECBs (External Commercial Borrowings) and NRI deposits. External debt has increased by $20 bn to $365.3bn and the Survey points out: "Of some concern is India’s increased dependence on foreign borrowing as growth has slowed." Indeed, GDP growth has fallen to 4.5 per cent in the last quarter.
The slowdown in manufacturing growth is another point of worry. Investment needs are growing for raising productivity and competitiveness. The Survey reveals that the corporate sector’s investment has been declining significantly. The 15 per cent investment rebate on investments above Rs 100 crore in the Budget is a good gesture but may not be enough to revive industry and manufacturing. Only with interest rate cut can industry revive again.
The savings rate has been coming down and people are actually saving in the form of valuables ( mostly gold and jewellery). This form of unproductive saving has been rising. For boosting savings and diverting them to equities, an incentive has been given via the Rajiv Gandhi Equity Savings Scheme.
This trend of saving less in productive assets has much to do with inflation. While the WPI has been brought under control to 6.6 per cent ( January 2013), food inflation has been in double digit. To control it, the supply constraints and the need to increase agricultural productivity have been addressed in the Budget.
A lot of incentives for raising productivity have been included - specially the much needed increased allocation in storage facilities in the villages. But will it take care of inflation which has mainly been in the case of cereal prices? Cereal price inflation was at a shocking 17.05 per cent in the third quarter of 2012-13. The outlook for all the kharif crops in the current year is bleak according to the Economic Survey. This may aggravate food prices further.
Getting votes from the youth, women and the poor have been aimed at in the Budget. A women’s only public sector bank has been proposed but all banks should be women friendly instead. Access to micro-credit would be more important for rural women rather than a public sector bank. Frankly, women need to be assured of their safety than banks at the present juncture.
Skill development fund for training the youth has been increased, which is a good thing but unless the manufacturing sector picks up there is no hope for rapid job creation in the organised sector.
For the unorganised sector, which employs 430 million people, Chidambaram announced a wider social security coverage, but the very next day the trade unions’ agitation revealed that the coverage is not universal and only minuscule numbers are being covered. For the poor, he has also emphasised that the direct cash transfer scheme will be continued in the future.
For infrastructure, more roads have been promised and more port facilities announced. These types of announcements are a regular feature of every Budget. What was different in this Budget? Almost nothing except that there has been fiscal consolidation. Obviously, it is not going to satisfy the common man, farmers, industry or foreign investors.
(The writer is a Senior Fellow at Observer Research Foundation, Delhi)
Courtesy : The Tribune, March 12, 2013
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