Originally Published 2013-02-25 00:00:00 Published on Feb 25, 2013
The government will need a lot of explaining to do about the rising corruption in the Budget session and will have to cast its tax net wider to catch the tax dodgers. What it will do to make the tax base bigger could be an interesting feature of Budget 2013.
Expecting a populist Budget
The forthcoming Union Budget will have few surprises and it would be perforce a populist budget, and India's economic performance will be praised and lauded. All doomsday scenarios will be cast aside and India's good performance in the global arena will be emphasised.

Even though all the economic signals seem to point towards a gloomy outlook for India in the next one year (2013), Finance Minister P. Chidambaram is likely to sound optimistic.

He will be hoping that all will be fine soon and India will be on a higher growth trajectory. The current account deficit, which is at 5.4 per cent of the GDP, the highest in absolute terms since 1949, will be played down and India's trade partners who are undergoing recession or slow recovery will be blamed for slow export growth. The high current account deficit could lead to a sharp depreciation of the rupee against the dollar, which will make imports costlier. It will also further deplete the foreign exchange reserves of $296.5 billion. On the other hand, the fiscal deficit, which is also high at 5.9 per cent of the GDP, cannot be reduced to 5.3 per cent in the forthcoming budget because there is no way by which the government can hope to bring down its expenditure or increase its revenue earnings any further.

The current account deficit too can only come down with higher export growth - something which is not possible and the latest export growth figure of below 1 per cent in January 2013 underscores it. India's own penchant for gold imports, however, will receive a strict rap on the wrist by way of higher import duties.

Unfortunately, industrial growth has also dipped in the last quarter and it shrank by 0.6 per cent in December, and agricultural growth is also low and projected at only 1.8 per cent for 2012-13. So, where is the optimism coming from? Perhaps the economic policy makers are looking around the world and when they see that other countries are growing at a far slower rate, they feel good about their own performance. Indeed, the lingering perception of India is of a burgeoning emerging nation. Otherwise, why is it that every developed country is trying to woo India with its products and services? Many are especially coming to India like the recent visit of French President Francois Hollande and British Prime Minister David Cameron to sell big ticket items. India is still growing relatively faster, and the middle class has a significant buying power. There is also a big amount of black money in circulation which gives a large section of the people access to all that they want. And Indians are known for their craving for shopping and liking for imported goods.

The Finance Minister will point out that inflation has come down significantly to 6.62 per cent (even though the consumer price index is still at 10.8 per cent) and will promise a further decrease in the WPI. Even if government spending on education, health and housing receives a cut in the budget (which is unlikely), this group with the buying power will not be affected. They will keep sending their children abroad to study and go to private hospitals for healthcare and will keep maintaining their high lifestyle as before. No member from this group is going to be affected by any austerity measures imposed by the government.

According to one estimate, the black money in circulation is equal to half of India's GDP. No wonder, despite a high rate of inflation, the consumer demand for goods and services in India does not get affected adversely that easily, and there is always enough demand to keep the economy on a roll. The sheer number of consumers is also huge as compared to developed countries with ageing populations, and Indian markets are always abuzz with people. People with lower incomes, however, are likely to cut down their inessential consumption than the robust stable-income middle class which often has more than one source of income.

The corporate sector is also not experiencing drastic salary cuts or facing major retrenchment and in general this sector is not very worried because once again it is likely to get various sops in the forthcoming Budget so that investments continue to flow in. Now the government has made it much easier for companies to go abroad for setting up business. The flow of FDI into the country will continue because there is always a better return to be expected than in neighbouring countries. Also since Mauritius is the biggest foreign investor with 40 per cent of investment coming from there, one can assume that a large chunk of Indian money will continue its 'round-tripping' via Mauritius to come back to India. The Finance Minister may give more incentives for FDI and equity finance to revive small investors' sentiments.

There is unlikely to be any big tax hike to affect the rich in the coming budget or inheritance tax because it will be politically inexpedient to do so, especially when the next general elections are only a year and a few months away. To appease the farm lobby, there will, however, be agricultural sops. It may also give exporters some tax relief and incentives.

In what makes India keep growing and beating recession, the high level of corruption plays an important part as illicit financial flows keep financing high lifestyles and pushing up the demand for luxury goods, real estate and the leisure industry. Everyone in India is aware of the high level of corruption in every walk of life but most are helpless to do anything about it. The government will need a lot of explaining to do about the rising corruption in the Budget session and will have to cast its tax net wider to catch the tax dodgers. What it will do to make the tax base bigger could be an interesting feature of Budget 2013. And whether it will be able to bring back money from Swiss banks is also awaited.

Unfortunately, it is the common man or woman who will have to be happy with small sops if there are any. He or she will have to wait for higher growth in the future. As Mr C. Rangarajan , head of the Prime Minister's Economic Advisory Council rightly pointed out recently, higher GDP growth is important for bringing more benefits to the poor and for creating employment. It is the GDP forecast of 5 per cent by the Central Statistical Organisation (CSO) which is bothering the government. The Finance Minister said that it was an underestimate. Strange as it may seem, the government is decrying its own estimates! It would lay emphasis on a 6.5 per cent growth in the Budget.

Courtesy: The Tribune, February 23, 2013

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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