Finance minister P Chidambaram delivered a carefully crafted budget on Thursday that sought growth and resisted the temptation to be populist ahead of looming state and general elections.
With the country still at risk of a debt downgrade, prudence unsurprisingly dominated the UPA II’s last budget before the 2014 polls, but there was something in it for three crucial constituencies: youth, women and people entering the ranks of the middle class.
Youth got a large allocation for improving skills, a new public sector bank was created for women and the emerging middle-class got breaks on income tax and home loans. And industry, a group that likes Chidambaram, got reason to cheer: for the first time in nearly a quarter of a century, it was given a generous tax break on capital expenditure.
That said, at first flush, there appeared to be little that stood out in the budget, which was predictably panned by the Opposition and welcomed by business leaders. But a joining of the dots revealed a clear pattern to Chidambaram’s thinking: the first priority is growth and investment. Achieve this, and jobs and the ability to spend will follow.
“Getting back to that growth rate (8%) is the challenge that faces the country,” the Harvard-educated finance minister said during the course of a one-hour-and-45-minute speech in which he invoked Tamil saint Tiruvalluvar on the importance of being steadfast.
Noting that growth of an economy was correlated to the investment rate, Chidambaram said: “The key to restart the growth engine is to attract more investment both from domestic investors and foreign investors.”
The extent of the task was underlined hours after the budget speech, when data showed that the economy grew at a weak 4.5% in the third quarter, setting the country on course for its worst annual growth in a decade, crimped by poor factory output and patchy monsoons. The Sensex stock benchmark ended 1.5% lower and the rupee fell.
To spur investment, Chidambaram introduced a 15% investment allowance for companies investing Rs. 100 crore in plant and machinery, over and above depreciation. And he unveiled other growth-oriented measures like industrial corridors between Chennai and Bengaluru and between Bengaluru and Mumbai.
With a view to leaving the emerging middle-class with a little more to spend, Chidambaram offered tax exemptions to those who earn between Rs. 2 lakh and Rs. 5 lakh a year, a move that will benefit 18 million taxpayers, or about half of the country's tax base.
"I propose to provide a tax credit of Rs. 2,000 to every person who has a total income up to Rs. 5 lakh," Chidambaram said. The measure will, in the final analysis, yield tax-payers a benefit of Rs. 3,600 crore.
First-time home buyers will get an additional deduction on interest of Rs. 1 lakh for home loans up to Rs. 25 lakh.
But "relatively prosperous" persons with a taxable income over Rs. 1 crore — and there are supposedly only 42,800 of them in India — will have to pay an additional surcharge of 10%.
Chidambaram also increased the excise duty on most sports utility vehicles (SUVs) and customs luxury cars, superbikes and yachts, making these goods costlier but earning the exchequer precious revenue.
The budget was not without a dose of populism.
The minister set aside ample resources to fund a proposed food scheme, which once voted into law, will entitle two out of three Indians to government-subsidised rice and wheat. The scheme will cost an additional Rs. 10,000 crore more to the exchequer.
It will be the latest addition to the UPA regime's welfare cupboard, joining the ranks of successful entitlement programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme.
Chidambaram, a 67-year-old lawyer-turned-politician in his third term as finance minister, has had to grapple with the impact of stalled reforms, policy missteps, high inflation and the perennial threat of a downgrade by credit rating agencies.
From a foreign investors' darling to a slowing economy, the deterioration in India's image has been rapid and demoralising.
Foremost among the worries over the economy has been the widening fiscal deficit, or the amount of money the government has to borrow to fund its expenses. Chidambaram pledged a fiscal deficit of 4.8% of GDP in 2013-14, down from 5.2% this fiscal.
The minister raised the annual allocation for defence, a sector recently rocked by charges of kickbacks in a deal involving the purchase of luxury helicopters, by 14% to Rs. 2,03,672 crore for 2013-14. India is the world's biggest importer of arms.