Small strokes

The small investor, the small homebuyer, the small saver, and the small enterprise 
are the focus of the budget for 2013-14

By Mohan Sule

There were three challenges facing the finance minister as he rose to present the budget for 2013-14. The first was to revive growth. The second was to stick to the fiscal deficit target. The third was to keep inflation low. Confronting even one of them head-on would have resulted in the resolution of the other two. Balancing demand and supply could have dampened prices without sacrificing growth. Ironically, the roots of these problems could be traced back to the heydays of 8% plus expansion of the economy, which increased the level of income of a large number of people, requiring the import of more energy and thereby fuelling prices. The textbook solution would be to tighten money supply so as to slow down demand and cool inflation. The global credit crunch, however, ensured that traditional solutions that had stood the test of time were no longer relevant. Funds in search of better yields flowed into India despite the fragile health of the economy as the central bank had to keep interest rates high to due to increase in consumption. As a result, the stock market’s surge was not accompanied by the strength of the underlying economy. Complicating the efforts to bring back growth on track was the policy paralysis stemming from a series of scandals. Prickly coalition partners that opposed the rollback of subsidies to blunt the falling revenue and policies that relied on government handouts to erase poverty rather than creating more jobs were the other obstacles.

The year also flags off the election season. Not the best of time even for the most fiscally conservative finance minister. In such a situation, the temptation is to nurture the traditional constituency. Hence, 30% increase in Plan allocation besides 22% more for agriculture, Rs 10000 crore for food security, and Rs 6000 crore for rural housing. Yet there is no major ramp-up in direct or indirect taxes to balance the spending spree. There could be four reasons. First, as the Economic Survey 2012-13 points out, the worst for the domestic and global economy could be over and any tinkering could have delayed, instead of aiding, the recovery. Second, revision in taxes could have been short-lived as the rates would have to undergo another makeover if the Direct Taxes Code bill is passed in the current session of parliament and consensus emerges among states on the Goods and Services Tax rates. Third, of course, is the prospect that such a move would contribute to inflation, which is at a delicate stage as the economy absorbs the partial rollback of fuel subsidies. Fourth, the increasingly vocal urban middle class could be the reason for the feeble attempt to increase the income or service tax rates and base such as levying a token surcharge of 10% on those whose taxable income is more than Rs 1 crore per annum, 6% more excise duty on mobile phones above Rs 2000, 1% TDS on transfer of property above Rs 50 lakh, 100% customs duty on luxury cars, 30% excise duty on SUVs, and service tax on AC restaurants.

Despite the ballooning expenditure without matching revenue-raising steps, the finance minister is confident of bringing down fiscal deficit to 4.8% in the coming year and maintaining it at 5.2% this year. Besides austerity measures and decline in the fuel subsidy burden that allowed him to keep expenditure at 96% of this year’s budget estimate, the bet seems to be on the record 250 million tonnes of food grain production in 2012-13 to bring down food inflation, the main component of concern in the headline inflation. This could pave the way for softer interest rates and allow industry to borrow cheaply. Going by the budget’s efforts to attract them including cutting STT on sale of equity futures, foreign portfolio investors have been recognized as the growth drivers and so also debt as a better option to meet resources: There will be 10% surcharge on distribution tax on dividends, one of the  attractions of equity investing. Road infrastructure is to get a regulator, tax-free infrastructure bonds will make a comeback, and stock exchanges will have a debt segment, satisfying foreign investors and the small saver. Pension funds can now participate in debt and exchange traded funds. Another crucial source of revenue for the infrastructure sector is insurers. Public sector banks will see Rs 14000-crore capital infusion and along with those in the private sector can act as insurance brokers. LIC will have a presence in towns below population of 10,000 in a belated move to reclaim the space occupied by shady chit funds. By introducting tax sops for home loans up to Rs 25 lakh, reducing STT on redemption of mutual funds and ETFs, and imposing surcharge on DDT for debt funds to blunt their advantage over fixed deposits, the overarching theme of the status quo budget is the small saver and the small enterprise: there will be 10% surcharge on corporate tax for those with profit of more than Rs 10 crore. And if India manages by default to become the second fastest economy in the world after China next year not due to any bold efforts but because of the global sluggishness, it will indeed be a small consolation.