A Responsible Budget within a Restricted Space albeit some Worries on the Expenditure-Revenue Math

The Indian Union Budget for fiscal year 2013-14 has been termed as a responsible budget under difficult circumstances, but a disappointment to those who were expecting extraordinary measures to jump-start the economy. Fiscal deficit in the current financial year has been contained to 5.2 per cent of GDP; this averts any immediate crisis in terms of a sovereign rating downgrade, but has led to a decade low quarterly GDP of 4.5% in the final quarter of 2012, with plan expenditure meant for developmental projects slashed by over rupees 90 thousand crore. With very little room for fiscal stimulus, the Budget has concentrated on infrastructure development and inclusive growth, the most demanding issues at present. Pressing issues like stimulating domestic savings and channeling those to the capital market have also been addressed within the Budget. Some tax responsibility has also been shifted to those who are better equipped to pay.

The Budget included several measures to spur investment both in markets and by corporations, including an incentive on investments in plant and machinery exceeding Rs.100 crore and extending tax breaks for small companies that grow larger, and an expansion of tax-free bonds for infrastructure and broadening of the scope of the newly introduced RGESS. Emphasis was given to foreign investment, with investor registration norms also being simplified.

However, while there is no opacity in the figures, all agree that the revenue projections are overstated in some areas; slippages are expected in tax revenues and the disinvestment target that hinges on stock market sentiment. Non-plan expenditure could also overshoot the target on account of subsidies and any disruption in oil prices.

Following are some highlights of the Budget:

The Budget estimates *Fiscal deficit at 5.2% of GDP in current FY and at 4.8% of GDP in 2013-14 *Net market borrowing at 4.84 trillion rupees in 2013-14 *Major subsidies bill at Rs.2.48 trillion (up from Rs.1.82 trillion) *Petroleum subsidy at Rs.650 billion 2013-14 as against revised Rs.968.8 billion for 2012-13 *Food subsidies at Rs.900 billion against revised Rs.850 billion in 2012-13 *Total budget expenditure at Rs.16.65 trillion, with Plan expenditure pegged at Rs.5.55 trillion *Direct tax proposals to yield Rs.133 billion, indirect tax proposal Rs.47 billion.

The Budget allocates *Rs.2.03 trillion, including Rs.867.4 billion capital expenditure to Defence in 2013-14 *Rs.801.9 billion to rural development *Rs.270.5 billion for agriculture *Rs.140 billion capital infusion in state-run banks in 2013-14 *Rs 100 billion for incremental cost for National Food Security Bill over and above food subsidy

The Budget proposes *No revision of personal income tax slabs; relief in first bracket through tax credit of Rs.2000 for earnings up to Rs.0.5 million to benefit 1.8 crore people *Home loans upto Rs.2.5 million to be allowed an additional deduction of Rs 1 lakh. *Surcharge of 10% on income exceeding Rs.10 million a year; only 42,800 people have declared such income *No change in basic customs duty rate of 10% and service tax rate of 12% *Surcharge of 5% to 10% on domestic companies whose taxable income exceeds Rs.100 million *Capital allowance of 15% to companies on investments of more than Rs.1 billion *STT on equity futures to be reduced to 0.01% from 0.017 % *CTT on non-agriculture futures contracts to be introduced at 0.01% * Zero customs duty for electrical plants and machinery *TDS at the rate of 1% on the value of the transfer of immovable properties where consideration exceeds Rs.5 million; agricultural land to be exempted *a 20% final withholding tax on profits distributed by unlisted companies to shareholders through buyback of shares *to raise import duty on certain luxury items (cars) and certain other items to boost domestic manufacturing *to issue inflation-indexed bonds *to move to revenue-sharing from profit-sharing policy in oil and gas sector *to allow FIIs to use investments in corporate, government bonds as collateral to meet margin requirements *to allow insurance, provident funds to trade directly in debt segments of stock exchanges *to allow FIIs to hedge forex exposure through exchange-traded derivatives *to treat foreign investors with stake of 10% or less as FIIs; any stake more than 10% will be treated as FDI *to make mutual fund equity schemes eligible for RGESS.

Get detailed highlights with our March-2013 issue of E-Updates.

RBI takes pro-growth measures on decelerating growth as inflation expectations moderate

The RBI, which had clearly indicated an interest rate reduction at the start of 2013, took growth enhancing measures after a period of 9 months in its third quarter review of monetary policy stating that it is now critical to arrest the loss of growth momentum. The policy repo rate and the Cash Reserve Ratio (CRR) have each been reduced by 0.25 percentage points to 7.75 per cent and 4 per cent respectively; the latter will inject approximately Rs.180 billion into the banking system. These measures ease borrowing costs and are expected to prompt banks to lower their lending interest rates, a transmission process which has already been started by some banks led by SBI, India’s largest lender.  The challenge is now on banks to manage their deposit and lending rates in a manner that stimulates lending as without affecting their net interest margins.

RBI’s supportive monetary policy was constrained due to the preponderance of non-monetary factors behind the current slowdown along with risks emanating from high inflation, and the widening current account and fiscal deficits. The central bank’s step at this juncture is justified by a number of economic data, which has also prompted the central bank to lower the growth forecast to 5.5 per cent and the inflation forecast to 6.8 per cent for end-March. GDP growth in the first half (H1) of 2012-13 was 5.4 per cent compared with growth of 7.3 per cent in H1 of 2011-12. The manufacturing sector witnessed sharp moderation in growth to just 1 per cent during April- November 2012. Capital goods industries such as machinery and equipment, electrical machinery and computing machinery registered a sharp contraction in output of over 11 per cent during the same period. Industrial growth is expected to stay below its trend due to supply and infrastructure bottlenecks and slack in external demand. With investment activity remaining subdued, the prospects of a quick recovery in industrial growth appear weak. Real fixed investment too has been trending down and could lead to irreparable damage if not arrested in time. The prolonged slowdown in industrial activity is reflected in the services sector growth too. Growth in GDP at market prices decelerated sharply to 2.8 per cent in Q2 of 2012-13 from 6.9 per cent in the corresponding period of 2011-12, the lowest in the previous 13 quarters, primarily reflecting net exports and most importantly weakening private consumption demand, while government consumption is expected to moderate in coming quarters due to fiscal consolidation efforts. On the other hand, the most important factor, so far restraining any interest rate cuts by the RBI, which is headline inflation measured by the WPI index has been moderating recently. 

Even as the timing for this rate cut is right as the external environment is slightly less hostile compared to the first half of 2012, with China and some other emerging economies and the US showing strong growth, while Euro area financial markets look more robust, RBI’s guidance for its future stance on interest rate easing understandably depends on a number of factors. These include global economic risks, such as progress on the fiscal front for the US and the Euro zone and the growth fallout of fiscal austerity, as well as domestic problems such as the containment of the widening CAD and the high fiscal deficit. Future policy will therefore be conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits.

Get the detailed highlights with the February 9 issue of E-UpDates—Ecofin’s monthly statistical bulletin.