Union
Budget 2012-13-On Expected Lines and little to cheer.
B.
Yerram Raju
Budget is generally
viewed in the backdrop of the Economic Survey. The Economic survey presented
yesterday did not hide the failings thus far in the economy and just fell short
of telling that the governance deficit would something beyond the FM. It laid
bare the retarding growth and rising inflation and also agreeing with the CSO estimate of depressing 5% growth
expectation during the current year. As at the quarter ending December 2012,
actual growth figures ended at just 4.5%. It attributes the retardation to the
declining contribution of services sector from 8.2% in 2011-12 to 6.6% in
2012-13 and in part from the fall in growth in agriculture and industries
sectors. It complements the medium term fiscal consolidation effort that pegged
the fiscal deficit at 5.3%. It expects that the growth would be in the range of
6.1%-6.7% in the coming year. It leaves us the hope that the downturn of the
economy is ‘more or less over.’ ‘Economic slowdown is a wakeup call for
stepping up reforms,’ the Survey mentioned.
It also predicts that
the global economy is also likely to recover setting at rest that the shadow of
continuing global failure would be a drag on the Indian economy. Core Inflation
shown to be at 4.2% and wholesale price index at 7percent with food inflation
at double digit figures leaves one in doubt regarding the inflation figures
mentioned in the Budget speech of the FM .
This optimism left hope
in the markets that the Budget would be in the direction of spurring
investments and domestic savings, measures to increase the consumption to spur
growth and fiscal prudence to contain inflation. But alas, the index fell by 1%
and the currency fell equally after the presentation of the Budget.
It hoped that the
fiscal targeting and the likely downtrend in inflation would help RBI to look
at rationalizing the interest rate structure.
Agricultural growth
declined from 2.7% last year to 1.8%. It called for appropriate policies in the
farm sector to reach the 12th plan target of 4% per annum: for
improved agricultural growth, the survey underlines the need for stable and
consistent policies where markets play an appropriate role, private investment
in infrastructure is stepped up, food prices, food stock management and food
distribution improves, and a predictable trade policy is adopted for
agriculture. The high dependence of employment in the backdrop of a declining
share in GDP to 14.5% is a cause for worry and this requires consistent policy
to develop alternate skill-sets in farm labour to migrate to rural livelihoods
programmes on one side and increasing mechanization on the other. Its analysis
of agricultural credit is however flawed: in the face of declining area and
deficient monsoon, if the banks claimed achievement of credit targets for
agriculture, something is seriously wrong and the Survey should have lent a
word of caution instead of praising the banks for reaching the targets.
The FM had to provide
for capital refurbishment to the Banks in the public sector at no less than INR
1.17crores to meet up with the Basel III norms from April 2013 and the drift in
the composition of NPAs from the erstwhile priority sectors that anyway do not
cross 40% of lending portfolio to the corporate debt hiding mostly in the power
and infrastructure sectors is the biggest worry. He has to provide for the railway
deficit of Rs.26000crores apart from the revenue deficit. Implementation
challenges of Food Security Act would also leave no room for containing the
deficit. Of this, he provided Rs.26000cr to PSB capital in the Budget. Moving
up on the revenue front against an incremental 1 to 1.7% of growth is not going
to be substantial. Therefore, containing the fiscal deficit at the expected 4.8% would appear unattainable.
The supply side issues
as were made out to be the key factors for food inflation at the current growth
in agriculture but had little mention in the budget.
In this backdrop, it
would be interesting but at the same time highly disappointing to see the
Budget neither growth oriented nor towards containing fiscal deficit. There are
also very few indications as to when and how the current account deficit would
be brought down to a reasonable level of, say,3%. Inflation anyway the economy has to reconcile
with during the year, notwithstanding any interest rate cuts that the RBI may
like to offer. Let us now look at the Budget figures as to why I have to come
to such conclusion.
How the pie of rupee
gets divided between revenues and expenditure gives us a clear picture. 27% of
the Rupee in budget 13-14 comes from borrowings while it was 29% in 2012-13.
The question that now confronts us is whether this marginal reduction in
borrowings would contain the fiscal deficit? The straight answer would be a
natural ‘no’. Let us see the other avenues vis-à-vis last year: There is no
change in the corporate tax pie- at 21%. Income tax has a marginal rise of 12%.
Revenue from customs has come down from 10 to 9 percent while the Union Excise
duties are estimated to come down by another 1%. Service taxes and other taxes
are expected to go up by 2% compared to last year at 9% in 13-14. Non-tax
receipts remain at 9% while the non-debt capital receipts are up by a
percentage. In so far as expenditures are concerned, non-plan assistance to
State and Union Territories and Plan assistance remain at the same share of 4
and 7% respectively. Same is the story of State’s share of duties and taxes at
17%; other non-plan expenditure at 11% in the year just concluding and in
13-14. Defence expenditure comes down from 11% in 2012-13 to 10% and he spent
ten minutes in his speech. Central Plan outlay has also come down by a
percentage point from 22% in 12-13 to 21% in 13-14. Do these figures give any
confidence that growth will be spurred? No way. At the same time, the growth
projection is 6.4% - 1.4% more than the current year! He defended the lower
growth rate as part of global phenomenon. China alone is credited with higher
growth. How can fiscal deficit come down to 4.8 percent in the backdrop of such
uncertain growth picture?
Yet, let me list out
some of the best things that this Budget announced:
The FM assured higher
employment for youth. Health sector has secured the highest attention.
Integrated development of women got an allocation of Rs.91.134crores, the
highest share in the recent years. He has even promised an exclusive Women Bank
with Rs.1000cr in the public sector. He may have already identified the Woman
CEO for the Bank!! It would work for the women and by the women.
Investment incentives
have found their due share and the stock markets have everything to cheer up
which they did just for a short while. The MNREGS got an allocation of
Rs.80184crores. This allocation is not backed up by any specific direction.
Actually the scheme objective specifies creating livelihood opportunities but
has confined itself to providing wage distribution with no asset creation. This
has led to serious imbalances in agricultural labour wages and the farmers have
been demanding a mechanism by which the scheme gets dovetailed with the crop
cultivation and horticulture in measurable terms. Rajiv Gandhi equity Scheme
has been liberalized. Household savings have also found a new route. Interest
deduction for investment in housing up to Rs.25lakhs is also on cards and is
likely to be announced after discussing with the RBI. Rs.2000 tax credit at the
lower end of the Income tax bracket would bring cheer to the wage earners. Inflation
Index bonds and Inflation indexed National Savings certificates are the new
instruments of savings for households are welcome features. On the infrastructure
side two ports – one from West Bengal and another from Andhra Pradesh found
mention. National waterways development for bulk cargo transport to ease the
road transport burden has also been announced. MSMEs get a better deal in terms
of allocation of higher refinance from the SIDBI and Micro Finance Equity Fund,
credit guarantee fund and Rs.2200crs for
15 additional technology centres and incubation centres as also waiving the IPO
offering for getting listed on SME Exchange are worthy to note. KVI artisan
clusters also received an allocation of Rs.800crores; handloom sector to get
working capital and term loan at 6% covering 1lakh individual weavers and
Rs.26crores interest subvention.
Another sector that got
rich attention is Finance Sector: He proposed setting up a Standing Council of
experts in the finance ministry to analyse the international competitiveness of
the Indian Financial Sector. He also
proposed a Committee to provide clarity on the treatment of Investment as FDI
or FII.
The most disappointing
attention is for the farm sector that got an allocation of just 1.4-1.5% of the
total budget outlay. Although growth of farm sector at 4%per annum on average
for the 12th Plan is held imperative for attaining 8% growth, there
are no indications to spur such growth in the budget. One can argue that
agriculture being a State subject much depends upon what the States allocate.
But the Economic Survey as we noticed above desired specific policy direction
for food prices, food storage and food
distribution. In the wake of 1.8% growth in the sector in 12-13, and with a
drop in the area cultivated how he expects a lofty target of 275mn tons in
13-14 is a big question mark, On the top of it once the Food Security Bill is
passed how he proposes to meet the nutritious food and grains at the promised
level in the Act for the poor can at best be a wild guess.
It was not also clear
as to how he presumed that the current year’s credit allocation for short term
agriculture at Rs.5.75lakh crores when the area under cultivation has come down
is not clear. On the top of it he proposed to raise such short term loans for
crops that too at concessionary rates of interest to farmers to Rs.7lakh
crores. In any case this does not come from the budget. There is no allocation
for interest subvention for such huge outgoes to the Banks. Continuing 4%interest scheme on farm credit
and treating investment in cold storage as infrastructure funding may be
welcome but he could have treated investment in cold storage transport also as infrastructure
funding. This would have made the
movement of perishables and vegetables, meat etc easier and faster and would
have stabilized their prices for the farmer.
On the manufacturing
front, the budget allows for deduction of investment allowance of 15% on
investment of Rs.100cr or more in plant and machinery during the next two years
13-15. Incentives for semiconductor manufacturing facilities including zero
customs duty for plant and machinery to promote domestic manufacturing of hardware
much of which is currently imported.
He chose to announce
recapitalization of the public sector banks to partially meet the requirements
of Basel III. But when the required recapitalization is of the order of
Rs.1.17lakh crores, Rs.26000cr allocation would be just a little less than one
fourth of the requirement. Another
similar incentive that might be counter-intuitive is, increase in the rural
infrastructure development fund. The
Expert Committee on Agriculture Indebtedness 2007 suggested de-linking of RIDF
from the lending to priority sector. As long as this does not happen, there is
a window of opportunity for the commercial banks to dress up their figures for
lending to agriculture. Third, although cooperative credit structure, occupying
a little over 12% of financial space, is in the hands of States, the FM would
have done well to release recapitalization of such rural credit cooperatives
who have moved forward in effective legal and structural reforms in that sector
because it is they that are within the easy reach of the farmer and they are
the best instruments of financial inclusion if shaped properly. Excluding cooperatives in the effort of
financial inclusion and dependence on the unwilling commercial banks would for
sure delay the process by a decade more if not less.
The announcement that
GST would find its entry in the midstream of the Budget year having covered
good ground to get acceptance of States and an allocation of Rs.9000crores
symbolically is a good push for this important reform measure. He kept to his
word regarding the direct tax by conforming to the code and a marginal increase
at the lower threshold has been noticed to be not upsetting his revenues on
this count. He introduced voluntary disclosure and payment of service tax for
filing a declaration of past dues for the past five years by waiving penalties
and interest on the hope of a million tax payers joining the stream, enhancing
the pass through privilege, providing for bringing jewelry up to Rs.50000 for
men and Rs.1lakh for men as part of baggge that will be welcomed by the middle
class. Similarly mobiles costing Rs.2000 and below would not get into
additional tax levied. Other luxury goods have been taxed. But the rich have
been let off. He is himself rich and would not like to tax himself.
