Boring Budget 2013: Did Chidambram Present Big Bong’s Budget By Mistake?

Indian Finance minister Palaniappan Chidambaram has become a victim of his own image and track record this time round. A budget that would been hailed as very good if delivered by his predecessor, has now sent the markets into a sulk for not being Big Bang enough. It would have been okay for the Big Bong, now in Rashtrapati Bhavan, but not Chidambaram.

Having managed expectations and built up hopes of reviving the economy after he took charge again as FM in September 2012, Chidambaram’s Budget 2013 turned out to be somewhat of a dampener –- a ‘boring Budget’, as fund manager Samir Arora said on CNBC-TV18.

The Budget, which came against the backdrop of a few key major reform announcements by the government, some tough decisions on fuel subsidy and some plainspeak by the FM himself on how the growth momentum needed to be brought back, did not have that ‘awe’ factor which the markets and Corporate India had come to expect of Chidambaram.  To be fair to the FM, however, he did attempt to address the key concerns in his speech, whether it was the need to create employment or bring in greater foreign investment or spur investment activity. But the measures announced in the Budget were clearly not Big Bang.

The best thing that can be said about the Budget, of course, is that it does nothing to unsettle the markets or corporate India – despite the 10 percent surcharge on the super rich (those with taxable incomes above Rs 1 crore) or even the higher surcharge on the dividend distribution tax. He plays with a pretty straight bat and delivers on his broad promise of keeping the fiscal deficit under check – at 5.2 percent of GDP for FY13 – and targets 4.8 percent for FY14. He has cut expenditure to Rs 4.29 lakh crore in FY13 and talks of redeeming the promise of bringing down the fisc to 3 percent by 2016-17.

Whatever the shortcomings, this Budget speech will get high marks for candour. The Finance Minister makes it clear that food inflation is the real worry and he would take all steps to ease the supply-side constraints to meet the growing demand for food items. The FM also made no bones about the fact that getting in foreign investment is a priority at this point, and India cannot choose between welcoming and spurning foreign investment.

“In the budget for 2012-13, the estimate of Plan Expenditure was too ambitious and the estimate of non-Plan Expenditure was too conservative. Faced with a huge fiscal deficit, I had no choice but to rationalise expenditure. We took a dose of bitter medicine. It seems to be working. We also took some policy decisions that had been deferred for too long, corrected some prices, and undertook a review of certain tax policies. We have retrieved some economic space,” Chidambaram says.

The Budget does focus on a few areas: an attempt at employment generation, some moves to please the capital markets, some steps which will make the small and medium enterprises and those who fund them happy. Equally important, he does not tinker with taxes much and keeps the base rates unchanged.

On the other hand, if you add up the measures, there’s probably enough to keep the political constituency happy with several steps aimed at the farm sector and the rural population. The interest subvention scheme for short-term crop loans will continue, and there are a slew of steps on education and health, with Rs 37,330 crore allocated to the health ministry. Almost Rs 66,000 crore has been allocated to the HRD ministry, and Rs 80,000 crore for rural development. There’s even a whole new bank for women.

Some concrete steps have been announced on the infrastructure front. Infrastructure debt funds will be encouraged, there will be a regulatory authority for the road sector and there will be tax-free infrastructure bonds to the tune of Rs 50,000 crore. On the investment side, an important move which could be good news for smaller and medium companies is the investment allowance of 15 percent on companies investing over Rs 100 crore in plant and machinery between 1 April 2013 and 31 March 2015.

The Budget also aims to bring in a greater proportion of household sector savings into financial instruments and hence proposes to liberalise the Rajiv Gandhi Equity Savings Scheme, introduce inflation-linked instruments and give additional deduction of interest upto Rs 1 lakh for a person taking the first home loan of upto Rs 25 lakh, during 2013-14.

Though the capital market isn’t enthused by the Budget – the BSE Sensex is down about 92 points as this piece is being written – the Budget does attempt to appease the markets by giving it some sops.

Markets regulator Securities & Exchange Board of India (Sebi) will be strengthened further, designated depository participants can register different classes of portfolio investors subject to KYC and a major simplification is being worked on to ease the entry of foreign portfolio investors into the markets. FIIs will also be allowed entry into the exchange-traded currency derivatives segment.

In a proposal which is aimed at making the stockmarkets happy, the Securities Transaction Tax (STT) has been reduced for certain categories, and a Commodity Transaction Tax, introduced in a limited way for non-agricultural commodities, will try and bring in a level playing field between the two markets.

On the direct taxes side, the FM did admit he had very little room to give away tax revenues or raise tax rates in a ‘constrained economy’. However, the Budget gives a wee bit to the lowest tax bracket by way of a Rs 2,000 tax credit to every person with total income upto Rs 5 lakh. There have been no broad changes on the indirect taxes side, with the normal rate of 12 percent for excise and service tax being retained and the peak rate of basic customs duty for non-agricultural products retained at 10 percent.

But despite all these measures across a host of areas, where the Budget fails to score is in the Big Picture. There are no clear roadmaps on how the 4.8 percent fiscal deficit figure will be achieved, nothing really big to ensure investment activity gets a quick leg-up. Besides, whether the numbers will actually add up will remain to be seen, given the 30 percent increase he has announced in Plan expenditure for FY14.

After the fineprint is read, Chidambaram’s Budget 2013 will probably go down as a sincere attempt, but one which lacks the power which was required to get an economy seriously in need of some energy. It is on this count that the FM scores lowest. With a Budget which is good, not great, he has lost a vital opportunity.