India’s federal budget 2013-14 — Playing safe act


P. Chandrasekhr

P. CHANDRASEKHR*

The Union Budget of India for the financial year 2013-14 predictably was on similar lines, as anticipated and in fact, failed to evoke the positive reaction that was much needed to speed up the economy.

To use a cliché, Finance Minister P. Chidambaram had the opportunity to address issues contributing to slowdown in a radical way but, sadly I believe electoral compulsions prevented him and the federal government and instead they chose to play a safe act lest, it proves costly later during the elections.  I am tempted to make a comment on my favourite topic  — NRI taxation:

NRIs and Direct Tax Code

Work relating to Direct Tax code (DTC) is still in progress. The minister affirms that the new DTC is based on the best international practices and will be compatible with the needs of a fast developing economy. Although the Standing Committee on finance had submitted its report, it is still under review and the government is yet to publicise the list of final recommendations.  The trepidation still exists with regard to what the final proposals shall be. Should the committee stick to the old proposals with a watered down version then, the NRIs face the uncertainty of taxation on their global income, which in turn is determined by stay and residency in India and not to forget retrospective taxation.  It would be better if there is no introduction of the same. 

Further, the Vodafone issue will really test the mettle of the political brass and will eventually determine the popularity of India as a safe and steady investment destination. It remains to be seen as to how the government is going to bring the proposals before the end of the current session of the parliament. 

Serious concerns
The finance minister has openly acknowledged the fact that over $75 billion is required to finance the current account deficit. The only way is to encourage actively, the foreign investment consistent with economic objectives of the country. The growth rate of 5 per cent projected by Central Statistical Organisation (CSO) does not offer great effort particularly amongst the backdrop of rapid growth rate seen in China and Indonesia. In the previous years, the growth rate had crossed 7 to 8 per cent and hence, the 5 per cent given the size and strength on India, is not an encouraging number.  All is certainly not well and therefore, more efforts needed by the government on the fiscal and economic front.

In absolute terms, fiscal deficit is at 5.2 per cent for the current year and at 4.8 per cent estimated for the year 2013-14.  Further, with the revenue deficit for current year and 2013-14 at 3.9 per cent and 3.3 per cent respectively, we are not "out of woods at-least not yet".  He has claimed that fiscal numbers are in line with recommendations of Dr Vijay Kelkar's committee recommendations made in September 2012.  Adding to the woes is government expenditure. The minister has also informed that it will be their promise to bring down the fiscal deficit to 3 per cent by 2016-17 and the revenue deficit to 1.5 per cent and the effective revenue deficit to zero.  Honestly, it is not an easy task. Some of the interesting budgetary proposals are as under:

Government will raise Rs142
illion during 2013-14 towards capital infusion in the public sector banks so that they meet capital adequacy, as required by Basel III regulations.  To my reckoning, it could be raised via the capital market so that the money could be externally generated instead of government infusing funds for recapitalisation. There are good 'cherry-picking in the bank stocks' which will in turn provide more vibrancy to stock market.  I am sure, small capitalised banks, looking to expand should find fancy of the investors.

The minister doubled the disinvestment target for next fiscal to Rs558.14 billion from Rs240 billion estimated in the current fiscal. But sadly, as against the planned disinvestment of Rs300 billions, the actual collection has been only Rs240 billion leading to a shortfall of 20 per cent.  This leads us to believe that PSU disinvestment process should be more refined, streamlined and result oriented. While public sector unit (PSU) disinvestment per se is most welcome as a tool of raising resources yet, the process of relying on auction and conventional mechanisms will not yield the desired results. Ideally, bought out deals or even aggressive techniques to sell the same to strategic investors should be considered. 

However, there is this threat of abuse of power but, this can be safeguarded by suitable mechanisms. The planned disinvestment in the current fiscal include Coal India, Indian Oil, Engineers India, PGCIL, NHPC, Neepco and THDCL, Bhel, Neyveli Lignite and HAL. Talking about disinvestment of PSUs and recapitalisation of banks leads to me think as to why not government consider introducing a variation of yesteryear proposals such as 'preference shares'. While remaining a quasi capital yet, large amount of foreign investment can come, which while augmenting revenues will also ensure that the dilution of share capital is not significant. Time to think 'outside the box'.
nFurther reduction in securities transaction tax will ensure that the investors will less to complain from, when they invest in the market.  This is a good step for better market operations. 

nAbout 70 per cent of imported mobile phones and about 60 per cent of domestically manufactured mobile phones are priced at Rs2,000 or below. Although mobile phones enjoy a concessional excise duty of one percent, it must not be forgotten that they play such a pivotal role in economic activity across the country and helps to ease trade flow and commerce.In my view, there should be no excise duty whatsoever.  By pegging the excise duty on phones up to Rs2,000 at 1 per cent and thereafter increasing by 6 per cent above Rs2,000 is not a right step. It is common knowledge that mobile phones that have both data and voice adaptability play such a stellar role both on social and business situations. With a mere Rs47 billion budgeted for the entire indirect tax proposals, it is anybody's guess as to how much the government will be able to raise through this mode?

nThe proposal to increase the defence allocation to Rs2,036.72 billion understandable given the marked uneasiness in the neighbourhood.  While it is open knowledge that India is not expansionist in its objectives yet, the external developments are compelling us to deploy more resources on this area. Although in percentage terms the additional allocation may not be significant yet, the worry remains about the leakages in utilization of budgetary resources as evident from the recent 'chopper scam'. 

nIn the previous year, I had pointed out that it has been difficult to engage with Indian Consultants and service providers. The situation remains the same this year too. Hiring Indian labour and Indian expertise becomes expensive if one were to reckon the competition from elsewhere.  This somehow, none of opinion makers seem to have picked up. Any services provided from India, be it for recruitment and other consultancy etc. is now liable for 12 per cent service tax.  In my opinion select services such as provision of manpower should be exempted.

nThe finance minister aims of India becoming the world's seventh largest economy by 2017 and by 2025, India could become an $5 trillion economy, that is, among the top five in the world. It  sounds exciting to hear this.  A lot of painstaking efforts however, are needed to reach there as the journey is fraught with several challenges.

*The author is group general manager of Jawad Sultan Group of Companies. The views expressed in this article are that of the author and do not represent those of the organisation that he works for

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