The Union Budget presented yesterday was, to my mind, a tame affair, along expected lines, and without any concrete policy breakthroughs.
First, the good news: there has been less of a lurch towards populism than was feared. We saw no change in corporate taxes, no special taxes on the more affluent or on capital creation, and non-Plan expenditure growing at a reasonable 8.7 per cent.
Whatever tax changes were made – the hike in excise and service tax rates to 12 per cent, the introduction of a negative list on service tax and so on – were in line with expectations. Some loopholes in corporate taxation, like bringing in a minimum alternate tax for partnerships, were closed. The government has, on a net basis, raised over Rs 40,000 crore of new tax revenue, a significant tax hike.
The finance minister also positively surprised by stating an explicit cap on subsidies of two per cent of GDP in 2012-13 (they were 2.4 per cent in 2011-12), and eventually moving this to below 1.7 per cent in three years. The statement that food subsidies will be fully provided for within this cap means, basically, that over the coming months we will have to see movement on reducing subsidies for fertiliser and fuel to make this overall subsidy cap realistic.
The finance minister also made positive noises about using the Aadhar to move to more direct cash-based subsidies on fertiliser, LPG and kerosene. One would have hoped for a faster rollout, but the commitment to move to cash-based transfers and moving beyond pilots should be commended. The only caveat to this is the desire to redesign a new public distribution system, or PDS, scheme for the food security Bill; this seems to imply no intent to move to cash-based transfers for food subsidy, which would be unfortunate if true.
The Budget arithmetic also seemed to be more realistic this time, though the final 5.9 per cent fiscal deficit will be more like 6.1 per cent for this year, and the target for 2012-13 of 5.1 per cent may be more like 5.3 per cent. The GDP growth assumption of 7.6 per cent, inflation assumption of six to 6.5 per cent, tax buoyancy and disinvestment all seemed sensible.
There was some attempt to boost spending on infrastructure — raising the limit on tax-free bonds for infrastructure to Rs 60,000 crore, pushing the National Highways Authority of India to go for 8,800 km of new roads, incentivising urea investment, and so on.
As for the negatives, the intention to reverse the Supreme Court ruling on Vodafone and bring in a tax amendment, with retrospective effect from 1962, is truly absurd. What signal are we sending to business, when even a Supreme Court judgment cannot be taken to be sacrosanct? Part of the solution to reviving corporate investment is to improve corporate confidence, and this amendment does not help. If you cannot ensure a stable policy environment in a country, why will anyone invest? It seems even a Supreme Court judgment no longer means the end of a dispute with the government; it can go back and change any law it wishes with retrospective effect. This step, like what happened with Cairn, implies a continued desire by the government to bully corporations and get its way. This is a truly horrible signal we are sending to corporations, both domestically and internationally, about the difficulty of doing business in India.
One had also wished that the government took more decisive action on raising fuel prices or on moving to a fixed subsidy on diesel. Similarly, could they not have at least tried to raise urea prices or given a time frame for the introduction of a nutrient-based subsidy framework? Or something on issue prices of foodgrain? Or a step to make this intention to cap subsidies more concrete and believable?
Nothing was mentioned about trying to dismantle the agricultural marketing framework and getting states on board to cut food intermediation costs. The intention to pump another Rs 1 lakh crore of credit into agriculture is worrying, as banks are already finding it difficult to meet the existing agricultural lending targets without bloating their non-performing assets.
The net market borrowing target of nearly Rs 5 lakh crore will ensure that interest rates don’t come down much on government bonds. Corporate investment needs to revive; it is going to be difficult to support this amount of government borrowing and strong private sector credit growth.
Net, net, not a disaster – except for the Vodafone tax issue – but not enough has been done to ensure the markets break out on the upside either. From here on, the markets will remain hostage to global liquidity and the unfolding political drama in Delhi. The finance minister had the chance to deliver a really positive Budget, as expectations were very low. This would have really enthused the markets and driven us to a new range on the upside. He made the right noises about controlling subsidies and revenue expenditure, but given the United Progressive Alliance’s track record, the markets need to see action before they believe.
Akash Prakash, Fund Manager & CEO, Amansa Capital
