New Delhi, Feb. 28: Finance minister P. Chidambaram today failed to ignite hopes of reviving a stuttering Indian economy after presenting a budget recipe that was long on optimism and short on substance.
The big focus was on fiscal prudence with the finance minister promising to cap the fiscal deficit at 4.8 per cent in 2013-14 after claiming he had wrestled it down to 5.2 per cent this year.
“I know there will be a lot of scepticism,” Chidambaram said, anticipating the disbelief that experts voiced throughout the day over his budget arithmetic and growth assumptions.
The UPA government — which faces a crucial general election next year — raised expenditure to a record Rs 16.65 lakh crore in 2013-14, a 16.5 per cent increase over the current year’s spending. In dollar terms India’s budgetary spending of $314 billion is one-and-a-half times the size of Pakistan’s economy.
India is projected to grow at just 5 per cent this year — far slower than the 8 to 9 per cent growth it has consistently achieved for most of the past decade.
Late in the evening, the Central Statistical Organisation reported that GDP growth in the third quarter (October-December) was a dismal 4.5 per cent, deepening worries about the future of what was once touted as the world’s second-fastest growing economy.
While he was successful in holding fiscal deficit within the “red lines” drawn by the Kelkar committee last September, Chidambaram admitted that the bigger worry was over the current account deficit (CAD) — the yawning chasm created by the gulf between dwindling exports and soaring oil-driven imports.
“We have to find over $75 billion to finance the CAD,” Chidambaram added. This deficit is normally financed by foreign fund flows in the form of investments and overseas borrowings.
“Foreign investment is an imperative,” the finance minister said, but failed to articulate a credible set of measures that would help ratchet up dollar inflows into the country.
The budget slapped a new 10 per cent surcharge on individuals with incomes of more than Rs 1 crore a year and firms earning more than Rs 10 crore) and gave taxpayers at the bottom of the pile a token relief of Rs 2,000 that didn’t win the UPA government any brownie points.
The Centre has limited his net market borrowings to Rs 4,84,000 crore — a mere 3.6 per cent growth over the revised estimate of Rs 4,67,384 crore — seemingly creating more space for the private sector to borrow more from banks at home. But it isn’t likely to start a stampede for rupee borrowings because of the high domestic interest rates and companies’ preference to raise loans abroad.
But there were two big surprises: the finance minister has slashed the subsidy bill by 10 per cent to Rs 2.31 lakh crore from Rs 2.58 lakh crore in the revised estimates for 2012-13. The biggest axe is on petroleum subsidies that have been slashed by almost 33 per cent to Rs 65,000 crore.
At the same time, he has estimated disinvestment proceeds at Rs 55,814 crore, a sharp jump of 132 per cent over the revised estimate of Rs 24,000 crore in the year that ends on March 31. A closer look at the documents shows that the government intends to raise Rs 40,000 from the sale of its stake in state-owned companies, and another Rs 14,000 crore from the sale of holdings in non-government companies.
Investors dumped stocks in disappointment, sending the Sensex sliding by over 290 points to 18,861.54 at the end of a volatile session.
Defence spending has been capped at Rs 2.03 lakh crore, an increase of just 5 per cent.
Some economists felt that it was a good plan of action given the circumstances in which it had been prepared.
“He has tried to balance growth aspirations with populist pressures. He is also trying to woo foreign investors — not by doling out incentives but by suggesting that the government will behave. It will not over-spend. It will fast track investment and hand hold you where needed,” said N.R. Bhanumurthy of the National Institute of Public Finance and Policy.
Except the super-rich surcharge, the other change of note was a Rs 2,000 tax credit to be given to tax-payers with income of less than Rs 5 lakh taking into account higher inflation.
The budget proposed to give tax breaks to first-time home buyers who take loans of up to Rs 25 lakh, offered investors the opportunity to invest in inflation-indexed savings schemes, and softened some of the rigorous provisions in the Rajiv Gandhi Equity Savings Scheme that is designed for newbie investors.
But there were many critics of Chidambaram’s eighth budget. “If the idea was to revive the investment climate and promote investment, nothing much has been done,” said U.R.Bhat, managing director of Dalton Capital Advisors (India).
The government, which is battling high inflation, slackening demand and rising debt, is hoping that domestic and foreign investors will continue to pump money into the economy.
If they do, Chidambaram’s gamble on growth may just pay off before next year’s election. If they don’t, the economic nightmare may continue.