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'Budget to be a tightrope walk for Chidambaram, fiscal correction main challenge'

The key challenge before the minister in the budget is fiscal correction, says Edelweiss Group Chairman & CEO Rashesh Shah.

     Last Updated: January 30, 2013  | 13:08 IST

Every budget exercise is a tightrope walk for the Finance Minister. In a loud and jostling democracy such as India, the pulls and pressures on the minister from various sections of society, industry and investors are incredible. And he has to walk this tightrope while keeping in mind the political agenda of the government.

It is not an easy job and had been made difficult this year because the finance minister has to contend with almost four years of fiscal profligacy. And that has resulted in a growth rate that has dropped to about 5.2 per cent, ballooning current account and fiscal deficits, and threats of downgrades by rating agencies.

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The key challenge before the minister in the budget then is fiscal correction. And what needs to be closely watched is not whether the budget meets the target of restricting the deficit to 5.3 per cent; what needs to be watched is the direction that the budget gives economic policy making.

The finance minister may not find it too difficult to meet the deficit target of 5.3 per cent. The worst-case scenario painted by sceptics is a deficit of about 5.8-6 per cent. The half-percentage-point difference between these two numbers (considering a GDP of about $2 trillion) is about $10 billion or about Rs 55,000 crore.

Factor in postponement of some expenses to a new financial year, disinvestment plans, proceeds from spectrum sale, and the government should be able to raise these funds.

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As the minister has reportedly said in his recent speech to global investors, he also has the fallback option of the holdings with the Specified Undertaking of the Unit Trust of India (SUUTI), which are presently valued at about Rs 35,000 crore.

So, the key to the understanding the budget is not the deficit percentage. It is the broad direction that the budget takes and it is on this point that there is a lot of room for optimism.

All signs emanating from the North Block are positive. Not only does the government seem to be fully cognizant of the situation, it also seems to be taking all the right steps to correct the fiscal imbalance and accelerate growth.

The recent decisions to postpone GAAR, partially de-control fuel prices, raise railway fares after a decade, and hike import duties on gold are all indications of this. It is therefore quite possible that, contrary to expectations, the finance minster will refrain from pursuing populist policies and deliver a budget that accelerates growth.

In one area, however, it is likely that the budget could take a populist stance. This is with respect to higher taxation on the super rich. While this generally proves to be counter-productive economically, the prevailing political winds around the globe - witness what is happening in the US - as well as looming elections mean that this move could easily be sold as a populist one.

What form this takes - whether estate duties and wealth tax make a comeback or whether the tax rates on the highest slab are enhanced - needs to be seen. The only hope is that the instinctive liberalising tendency of the finance minister would mean that such hikes may be moderated.

The Securities Transaction Tax, while an added source of revenues during boom times, is now proving counter-productive. This is because, increasingly, our markets are being exported as the proportion of Nifty futures traded overseas is going up. Currently, the lower rate of taxation on the F&O (futures and options) segment also tends to encourage more speculation rather than delivery based trading in the cash segment. It is expected that some amount of rationalisation of the STT will happen, especially for tax applicable on the F&O segment.

With the government serious about pursuing the passing and implementation of the goods and services tax (GST) , it is possible that we will also see a rationalisation of excise duties in tune with the rates foreseen under the GST regime.

But the fact is that despite all this, the finance minister has limited room to raise resources through taxation. Raise the levels too high and it would be counter-productive to business and growth. He has to tread a fine line.

One area where the minister has the largest room for fiscal correction, however, is the expenditure side.

Presently, schemes such as MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) follow the old Keynesian adage: get one set of people to dig a ditch and another set of people to cover it up. By the sheer amount of money the government spends, it will boost Effective Demand.

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With elections only a year away, there should be no expectation that the finance minister will reduce the ambit of social schemes such as MGNREGS. But going by recent news reports, the finance ministry seems serious about making the implementation of such schemes much tighter to stem leakages. The cash transfer being proposed should go a long way in making these schemes more efficient.

But the challenges faced by the Indian economy go beyond what the budget can tackle. These relate to issues such as interest rates, re-starting the investment cycle - especially in the infrastructure sector - and the rising NPAs (non-performing assets) of banks. They require a combination of good fiscal management by the government and helpful monetary policies by the RBI (Reserve Bank of India). It remains to be seen how these two pan out.

Rashesh Shah
Chairman & CEO, Edelweiss Group

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