The finance minister had a difficult task of balancing the objectives of maintaining growth momentum while moving along the fiscal consolidation path. It is heartening to note that fiscal deficit is proposed to be contained at 5.2 per cent in 2012-13 and reduced to 4.8 per cent in 2013-14.
This seems to have been planned on the basis of tight expenditure control and effective implementation of policies and schemes, rather than revenue generation through major new tax measures.
The focus of the budget is on generating growth and through it job creation. The budget has sought to boost investments in manufacturing and infrastructure though this will not happen immediately but gradually as several constraints lie outside the budget. It has also rightly focused on important areas such as development of industrial corridors, ports, roads, etc. including through PPP in coal.
It has taken significant steps towards boosting savings and change the composition by seeking a shift towards financial savings from assets like gold. This would really encourage equity culture and more importantly bridge the investments– savings gap.
The reintroduction of investment allowance at 15 per cent for investments of over Rs 100 crore is welcome and has been a long standing demand of the industry. Increased allocations for key areas such as health, education, skill development, JNNURM are also essential in attaining higher growth. The budget has rightly emphasised need for improved growth in agriculture which is essential to tackle food inflation.
Wide distribution of financial products in small towns and rural areas and enhancement of the Rajiv Gandhi Equity Savings Scheme should help in boosting savings. Measures to widen the bond market and introduction of inflation indexed bonds are also welcome. The finance minister has also signalled that attracting foreign investments is an integral part of the growth strategy. It is also hoped that subsidies will be better monitored and delivered through wider implementation of the cash transfer scheme.
Regarding the deficit issue, Chidambaram has sought to achieve this both by better expenditure management, like greater use of Direct Benefit Transfer scheme as also through non-tax revenue measures such as disinvestment, reducing or disposing of government’s residual shares in non-government companies, auctioning of FM radio stations etc.
The budget has not changed the basic tax structure, even though one would have liked to see some reduction in the incidence of tax burden both on corporate and personal income tax especially in view of the slowing down in consumption growth.
However, concerns arise from the increase in surcharge on corporate tax, DDT and personal income tax. It was expected that the tax base would be widened rather than increasing tax pay-out for the existing assessees. This also brings about an uncertainty in the duration even though the FM has proposed it for one year. Past experience has been that tax measures once introduced have been extended and rates have gradually moved up. For several years the emphasis was on moderate and stable tax policy. Besides, we have seen an increased tendency of tax avoidance and development of a parallel economy with higher tax rates.
Last but not the least, while none of the budget proposals are likely to stoke inflation, the inflation risk nevertheless remains. The imperative is to encourage the private sector to play its role in augmenting the supply-side especially in agriculture and rural development. Government has been taking up some steps in this direction but it needs to do more. It is expected that we would see concerted measures in this regard soon.
Singhania is president, ICC India & director, JK Organisation