THE last week of February is a time when the Indian government presents three crucial documents that reflect the state of the economy, indicate the direction that the nation is headed, and tells the citizens about its finances — in terms of revenues, expenditures, and most importantly, taxes that the people have to pay.
Bureaucrats in finance and railway ministries burnt the midnight oil for weeks at a stretch in the run-up to the last few days of February, as they huddled in their respective secretariats and discussed the finer points with their political masters.
Last week saw three major documents – the Railway budget, the Economic Survey and the Union budget – being presented to parliament by the government. Expectedly, the two budgets were timid in terms of tax proposals or fare hikes, as the United Progressive Alliance (UPA)-government did not want to alienate the public a year before general elections with any harsh proposals.
This was the eighth budget presentation for Indian finance minister P. Chidambaram. He first became finance minister in 1996, when a coalition government led by then Prime Minister H.D. Deve Gowda, was in power. This time, Chidambaram opened up the purse strings, and liberally handed out funds for the UPA government’s social sector welfare schemes.
Even as he warned of the dangers of unbridled growth in subsidies, Chidambaram hiked the budgeted expenditure for fiscal 2013-14 – which begins on April 1 – by a hefty 16 per cent, to Rs16.65 trillion. Amazingly, he also promised that the fiscal deficit for the current fiscal will be at 5.2 per cent of GDP, down from a revised target of 5.3 per cent.
“The fiscal deficit for 2012-13 has been contained at 5.2 per cent. I propose to bring it down to 4.8 per cent by 2013-14,” Chidambaram revealed in his budget speech. However, he expressed apprehensions about the growing current account deficit (CAD). The government would need a whopping $75 billion to bridge this gap.
The finance minister, who has been pushing for the opening of several sectors for foreign direct investment (FDI), made a pointed reference to the CAD when he told lawmakers (particularly those belonging to the opposition Bharatiya Janata Party, that “India, at the present juncture, does not have the choice of welcoming and spurning foreign investment. We need to welcome foreign investment.”
Chidambaram was the finance minister for much of the first term of the UPA government. However, after the 26/11 terror attacks in Mumbai, the government kicked out the then home minister, Shivraj Patil, and moved Chidambaram to the key portfolio. Then last July, Chidambaram was brought back as finance minister after then finance minister, Pranab Mukherjee, quit his job to contest presidential elections.
It was then that he Chidambaram steered a series of moves to deepen reforms, and opened up multi-brand retailing to FDI.
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CONSIDERING his pro-reforms image and the fact that he over-turned many of the regressive measures initiated by his predecessor, much was expected of Chidambaram and the budget he presented. But by making huge allocations to government programmes, the finance minister disappointed local markets.
Both the Bombay and National Stock Exchanges saw key indices tumble, as investors feared that reforms would now be put on the backburner till the middle of next year, when elections would have been held.
Of course, one good thing was that even though Chidambaram was under pressure to raise taxes, he resisted such moves, and only made token gestures of taxing the super-rich. The American and French governments have also recently levied additional taxes on the super-rich in their countries, to help them tide over the economic crisis. However, they also wanted to pacify theirarticulate middle-class population, which had been demanding a tax on the super-rich.
Support for the millionaires’ tax has gained strength around the globe, and the Indian government could not apparently resist hitching a ride on the bandwagon. “I am confident that when I ask the relatively prosperous to bear a small burden for one year, just one year, [then] they would do so cheerfully,” said Chidambaram. The super-rich – people with annual taxable incomes of more than Rs10 million (around $187,000) – would have to pay a 10 per cent surcharge, and the effective tax rate on their incomes would go up from 30.9 per cent to about 34 per cent.
The move would affect less than 45,000 taxpayers, most of whom are unlikely to complain. Chidambaram also raised duties and tax rates on imported luxury cars, high-end motorcycles, sport utility vehicles (SUVs), and fancy mobile phones. Smokers were also targeted.
The finance minister also doled out three packages worth Rs10 billion each, for new schemes and projects. However, much of the money would likely end up sustaining the bureaucratic machinery, overstaffed institutions and, therefore, result in wastage. The first Rs10 billion is for an all-women’s public bank, which would be staffed mainly by women, and cater to disadvantaged females.
However, many observers fear that the women’s bank would also end up as yet another wasteful public sector utility, as public sector banks dedicated to specific segments, like agriculture, small-scale industries and so on, have not served their basic objectives here in India.
The other two schemes are aimed at encouraging youngsters to take benefit of job-oriented programmes, and to empower women and provide them security.
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JUST a day before the budget was presented, Raghuram Rajan, the chief economic advisor to the government, had warned in the Economic Survey of the dangers posed by unbridled subsidies and wasteful expenditure to the country. Rajan is an Indian-American, and is also a professor of finance at the Booth School of Business at the University of Chicago.
“Controlling the expenditure on subsidies will be crucial,” noted the economic survey. “Domestic prices of petroleum products, particularly diesel and liquefied petroleum gas (LPG) need to be raised in line with the prices prevailing in international markets. A beginning has already been made with the decision in September 2012 to raise the price of diesel, and again in January 2013, to allow oil marketing companies to increase prices in small increments at regular intervals.”
The subsidy bill for food, fuel and fertiliser would add up to more than Rs1.9 trillion during the current fiscal, warned the survey. It also cautioned the government about the dangers of a widening current account deficit (CAD), which, at 5.4 per cent of the GDP, is almost double the level at the height of the 1991 currency crisis.
The survey blamed growing import bills for oil and gold for the widening CAD. It called for curbs on the import of oil, and the linking of the sale price to the global oil prices.
Another major concern that came through in the Economic Survey was that India could face a crippling external shock because of its reliance on short-term flows from portfolio investors to bridge its CAD. Such inflows can reverse at any moment, which would not just hurt the Indian currency, but can also lead to a major crisis.
“Though capital flows are bridging the gap, the nature of portfolio capital may lead to greater potential financial fragility and also rupee volatility,” says the survey. “A sizeable share of capital is in the nature of foreign institutional investors' investment that could moderate or even reverse if investors switch to risk-off mode. The balance of payments position, therefore, is more vulnerable, which has been reflected in the high rupee volatility.”