Palaniappan Chidambaram had promised the nation a responsible budget and he has delivered. The finance minister is on course to take the fiscal deficit back to 4.8% of the gross domestic product (GDP), a level last seen in 2010-11 just before the economy went into a deep dive. The fiscal deficit is pegged at 5.2% in the revised estimates for 2012-13 — and that is half the battle won. The other half a percentage point reduction in 2013-14 will not be accompanied by extra taxes, except the politically correct surcharge on the rich and big companies, and forensic imposts on security, commodity and property transactions. The sundry direct and indirect tax changes announced by the finance minister will bring in only R18,000 crore of the R141,963 crore additional tax revenue expected next year. Mr Chidambaram is betting tax revenue will climb 19% as the economy grows in the range of 6.1-6.7% in 2013-14. This is well in line with the current year’s experience. It will take a bit for tax buoyancy to return above 20%. The goods and services tax and the direct tax code could shorten the wait.
If Mr Chidambaram has been pragmatic with his revenue forecasts, he has been harsh with expenditure. Government spending for 2012-13 is 9.6% higher than a year ago, nearly 5 percentage points less than the original projection. And the austerity is to endure: the finance minister is pencilling in expenditure growth at 3 percentage points below his revenue estimates for 2013-14. This he intends to do with capital expenditure growing thrice as fast as revenue expenditure to bring the revenue deficit down to 3.3%, which still remains on the higher side. The shrinking entry on the government’s books is subsidies that have climbed to 2.6% of the GDP in 2012-13. This is slated to fall to 2% next year with the phasing out of the diesel subsidy and furthermore as direct cash transfers roll out countrywide by 2014. A whittled subsidy bill on its own can restore the fiscal balance Mr Chidambaram is seeking. His belt-tightening message goes out to the wider economy in higher duties on items of conspicuous consumption like sports utility vehicles, smartphones, big houses and eating out at fancy restaurants.
Prudence is but one — albeit the most significant — pedal to push for economic resurrection. On it rests the prospects of lower inflation and interest rates that can pump up languishing animal spirits. Industry and infrastructure are, however, in need of direct intervention. The former gets it in tax credits for investments and the latter in a wider pipeline of funds. Financial savings, likewise, ought to gain from tax credits on equity investments and home ownership, easier access to insurance, and inflation-indexed bonds. The thicket of red tape around foreign investments, which effectively pays for all the oil we buy, is also trimmed with a new definition of portfolio investors, greater access to the country’s capital markets and the promise of a non-adversarial tax administration. The messy energy industry gets an overhaul through revenue-sharing for gas finds and private participation in coal mining apart from the already announced incentive for rationally priced electricity.
Mr Chidambaram has accomplished much by doing little. The market may have priced in higher expectations. It must realise the true achievement here is that economics has prevailed over the populism inherent in an election-year budget. The United Progressive Alliance is doing itself a favour by recognising economic growth with spin-off benefits on jobs and income redistribution is its broadest political plank. The UPA’s most widely anticipated budget, and the flurry of reforms that preceded it, is a credible shot at returning to sustained high growth.