2013-14 Budget in black and white

February 7th, 2013

Any government presenting last budget before going into elections is expected to make it a populist one. The current UPA government at the centre, however, is indicating that it will not do so.

The next Lok Sabha polls are due in 2014 but signals emanating from the finance ministry hints at a tight and pragmatic budget to kill the threats of a rating downgrade by the international rating agencies to junk from the investment grade.

This is difficult to digest. Experience suggests that the savings made on the plank of fiscal prudence will be utilized to fund some scheme which will be the real ‘game changer’ in 2014 elections as farmer debt waiver scheme proved to be in the previous one for the Congress party.

The government is currently projecting the direct cash transfer as a game changer. Budget for 2013-14 is set to introduce the actual game changer and food security appears to fit the bill. The cost becomes immaterial if the politics is solidly behind a scheme.

Here lies the catch. Will the government be able to bring in a big money spending scheme only with the help of savings or it needs additional revenue generation for the same keeping in mind the sword hanging on the country’s head of rating downgrade?

The current state of government finances suggest that deft balancing would be required between revenue and expenditure if the real game changer scheme has to be introduced in the budget for 2013-14.

Ruling out the chances of extension of tax ambit to those who are out of the tax net at present would be a folly in this kind of a scenario.

Some method to augment tax collection from largely untapped unorganized sector and also the charitable institutions could be in the offing.

Raising indirect tax rates – excise, customs and service tax — is also an option which finance ministry must be looking at and a final call apparently in this case would be taken at the highest level.

On February 28, the analysts would look at the upcoming general budget through the lenses of meeting 5.3 per cent fiscal deficit for 2012-13 and sticking to the 4.8 per cent target for 2013-14.

The political class would focus on the game changer scheme. The ‘aam aadmi’ (tax payers) will count the tax savings, or hit, which the government in all probability would avoid this year.

On balance, additional revenue generation to fund the game changer scheme would be the key and budget team led by finance minister P Chidambaram must have given a shape to it by now.

Those avoiding taxes or not paying taxes at all are likely to be brought on the centre stage, when the finance minister presents UPA-II government’s last budget before Lok Sabha elections.

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Problem is trust deficit, not twin deficit

November 22nd, 2012

While concerns on the twin deficits – fiscal and trade deficit – are being raised across the board, digging deep into the developments in the last two years throws up a simple diagnosis and simple prescription for a remedy to the Indian economy.

Twin deficits are just the symptoms and the real disease is trust deficit, which the current government has created with little scope for redemption.

Why should Indian companies invest at a time when they are not at all sure about the policy direction in any of the areas? Similarly, why should a foreign investor choose this kind of a destination for medium- or long-term investment? Of course, short-term money chasing quick returns will always come, but is that the need of this hour?

The 2012-13 budget proposals including General Anti-avoidance Rules (GAAR) and retrospective amendments have just played the catalyst role in aggravating the situation which was already scripted by policy-paralysis.

The debacles on the 2G spectrum allocation front and failure in getting even one disinvestment proposal through this year up till now are putting immense pressure on fiscal deficit front. The goalpost for this fiscal has already been shifted from 5.1 per cent of GDP to 5.3 per cent of GDP. Clearly, even to achieve 5.3 per cent, nothing less than a miracle would be required.

This could have been possible but the trust deficit, both within the government and also that of the people on the government, is unlikely to help the cause.

The Winter session of Parliament beginning Thursday may provide another lease of life to the UPA government but it is all set to blunt its newly acquired reform drive as FDI in retail may not find majority favour during the impending discussion.

The larger question in this kind of an atmosphere is: should the economy be allowed to languish till 2014 Lok Sabha Polls the way things are going currently?

The prescription in favour of bringing growth and investment back to the track asks for a bitter medicine.

The UPA government has lost trust, if not of the people across the country, surely that of the investing community. This trust is hard to revive. A government running with the support of SP and BSP bears the possibility of getting pulled down any day.

The medicine then is – call it a day – go to the elections and allow this trust deficit to diminish. In the current situation, there is a possibility of a UPA-III or a Third Front government with Congress support if this government goes, besides the NDA option.

Whichever party comes to the power after the elections, will at least start without the trust deficit, and will have a better chance to be able to tackle the twin deficit, inflation and subsequently push the growth prospects.

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