A very practical budget

Finance Minister P Chidambaram presented on 28th February a very practical Budget that would amplify economic growth while ensuring stability.  He has not only reduced fiscal deficit in the current year but also kept his word of maintaining it at 4.8% in 2013.14.  The Budget will make a qualitative and quantitative change to the economy which had been under some stress.

The Finance Minister has rightly combined good politics by providing for a number of welfare schemes while ensuring that growth remains high, inflation is down and exports are encouraged.

The Finance Minister has been selective in putting emphasis on education and public health in the welfare schemes that have been provided for.  Education and public health are the software of economic development and, apart from infrastructure, have become constraints on productivity and consequently higher growth.

The major concern of the Finance Minister has been economic recovery through higher investment.  The plan expenditure has been increased 29% and the investment allowance will encourage investment in private sector.  Inflation will be in check to the extent that the fiscal deficit has been reduced.

The Budget gives special attention to acceleration of investment by providing investment allowance at 15% to companies on investment of more than `100 crore.  This hopefully will generate investment in manufacturing industry but would have been more effective had it been extended to all investments in plant and machinery.

One of the threats has been the excessive current account deficit which requires to be financed from inflows from FII and FDI, apart from external borrowings.  The facilities provided for exports can to some extent reduce the trade deficit and consequently bring about better payments balance.  However, considering that interest imposes a high cost which reduces India’s competitiveness, some incentive related to finance was necessary.  Foreign investment in retail, which is now permitted, could have been made more active since participation of foreign companies in trade also facilitates exports.

As the Economic Survey underlined, one of the bottlenecks for development was the 9% peak power deficit.  To accelerate power development the Budget provides for zero custom duty on electric plants and machinery, low cost funding and incentives for renewable energy.

The increase in investment has to be supported by increased savings.  The latter will be encouraged with incentives like inflation-linked bonds, which should also curtail import of gold.  The liberalised RGESS will generate and direct savings to the capital market that will be further activated with reduction of STT.

While ensuring stability of the tax system, both direct and indirect, the Finance Minister has imposed 10% surcharge on domestic companies with income of more than Rs 10 crore.  This will partly negate the benefit under investment allowance.  It is, in any case, necessary that the temporary increases in surcharge are removed as early as possible and revert back to a stable tax system.

The writer is Chairman R.P. SanjivGoenka Group