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Pulls & pressures on PC’s budget

Finance minister P. Chidambaram will have to impress his country with his eighth budget around a month after he charmed business leaders abroad during his four roadshows in Hong Kong, Singapore, Frankfurt and London, organised with the objective of attracting investments.

Unlike the roadshows, where performance is measured on the basis of statement of intent, the proposals in the Union budget — an annual statement of account of the government — have to be backed by facts and figures, which makes the job of a finance minister an unenviable vocation.

Besides, the finance minister has to address an entire gamut of concerns that range from the livelihood of a below-poverty-line farmer to investment options for a super-rich countryman.

Chidambaram, who had assumed the role of finance minister last August, has made his job complicated by raising hopes amid a section that credits him with being the architect for pushing through a contentious policy like allowing foreign direct investment in retail despite opposition from both allies and political rivals. The gradual phasing out of subsidy on diesel and pruning of outgo on account of LPG have also been viewed as Chidambaram’s successes.

As the railway budget has also dropped hints that the UPA-II government will press the pause button on populism for some time, fiscal conservatives — who want the deficit to be under control — think that the finance minister will carry on with his reforms agenda.

But others — even some in his party — want him to shun the reforms path and spend more on populist projects as this is going to be the last full-fledged budget before the 2014 Lok Sabha elections.

When the finance minister will rise to present his budget on Thursday, he will remember all the pulls and pressures.

The Telegraph tries to list them and reads the pulse of Palaniappan Chidambaram a few hours before Union Budget 2013-14.

Poll-wary leader

Demand from budget: It is common knowledge in Delhi’s policy establishment that a sizeable section in the Congress has been pressing for higher spending by the government over the next fiscal, which has become a trend.

A report prepared by Standard Chartered Bank by studying the last 10 general elections reveals that the impact of an upcoming general election on budget expenditure is felt in the two years prior to the election.

Historical data show that expenditure picks up in both real and nominal terms in the two-year period. For instance, the government in power from 1991-96 cut average real expenditure by 4 per cent (year on year) in the first two years of its term, but raised it by 3.6 per cent in the final three years. The trajectory has been similar for other governments as well.

Chidambaram himself went on a spending splurge while presenting the 2008-09 budget when he waived farm loans to the tune of Rs 65,000 crore, increased social sector spending, hiked minimum support price for agro-products and implemented the recommendations of the Sixth Pay Commission.

“This time there will be pressure on the finance minister to release more money for various flagship programmes of the government as the country is heading for a general election next year. We have to see what he does,” said Tapas Sen, professor of economics at National Institute of Public Finance and Policy.

Sources in the finance ministry reveal that some senior Congress leaders have been trying to convince the finance minister to loosen his purse strings through various social development programmes in the next fiscal without bothering about fiscal constraints.

Likely outcome: The finance minister — who has the full backing of Prime Minister Manmohan Singh and Congress chairperson Sonia Gandhi — is unlikely to give in to such demands and will keep his focus on fiscal consolidation. The fact that he has already laid bare his fiscal deficit targets — 5.3 per cent for 2012-13 and 4.8 per cent for 2013-14 — leaves little room for budgetary largesse. He is likely to restrict his populism to allocations for the food security bill and direct benefit transfer (DBT), the money for which may come from pruning the fuel subsidy burden.

Salaried class

Demand from budget: The last year has been difficult for the salaried class as incomes continued lagging behind expenses due to a number of reasons.

Increase in electricity tariffs, higher petrol and diesel prices, cap on the number of subsidised LPG cylinders and higher railway fares — all of these can be linked to the government’s reform initiatives — have made a considerable dent in household purchasing power. High food price inflation, which can be attributed to supply side factors, has made balancing the household budget a difficult job.

“Consumption is nearly two-thirds of India’s GDP…. The erosion of purchasing power seems to be adversely impacting household consumption demand and, in turn, growth,” said Siddhartha Sanyal, chief economist, Barclays India.

The need to focus on growth cannot be overemphasised as the CSO has projected that the economy will grow at 5 per cent in 2012-13, the lowest in a decade. It was 6.2 per cent in 2011-12 and 9.3 per cent a year ago.

The Economic Survey, which was tabled today in Parliament, has projected growth in the range of 6.1 to 6.7 per cent for the next fiscal.

While the survey — which captures the intent of the government — has clearly mentioned that the fulfilment of the target will depend on a normal monsoon, moderation in inflation rate, mild recovery in global growth, growth and job creation in the domestic market will hold the key.

“These are difficult times, but India has navigated such times before, and with good policies it will come through stronger,” said Raghuram G. Rajan, chief economic adviser, in his introduction to the survey.

For most salaried persons, “good policies” will mean measures that can counter-balance the loss of purchasing power.

Likely outcome: As some of the calculations of the finance minister hinge on a growth revival, he may raise the base tax exemption from Rs 2 lakh. The salaried class can also expect some realignment on tax exemption limits for several allowances like education, transportation, medical etc. The income tax exemption on payment of interest on housing loans may move northwards, from the existing Rs 1.5 lakh a year. He may also announce a roadmap for the direct tax code.

Left-wing economist

Demand from budget: At a time fiscal consolidation is the buzzword in the policy establishment, some Left-wing economists are reminding the government about the vicious cycle of low growth, low revenue and higher deficit, if it wants to pursue its policy of expenditure pruning.

Chidambaram, who has committed himself to the cause of reining in deficits, has already shown enough signs to pass on the message that if it is a toss-up between growth and fiscal consolidation, he would opt for the latter. Data reveal that plan expenditure in the first nine months grew only by 7 per cent, much lower than the budgeted 22 per cent.

“This government seems to be making the same mistake as the European countries have made and now paying a price. Our deficit figure of 5.3 per cent (if achieved), is not that bad if compared with the European countries or the US. Cutting down on expenditure cannot solve the problems,” said Prasenjit Bose, a Left-wing economist.

Some policy analysts think that the government should concentrate more on resource mobilisation — through increasing dividend tax, reintroduction of long-term capital gains tax and inheritance tax — and curb the tendency of investments getting channelled into idle assets like gold.

The rising gold imports have caught the attention of the survey as well, which has suggested the need to curb gold imports in order to bring the current account deficit (CAD) down to a comfortable level. The CAD — the gap between domestic savings and investment —in the second quarter of 2012-13 has been 5.4 per cent of the GDP. The figure is alarming if compared to its value, 3 per cent of the GDP, in 1990-91 when the country faced its worst balance of payments crisis.

Likely outcome: A stimulus package from the government seems a distant dream at present. There is a buzz that Chidambaram, who introduced taxes like the fringe benefit tax, securities transaction tax and the banking cash transactions tax, may impose new levies like super rich tax and inheritance tax.

In a country where only 6 per cent of taxpayers report an annual incomes of more than Rs 10 lakh and account for 75 per cent of the total income tax collection, raising their tax rate by say 5 percentage points would not help in reining in fiscal deficit. If at all he imposes such taxes, it would be more to send a political message than the government wanting to tax the rich.

Chamber call

Demand from budget: In view of the sharp slowdown in growth against the backdrop of persistently high inflation, falling investment levels, shrinking export volumes and plummeting consumer demand, almost all the chambers of commerce have made representations to Chidambaram to focus on reviving the growth momentum of the economy.

Against the backdrop of the slowdown in industrial production, which recorded a growth of mere 1.0 per cent in the first nine months (April-December) of the current fiscal, the demand for government intervention to kick-start growth has been loud from the industry lobby.

From urging the government to use a part of the Rs 2.5 lakh crore investible surplus of public enterprises to creating capacity to exempting infrastructure companies and SEZs from paying minimum alternate tax, India Inc has come up with several suggestions in the run-up to the budget.

Although the industry has not demanded a stimulus package through a slash in the excise and service tax rates in view of the fiscal deficit, there has been a demand for status quo in these rates. Industry is also awaiting a clear direction for the goods and services tax (GST), the introduction of which may add a percentage point to the GDP growth rate.

There, however, has been a demand for abolition of surcharge and cess on corporate tax, in line with the proposal of the Direct Tax Code.

Likely outcome: Given the deficit targets that Chidambaram has set, it may not be possible for him to grant tax sops. But he is likely to announce success in a move towards GST. The finance minister, despite his fiscal constraints, is likely to try his best to give a fillip to investments.

“The finance minister is aware that the markets are awaiting some positive news… So, he may announce some measures to boost FII investment in infrastructure bonds. Besides, he has already started inviting investments in infrastructure debt funds,” said Samiran Chakraborty, head of research, Standard Chartered Bank, South Asia.