The disappointment surrounding the Budget and the stock market's subsequent decline is really based on expectations being too high and maybe even unrealistic. We all wanted a Budget speech that would lay out concrete steps as to how India would regain its growth trajectory and kick-start investment. In reality, the finance minister cannot solve the problems of stalled projects, incoherent policy, lack of regulatory approvals, etc all by himself. Beyond getting the Cabinet Committee on Investment to meet and take decisions, he cannot force ministries to work together and move files. In other words, he is not the prime minister and cannot perform that role.
However, given that he is the only minister who understands the market and has a sense of urgency and credibility, we want all the solutions to come from him. Nonetheless, it was disappointing that he did not even mention what steps were being taken to address the ease of doing business in India. He did not talk about food inflation and how to address the structural price rise of protein-rich items. There was no mention of how to improve the agri-supply chain, amend the agricultural marketing Acts, or use our food stocks better. While there was talk of skilling and vocational training, the amounts allocated were nothing dramatic. There was no mention of how the government would address the policy issues related to labour flexibility, education and so on. Not enough has been done to encourage financial savings - he could have been far bolder in giving tax breaks for financial investments. The revamped Rajiv Gandhi equity scheme and greater penetration of insurance company offices in semi-urban and rural India are hardly enough. Given Mr Chidambaram's market savvy and willingness to take decisions, investors wanted a big-bang, feel-good Budget - something that would get them excited about India's growth prospects. This document clearly fails on this front.
As for the Budget document, we have to recognise that, given electoral compulsions, it could have been far worse. While the rural development ministry has received Rs 80,000 crore (up 46 per cent), at least there is no loan waiver. The finance minister managed to bring the fiscal deficit down to 5.2 per cent, a target everyone thought was impossible. He did this by savagely cutting Plan expenditure and pushing some subsidy payments into next year, but he delivered the number. The target for next year, of 4.8 per cent, is exactly what he promised.
He has assumed a nominal GDP growth rate of about 13.4 per cent in 2013-14, which seems high; aggressive tax revenue buoyancy; and a subsidy decline of about Rs 10,000 crore. Even so, the 4.8 per cent fiscal target does not seem outlandish. Sadly, even in 2013-14, revenue expenditure is rising as a percentage of GDP (but then, it is an election-year Budget), and we are once again relying on asset sales to meet fiscal targets (Rs 40,000 crore each from divestment and spectrum sales, which is tough). We need to slow revenue expenditure and raise the tax-to-GDP ratio. Asset sales must be done aggressively, but earmarked for capital expenditure.
He has kept indirect tax rates unchanged, for which he should be commended; hopefully, the fine print will clean out a lot of exemptions that permeate the code. The 10 per cent surcharge on high net-worth individuals is not that significant, and he avoided the temptation of an inheritance tax. The increase in surcharge by five percentage points on companies is nothing serious. That only 42,800 Indian residents declare a taxable income of more than Rs 1 crore highlights the need to dramatically expand the tax net through technology.
The net market borrowing number of approximately Rs 4.85 lakh crore for government securities has met market expectations, and should cause no stress on bond yields. There seems to be some confusion over the tax residency certificate and the Mauritius treaty; hopefully, this will be clarified and not cause panic again, just when the whole GAAR issue has been laid to rest. It was disappointing to hear nothing about scrapping retrospective amendments to tax law or clarifying the issue of indirect transfers.
The introduction of an investment allowance for a two-year period and the extension of Section 80IA are useful for firms with capex in process, but not likely to have much impact on investment intentions. An additional Rs 1 lakh tax deduction for housing loans is useful, but not game-changing. The food security Bill finally seems to be a reality. Even though he has only budgeted Rs 10,000 crore for the programme, it has the potential to turn into a real monster in the long term. I was surprised the finance minister did not talk more about the direct benefit transfer scheme, the pace of roll-outs, the likely savings, how it can help cut subsidies, and so on.
Net-net, not a disaster, but not enough done to change the market's trajectory. We are in a trading range, once again hostage to foreign flows and the pace of domestic reform. Government action on reforms over the coming months will be key.
Akash Prakash
Fund Manager & CEO, Amansa Capital
However, given that he is the only minister who understands the market and has a sense of urgency and credibility, we want all the solutions to come from him. Nonetheless, it was disappointing that he did not even mention what steps were being taken to address the ease of doing business in India. He did not talk about food inflation and how to address the structural price rise of protein-rich items. There was no mention of how to improve the agri-supply chain, amend the agricultural marketing Acts, or use our food stocks better. While there was talk of skilling and vocational training, the amounts allocated were nothing dramatic. There was no mention of how the government would address the policy issues related to labour flexibility, education and so on. Not enough has been done to encourage financial savings - he could have been far bolder in giving tax breaks for financial investments. The revamped Rajiv Gandhi equity scheme and greater penetration of insurance company offices in semi-urban and rural India are hardly enough. Given Mr Chidambaram's market savvy and willingness to take decisions, investors wanted a big-bang, feel-good Budget - something that would get them excited about India's growth prospects. This document clearly fails on this front.
As for the Budget document, we have to recognise that, given electoral compulsions, it could have been far worse. While the rural development ministry has received Rs 80,000 crore (up 46 per cent), at least there is no loan waiver. The finance minister managed to bring the fiscal deficit down to 5.2 per cent, a target everyone thought was impossible. He did this by savagely cutting Plan expenditure and pushing some subsidy payments into next year, but he delivered the number. The target for next year, of 4.8 per cent, is exactly what he promised.
He has assumed a nominal GDP growth rate of about 13.4 per cent in 2013-14, which seems high; aggressive tax revenue buoyancy; and a subsidy decline of about Rs 10,000 crore. Even so, the 4.8 per cent fiscal target does not seem outlandish. Sadly, even in 2013-14, revenue expenditure is rising as a percentage of GDP (but then, it is an election-year Budget), and we are once again relying on asset sales to meet fiscal targets (Rs 40,000 crore each from divestment and spectrum sales, which is tough). We need to slow revenue expenditure and raise the tax-to-GDP ratio. Asset sales must be done aggressively, but earmarked for capital expenditure.
He has kept indirect tax rates unchanged, for which he should be commended; hopefully, the fine print will clean out a lot of exemptions that permeate the code. The 10 per cent surcharge on high net-worth individuals is not that significant, and he avoided the temptation of an inheritance tax. The increase in surcharge by five percentage points on companies is nothing serious. That only 42,800 Indian residents declare a taxable income of more than Rs 1 crore highlights the need to dramatically expand the tax net through technology.
The net market borrowing number of approximately Rs 4.85 lakh crore for government securities has met market expectations, and should cause no stress on bond yields. There seems to be some confusion over the tax residency certificate and the Mauritius treaty; hopefully, this will be clarified and not cause panic again, just when the whole GAAR issue has been laid to rest. It was disappointing to hear nothing about scrapping retrospective amendments to tax law or clarifying the issue of indirect transfers.
The introduction of an investment allowance for a two-year period and the extension of Section 80IA are useful for firms with capex in process, but not likely to have much impact on investment intentions. An additional Rs 1 lakh tax deduction for housing loans is useful, but not game-changing. The food security Bill finally seems to be a reality. Even though he has only budgeted Rs 10,000 crore for the programme, it has the potential to turn into a real monster in the long term. I was surprised the finance minister did not talk more about the direct benefit transfer scheme, the pace of roll-outs, the likely savings, how it can help cut subsidies, and so on.
Net-net, not a disaster, but not enough done to change the market's trajectory. We are in a trading range, once again hostage to foreign flows and the pace of domestic reform. Government action on reforms over the coming months will be key.
Akash Prakash
Fund Manager & CEO, Amansa Capital