General Budget 2013: Out of the L(Oops!)

Listening to the Budget Speech 2013 was more fun than I ever expected. The Finance Minister carried a simple and single attitude throughout the speech. His mindset was very clear the way he started it. He accepted the fact that Indian economy is going through a slowdown. He referred to the good old days back in 2009-10 when the average growth rate of GDP was over 8%. Using this fact to point out at our potentials, the minister focused on the need for growth. And then came his punch-line, and I would accept I became a fan of him the moment he said that – My motive of this budget is to ensure a higher growth leading to inclusive and sustainable development.

Whether the budget has actually made a perceptible move in that direction is a different matter altogether! Presently, the GDP growth rate is estimated to be somewhere around 5%, which is not a very impressive figure (irrespective of the overall world scenario). He argues, maybe rightly, that with growth shall come all the other positive indicators. To be safe, he smartly added the words ‘inclusive’ and ‘sustainable’ development to the growth factor.

So this gets us to the first observation that we draw from the budget proposals –

Observation ONE: The government intends to focus on the measures that encourage growth.

There are several measures that encourage growth. The most important among these is – investment. If there is more investment in the economy, there will be more production, higher incomes and consequently higher consumption. Investment comes when there is a sound monetary policy in action. You need to encourage savings, only then it will flow into investments. Mentioned below are some of the excerpts that substantiate this:

	Sector	Observations
1	Encourage investment	§  The government talked about a requirement of investment amounting to US $ 1 trillion in infrastructure, about half of which will be coming from the public revenue. § Delhi-Mumbai, Chennai-Bangalore Industrial Corridors to be allocated higher funds for development §  Additional tax-deduction for interest to people who construct their homes for the first time
2	Encourage savings	§  Many tax free bonds and funds shall be encouraged that cater to the need for infrastructure (like IDFs) §  The scope of Rajiv Gandhi Equity Scheme has been encouraged
3	Promote education	§  Allocation of around 65000 crore for RTE and Sarv Shiksha §  Stress on the need for educational and vocational training of youth, allocation of about 1000 crores §  Scholarship programmes to girls and SC/ST/OBCs §  Mid-day meal
4	Support Agriculture	§  Allocation of about 27000 crores to agriculture ministry §  Agricultural credit scheme extended to loans taken from the private sector banks §  Minimum Support Prices retained at the high levels

All the above measures are likely to boost growth. Nevertheless, whether the measures are really as effective or not is something that time will tell. There are, however, certain concerns that haunt my mind. All the above measures are likely to have a direct impact on the fiscal deficit.

This gets us to the next observation –

Observation TWO: Growth measures are likely to increase the fiscal deficit, thereby impacting inflation  

Fiscal deficit is the amount by which the planned expenditure exceeds the planned revenue. The above mentioned plans of action will either increase the public expenditure or decrease the public revenue, thereby increasing the fiscal deficit. The side-effects of fiscal deficit are significant.

Whenever the fiscal deficit rises, the economy is affected by what is popularly called “inflation”. Inflation is nothing but a rise in the general price level of the economy. Price, as we all know, is a function of demand and supply. Therefore, inflation increases when the gap between demand and supply increases. How that will happen is something to be understood.

Whenever the government increases its expenditure, the money reaches in the hands of people. This  money gives them the purchasing power and therefore it leads to an increase in the demand. This is evident from the measures announced in the budget – more tax deductions, tax free bonds etc. The concerns for inflation are most likely in such circumstances.

In his speech, the finance minister referred to this concern. He mentioned that the WPI inflation in the economy is around 7% and the core inflation is around 4%. He understands that any increase in the fiscal deficit may not be a good sign for the progress of the economy. Yet, he proposes increase in the government expenditure. So the question is – What is going on in his mind?

This gets us to the third observation –

Observation THREE: Government intends to curb fiscal deficit

During the count-down to the budget, in the month of January and the first week of February, 2013 – the Finance Ministry gave clear indications of its intention to curb the fiscal deficit. The current year’s fiscal deficit is estimated to reach somewhere around 5.2% of the GDP. Our Finance Minister expects this to get down to 4.8% by the end of the next financial year; and further curb this to 3% by 2016-17.

But the question is – HOW? There are only two ways to reduce fiscal deficit – (1) Either reduce the public expenditure; or (2) Increase the public revenue. Let us consider whether these measures are really envisaged in the budget speech – There is no question of reducing the public expenditure. Our minister happily announced that allocations for almost all the sectors are higher than the last budget, subject to some insignificant exceptions. Thus, the only route available with the government is to go look at the government revenue.

This gets us to the fourth observation –

 Observation FOUR: The Government needs money

Let me be very frank: this does not come as a surprise to me. Of course the government needs money. When you have just gone through some of the worst scandals that the country has ever seen, including the coal block allocations and the 2G spectrum allocation scam, obviously the government needs money! This was very evident from some of the dialogues that Mr. Chidambaram used in the speech.

“So when the finance minister needs money, where does he turn towards? The cigarettes!”; or another of his dialogue, “I’m sure when I need money, the top notch of 42800 Indians who admitted to having an income exceeding Rs. 1 crore will not mind paying surcharge of 10% on the tax!” These are not the exact words that he might have used, but then this is what he meant to say.

The problem with the Indian politics is – you cannot take the right steps for the economy, because timing is very important! But some people would call it right. It is only a matter of perception. How would you react to this in context of the elections that are coming up next year? Maybe the budget was politically right, but economically flawed!

How it was economically flawed, is something that I will point out in the following paragraphs. So the next observation for us is –

Observation FIVE: Although money is needed, no increase in taxes has been made

Now this is where our analysis takes a humorous turn. This is why I pointed out at the beginning of my post that the budget speech was more fun than learning! I will explain the joke to novices –

Consider the economic circle:

First, you say that we need growth. Then, you encourage spending in order to increase growth. But, you are afraid that increasing the expenditure will increase fiscal deficit. An increase in fiscal deficit will lead to inflation. So you say that fiscal deficit needs to be reduced. If you have to reduce deficit and increase expenditure, there is only one way out – increase the revenue. BUT, you do not make any changes in the tax rates – so how does the revenue rise?

No – the joke is not over yet!

Now let us flow back the economic circle:

Let us “ASSUME” that the economy grows. This leads to more production and higher taxes (even though the rate is same, amount will increase!). Thus, you can reduce fiscal deficit even if you increase public spending. Why do you want to increase public spending. Because doing so will ensure growth! Hang on, but we have already ASSUMED a growth. So why do we revolve around it then?

The real part is – the government expects the economy to grow! So the next observation is –

Observation SIX: The Government has made an inherent assumption of growth

Due to the logics mentioned above, what comes out to the fore is the sad story of how the government expects the economy to grow inherently. This is surprising to compare with the first observation when we say that the country needed growth. If that was to be, we cannot assume that there is going to be a growth in the GDP.

This is how the budget seems to be economically flawed

Maybe the government depended too much on the RBI’s monetary policy to aid growth. Recently, the RBI relaxed the cash reserve ratio and lowered the interest rates. That is expected to inject more money in the market. But whether this measure is strong enough for the government to make an assumption of a higher growth? This is something that the finance minister was silent upon.

Interestingly, in his speech, he talked about the expected fiscal deficit for the 2013-14. However, he did not make a clear expectation regarding the GDP growth rate for year 2013-14. So there we go – we are basing our arguments on hypothetical assumptions!

Some other observations from the budget –

1.      While talking about the need for investment, the Finance Minister played a smart game by referring to the need for FDI. This becomes important in light of the controversy that surrounds the government relating to the FDI in retail. More importantly, the definition of FDI and FII is defined clearly with the distinction mark of 10% stake.

2.    The Finance Minister had also referred to the growing current account deficit. This is mainly due to oil and gold imports. He addressed the gold attraction by encouraging other saving options for household investors such as Rajiv Gandhi Equity Scheme. As regards oil, he was silent. Nevertheless, there has been no significant change in the customs duty. So it becomes tough to see how the minister seeks to address the concerns that he himself pointed out.

3.  The marginalised increase in taxes is targeted mainly towards the high-income group. This is evident from the proposals – (1) increase in customs duty for motor vehicles, yachts etc that are mainly used by high class people.; (2) Excise duty on high-class smart mobile phones; (3) Introduction of surcharge for people having income above 1 crore etc. All these measures are likely to impact only the high end people. This might be because the government does not see them as the potential vote banks. How many of the civilised and educated Indians are going to vote for the UPA in any case?

4.    The budget was used as a political tool to cater to the needs of the UPA; instead of being used as an economic tool to cater to the needs of India. More focus remained on SC/ST/OBCs, women empowerment (not to forget the idea of a women’s bank! The best it did was to make me laugh amid the boring words), food security, SMEs etc. All of these are missions that were advocated by the UPA. I do not say these are not important, but I must be concerned about the ground realities regarding the implementation of these schemes.

5.   Somewhere during the speech, the Finance Minister referred to the need for a clear, fair and stable tax administration matched with the best global practices so that investor confidence is maintained. I don’t say it, but it does give a feeling of the government’s stand on the Vodafone case. Nevertheless, he did not talk about any clear timeline regarding the implementation of the much awaited direct tax code and the GST.

6.     Some measures were adopted to address tax evasion. This includes – (1) TDS of 1% on property transaction exceeding 50 lakhs in value; (2) Incorporation of GAAR (General Anti-Avoidance Rules) in the Income-tax Act; (3) Introduction of one time scheme for defaulters in service tax to make a truthful declaration and avoid any penalty (he also mentioned “interest” in his speech, but I’m not so sure of it.) Nevertheless, I do not call these some hard-core measures that were really required to check the tax evasion. The minister remained silent on the issue of money laundering for instance.

Overall View

I am sorry to say, but in my opinion, this general budget was only a formality.

28^th February comes every year. And the Minister of Finance is expected to arrive with his kit-bag, pose smiles for the waiting photographers, enter the Parliament, start speaking from his file, face a little resistance from the opposition, praise the ruling party and sit down at his seat. This is bound to happen, and this has happened.

And the rest of the country is expected to stick to the televisions, turn off the cell-phones for a while, hope that it has something in it for them, switch through the news channels, and finally conclude that it does not really change the miserable lives they’re already going through. This was bound to happen, and this has happened.

The budget sails us through all the problems that we’re facing, and gives an overview of what needs to be done; but sadly – does not actually take any confident step in that direction. To me, it only seemed as a formality. I’m sure Mr. Chidambaram was not very excited about today.

He did not take any strong decisions that he could have to sail us through the slowdown we’re going through. In English, there is a phrase called “being out of the loops” – which means not being involved with the real issues. The title of this post speaks the most of it.

Palkesh Asawa

Indore