Budget 2013

by R Jagannathan

Quick verdict on

a mouse in budget 2013

R Jagannathan Feb 28, 2013 12.31pm: Excise on cigarettes up 18 percent, SUVs from 27 to 30 percent. Bad for ITC and Mahindra and Mahindra.Duties on mobile phones up, especially those above Rs 2,000 price. Service tax on all airconditioned restaurants even if they dont serve liquor. The markets have taken the increase in corporate surcharge, and the hike in dividend distribution tax badly despite cut in STT. derivatives too. Commodity transaction tax coming up only on non-agricultural commodities. Stock markets should be happy, but not commodity markets. 12.07pm:Here comes the tax blow. Only 42,000 people with incomes of over Rs 1 crore. Additional surcharge of 10 percent for them. Tax administratin reform commission to be set up. Will raise tax-GDP ratio 11.9 percent. Says time for prudence, restraint and patience. Rates of taxes 10-20-30 percent wont be changed. Level of tax-free threshold to be raised: for 2-5 lakh bracket, tax credit of Rs 2,000 to be given. Rs 3,600 crore revenue loss. 12.05pm:Fiscal deficit is 5.2 percent; for 201314, it is 4.8 percent. Revenue deficit at 3.9 percent and 3.3 percent for next year. Now, taxes. 12.03pm:The first phase of the speech is drawing to a close. We now have to move to the tax part. Wait with bated breath. But the markets are in negative territory. 12.01pm:Post offices to become part of banks core banking. This means POs cant become banks, but can offer bank-like services. 12.00 noon: Sebi Act to be amended. Sebi to unify various FII categories. FIIs to be allowed to participate in currency derivatives. FII and FDI holdings to be based shareholding. Below 10 percent, a stake will be classified as FII. This is a route for those keen to build up a clandestine stake through the FII route. Pension and provident funds can invest in exchange-traded funds. Mutual Fund distributors allowed to become stock exchange members. Stock exchanges to have dedicated dent segment. Markets still under the weather. 11.44am:First womens bank with Rs 1,000 crore capital is more pandering to optics. Congress trying to retrieve its image after Delhi
Copyright 2012 Firstpost

how Chidambaram delivered

12.30pm: Peak rate of customs duty remains the same. Some sops for exports. 12.20pm: DTC direct taxes code to be introduced before end of budget session. 12.15pm:Companies with more than Rs 10 crore profits to pay additional surcharge of 10 percent. Surcharge on dividend distribution doubled from 5 to 10 percent. This will tax companies, not rich or less rich equity holders. TDS at 1 percent on properties being sold for more than Rs 50 lakh. STT rates cut from 0.017 to .01 percent for equity futures. Small cuts for mutual fund and

gangrape. Public sector compaget additional capital of Rs 14,000 crore simply not enough, given scale of bad loans. Chidu is on his inclusiveness agenda, and talks of allowing insurance companies to set up offices without the permission of the insurance regulator. How is undercutting the regulator wise? What message is he sending? That the FM can do anything? Not that the idea is wrong, but the announcement should have come from Irda. A better move is to allow bank KYC to be used for insurance. 11.43am: New revenue share policy for shale gas, and clearance of exploration in NELP blocks should be a positive for oil sector but Reliance up only by rupee. Market clearly views all they have heard so far of Chidus speech as mere tinkering. Did they expect too much? 11.42am: More money for SME sector, donations to academic institutions for tech to be counted as CSR activity. Big money coming for textile sector, including powerlooms and handlooms. Markets still flat. 11.40am: What are the markets missing here? There is something for savers and investors, including the much-loved investment allowance. But Nifty is up only 10 points, Sensex 35 points at this hour. Theres more for savers. An inflation-linked instrument through PO savings from 1 June. 11.35 am: Finally, a market booster. To attract new investment, investment allowance of 15 percent for companies. savings to get a boost. Measure include: Rajiv Gandhi ESS to be liberalised. Income limit for eligibility raised from Rs 10 lakh to Rs 12 lakh. Higher deduction of Rs 1 lakh for home loan EMIs. 11.31 pm: Chidu talks investment and ease of doing business. He wants investment in infrastructure. Infra debt funds will be encouraged. Four such fund registered, two launched in Feb. Tax-free bonds are losing charm. From Rs 30,000 crore, this year raising down to Rs

25,000 crore. Looks like FM may start facing them out, but says Rs 50,000 crore will happen still in 2013-14 11.30pm: Now we know where the money for next year plan expenditure has come from. It is entirely by cutting this years budget. Plan expenditure was slashed from Rs 5.21 lakh crore to Rs 3.9 lakh crore a saving of Rs 1,31,000 crore which is what has enabled him to raise next years number to Rs 5,55,320 crore. He has cut muscle this year to feed next years spending. 11.25: The FM has started the boring part of the budget, where every minor expenditure will be outlined even though no one has the foggiest where the money will end up. More for health, education, etc. Some of it is money saved from clamping down on expenses this year. Again, its all about outlays, not outcomes. Again the balancing act. Chidu talks of balancing economic policy and econmic welfare. The latter is a tit-bit thrown for placating Sonia and the Congress crowd. And hes talking jobs all over, as we predicted. expenditure target of Rs 16,65,297 crore in 2013-14. Plan expenditure is at Rs 5,55,320 crore up 29 percent. But dont be too impressed with that. He has merely cut expenses in 2012-13 to next year. Neat trick 11.10 am: FM says that current account deficit is his biggest worry. He can say that since he has got that inclusiveness bit out of the way. The choice between is FDI, FII and external borrowings. Wonder what he will choose finally to bring down CAD. Also talks of food inflation as the real problem. He also wants to control fiscal deficit. Wants to rationalise expenditure. Claims it is working. 11.05 am: Chidu is talking of inclusive and sustainable development. Emphasises growth as necessary for inclusiveness. The jholawalas wont like this. They think inclusiveness should precede talk of growth. They may be disappointed by Chidu.

Copyright 2012 Firstpost

Chidu is not only talking the market up, but also taking the National Advisory Council jholawalas down. Lots of words talk of inclusiveness, women, SC/ST. Talk is cheaper than action. 11.00 am: Chidu is talking about the global slowdown rather than ours. This is the political blah when the Economic Survey says that our problems are the failure of policy. No reason for gloom, says Chidambaram. He is talking up the markets, for sure.

ply chains have helped us in a more effective management of inflation and led to a decline in food inflation. But there is, and has been, no relief from consumer inflation. The two indices wholesale prices (WPI) and consumer prices (CPI) are heading in opposite directions. While WPI is going down, CPI is in double-digits, thanks to food inflation. While WPI and core (non-food, non-fuel) inflation are coming down thanks to the slowdown, retail prices are rising. The WPI The fall in the WPI below 7 percent is good news for business and the khaas aadmi, but the rise in CPI is bad news for all of us. It is an electoral red signal. Chidambaram cannot avoid addressing this, for CPI is what concerns the aam aadmi. But we know the food inflation is actually getting worse, thanks primarily to government policy actions in increasing minimum support prices. The Economic Survey said as much: Elevated food inflation, however, remains an area of concern with inflation gradually inching upwards to double digits in December 2012. Unlike the previous year, when food inflation was mainly driven by higher protein food prices, this year the pressure has been coming mainly from cereals. Inflation in cereals has increased to 17.05 percent in the third quarter of 2012-13 from 6.36 percent in the first quarter mainly on account of an increase in prices of wheat, rice, and maize. Besides an increase in the minimum support price (MSP) for wheat and rice, inadequate open market availability relative to demand, particularly for wheat, has also resulted in a build-up of price pressure and hardening of inflation for cereals. The recent increase in onion prices in December 2012-January 2013 may also put some pressure on primary food articles inflation. However, milk and other protein items witnessed moderation in inflation in the second and third quarters of 2012-13. The survey is saying a thing that should be painful to UPA ears: it is saying food inflation is the
Copyright 2012 Firstpost

10.45pm: Last thoughts The big failure of the UPA has been on inflation. The entire boatload of economists available with the government, from the PM himself to Montek Singh Ahluwalia to C Rangarajan to the Chief Economic Advisor (especially the previous incumbent, Kaushik Basu), has gotten nowhere with inflation. Every recent budget has got it wrong, both on growth and inflation. They could get it wrong again, unless P Chidambaram does something more than pay lip service. However, UPAs two Finance Ministers have simply failed to impress. Last year, Pranab Mukherjee said: Indias inflation is largely structural, driven predominantly by agricultural supply constraints and global cost push. Evidence suggests that prolonged periods of high food inflation tend to get generalised. Fortunately, steps taken to bridge gaps in distribution, storage and marketing systems to strengthen food sup-

result of the governments MSP policy, but this is vital to the Congress partys rural vote. If consumer price inflation is going to get worse, and if raising MSPs is critical to getting the farm vote, how is Chidambaram going to do his balancing act? The markets and the rating agencies will be watching this very carefully. 10.20 am: Even more musings before the budget Budgets can signal and impact sentiment, but they cannot really push up growth. If the Economic Survey talked about 6.1-6.7 percent GDP growth in 2013-14 even before the budget, the forecast is probably based on hunch or expectations of big election-eve spending which will anyway push up growth. But if the Finance Minister is to give the economy a real leg up, he has to make announcements about not just his budget finances, but how the system will change to provide the right environment for investment and growth. More important, as the Economic Survey pointed out yesterday, the economy has three choices: business as usual, where growth will level off at 6-7 percent as the new normal; towards decline (which is the case now); or serious reforms, in which case growth can be pushed up to 8-9 percent. Raghuram Rajan described the three scenarios thus: Business as usual (what Chidambaram has to break out of): Some improvement in infrastructure but only slow improvement in education, and no change in institutional structure such as business regulation and labour laws. Some movement from agriculture to low skill services such as construction and household work, as well as to new growth settles into a comfortable 6-7 per cent, the new normal. There is growing presence of unprotected workers in manufacturing and the possibility of rising labour frictions. There is immense pressure on education to make students job-worthy, but with organised manufacturing playing little

role in training workers and imparting skills on the job, there is a continuing mismatch between employer needs and worker capabilities. Growth is slower than it could be and inequality higher than it ought to be. Reforms (what the FM will promise):Vast improvements in infrastructure, education, as well as in business regulation and labour laws. As fewer workers depend on agriculture, larger holdings and more investment in capital and technology create a much healthier agricultural sector, with significant rural entrepreneurship surrounding activities like horticulture, dairy products, and meat. The manufacturing sector becomes a training ground for workers, absorbing more students with a middle or high school education. India moves into niches vacated by China such as semi-skilled manufacturing, even while enhancing its advantage in skilled manufacturing and services. India experiences faster and more equitable growth. Social frictions are minimised as both agriculture and manufacturing create better livelihoods. Decline (what the FM would like to avoid): No improvement in infrastructure, education, or institutions: As fewer jobs are created outside of agriculture, more stay in agriculture, increasing the pressure on land and lowering incomes. Small agricultural plots do not provide enough income, nor can they be leased out. More families break up, with males seeking work elsewhere, and labour participation increases. There is large-scale migration to overburdened cities. More supports are given to agriculture and transfers are made to rural areas so as to prevent further migration. The strain on government finances increases. Income inequality between good service jobs in cities and marginal agricultural jobs in rural areas increases tremendously. Social strains grow. Chidambaram will make noises on reforms to ensure that it is at least business as usual this year. If not, decline is the only possibility. 9.55 am: Behind Chidus smile: Rs 1,00,000 crore cash A big surprise, which is no surprise to money
Copyright 2012 Firstpost

market watchers, is the sheer amount of cash that Chidambaram will be showing on his balance-sheet for 2013-14. This is intended to impress S&P, Fitch and Moodys, the rating agencies who are watching the deficit numbers with a hawks eye. What Chidambaram has done this year is hoard his cash by not allowing any ministry to spend after he took over beyond basic hygiene amounts. The current estimate is that he has Rs 80,000-1,00,000 crore in the exchequers bank balance, and this money is part of the reason why short-term interest rates are so high and the overnight borrowings of banks are around Rs 1,20,000 crore.

parts of the Raghuram Rajan-produced Economy Survey the Finance Minister will choose to take on board. The new thing the Survey talked about this time was jobs both how to increase them, and how to improve the quality of the jobs available in the economy. Now creating jobs is critical to political nirvana. So one can be sure that the budget will talk about jobs. The last two National Sample Surveys showed that there was very little job creation during UPA rule, even while the NDA did much better. The survey makes several recommendations on how to increase jobs: these include giving a fillip to small and medium enterprises, which employ more than 80 million people, reducing the burden of regulation on them, and by improving the access to credit. One should expect announcements in this regard.

What has happened is that Chidambaram has not spent his December advance tax revenues, which has tightened the money market and driven up costs for short-term borrowings. It may also have accentuated the GDP slowdown. He expects to use this cash surplus to show a more moderate borrowing target in 2013-14 and impress the rating agencies. According to calculations by Firstpost columnist Arjun Parthasarathy, next years borrowing number will be around Rs 5,25,000 crore gross, and Rs 5,10,000 crore net which will enable him to maintain the fiscal deficit at around 4.8 percent. Nothing like Rs 1,00,000 crore in the bank to make a finance minister look good, feel good. Who doesnt like money in the bank, even if it is only for a fleeting moment? 9.30: Why Chidu will talk jobs An interesting thing to speculate on is which

The survey talks about easing labour laws, and also makes a case for asking organised sector companies, which created very few jobs after liberalisation in 1991, to take on apprentices. Creating more jobs in the organised sector needs changes in labour laws on hiring and firing, but this is political dynamite. The FM could thus take the apprentice route. Making apprentices easier to hire by diluting labour laws for them is easier no one will strenuously object to the creation of jobs that currently dont exist. One should expect the finance minister to say something on this. Lets remember, the Railway Minister announced the creation of 1,52,000 jobs in railways the other day, despite parlous finances. P Chidambaram is not going to miss this trick. And it may not cost much. You just have to make the announcement; whether the jobs happen or not is another story. 9.15 am: Two certainties: 5.3 percent fisCopyright 2012 Firstpost

cal deficit, higher tax on rich With just about two hours to go before Palaniappan Chidambaram rises to present the budget for 2013-14, the best we can do is try and understand the finance ministers motivations to figure out what his budget box will contain. The two things that appear to a certainty are this: he will meet his fiscal deficit target of 5.3 percent without doubt; and he will indeed tax the rich. Heres the reasoning for both. In the run-up to the budget, P Chidambaram has been on a global roadshow assuring investors about how he is preparing a responsible budget by curbing subsidies and expenditure. But back home he has been muttering darkly about why the rich must pay more and intergenerational equity. He has been talking revenues. The foreign audiences he is really addressing are, first, the rating agencies, who have threatened a downgrade, and foreign institutional investors (FIIs), without whose capital flows the rupee would hit 60 to the dollar in no time. At home, Chidambaram has to please two constituencies: first, Sonia Gandhi and the Congress party, and second, the broader electoral constituency that the party must placate to salvage enough seats to again form a government in 2014.

Chidambarams dilemma is this: how do you prove you are responsible to the raters and still be irresponsible enough to woo his boss without upsetting either constituency. His strategy, as it has unfolded, tells us how he has squared the circle. First, he has focused on the 5.3 percent budget deficit target and drawn a line in sand around it. He has repeatedly done this primarily becausehe knows he can achieve it this year. This will mollify the rating agencies. Second, he also knows that he has no leeway to spend. Beyond token allocations to food security or other freebies, he cant satisfy his pro-poor constituency. This is why he has been talking about taxes on the rich. There are two ways to placate the poor mans lobby: one is by throwing a few shekels into his bowl, and the other is to rail against the rich. If you cant help the poor since you dont have the money, shout at the rich. It works well in politics. This is why one should expect a small hike in taxes on the rich by either imposing a higher surcharge on the upper income brackets, or by taxing so-called luxury goods. Or both.

Copyright 2012 Firstpost

The speech that Chidambaram wont make

What kind of Budget speech do we really require from P Chidambaram this year? Here are some things he needs to say to put India on the road to recovery.
R Jagannathan Feb 27, 2013

adam Speaker

With all humility, I would like to acknowledge that my reading of Indias growth prospects in 2008 turned out to be totally wrong. In 2008, with considerable pride I mentioned that the four years to 2007-08 have been the best years so far but, may I say with humility, that the best is yet to come. I am afraid, I have to eat my words today, in even greater humility. The five years since then have turned out to be very difficult for the Indian economy, and we have to produce our best today in order to see that the economy does not sink further into a morass of despondency and pessimism.
Copyright 2012 Firstpost

I rise to present the Union Budget for 2013-14. It is exactly five years since I presented my last budget in February 2008. Much water has flown down the Cauvery since then, and I realise that the situation today is the exact opposite of what I thought it to be on that day. GDP growth is down, consumer price inflation is still in doubledigits, the fiscal deficit is still very high and the current account deficit is clearly unsustainable.

While it would be easy to blame the global financial crisis and high oil prices for our troubles, I must admit that crises come and go, but it is the quality of our response to troubles that matter. We have flunked the test before, but we cannot flunk it again. The future of the Indian economy and the well-being of our 1.2 billion people is too important to be sacrificed on the altar of ego. In order to correct past mistakes, it is first important to acknowledge them. So I will begin by explaining what went wrong from 2008 to now, and how I propose to begin setting things right with this budget and beyond. One, we assumed in 2008 that 9-10 percent growth was our birthright. It turned out that we have to work hard for growth. In particular, spending our way out of crisis is not always the best way to revive growth after a global financial crisis. Two, there can be no growth with high inflation. We know our social spending did a lot of good, including lift several millions out of poverty, but the resultant inflation is pulling some of them back into poverty while also making our spending on schemes like the Mahatma Gandhi Rural Employment Guarantee Scheme unsustainable. If the scheme does not create commensurate assets, the higher spending cannot result in higher rural productivity which is essential to pay for the scheme in future. We have to fix this scheme to obtain optimum benefits. Three, our current account deficit, which has reached an all-time high of nearly 5 percent of GDP, is simply not acceptable. This has happened due to our failure to pass on the costs of higher global fuel prices to users in India, as a result of which domestic consumption soared, and people purchased diesel SUVs and used diesel inefficiently. Not passing on real cost increases to customers is a moral hazard we could ill afford. It ruined both central finances and our external deficits. We have begun correcting that, but much more needs to be done before we can say we are out of the woods. Four, we cannot borrow our way to higher spending whether from internal sources or from abroad. That way we are headed for the

same future as Greece or Spain or Italy. We went down that road in 1991, and I would not like to go down in history as the Finance Minister who led the country to external bankruptcy. It is with these explanations and acknowledgements of past mistakes I would like to present the Budget for 2013-14. Madam Speaker, I would like to outline the key fiscal and other objectives for the UPA government in this last full budget before the next general elections due in May 2014. In many ways, the situation facing today is not very different from what we faced in 1991. The only difference is that we have more forex reserves now than at that time. This is a matter of both regret and hope. Regret, because we failed to learn the lessons of the 1980s which brought us to 1991; hope, because we know we faced the earlier crisis with resolute action. This time too I hope to do the same. Our esteemed Prime Minister was Finance Minister in 1991 under Narasimha Rao; I hope I will have the same support of the Prime Minister and the party President, Smt Sonia Gandhi, as I set out to correct the mistakes of the past nine years. First, our export system is broke. Over the first 10 months of this year, we have seen exports crash and imports rising faster, leaving us with a huge trade deficit of over 10 percent of GDP. While recognising that exports will not revive till global growth recovers, we still have to fix our huge current account deficit (CAD). To give exports a sharp leg-up and give the system some shock-treatment, I propose to devalue the rupee to Rs 60 to the dollar from today. The Reserve Bank Governor will make a separate announcement to this effect on dollar purchases at this price, and the plans for shoring up dollar reserves. Second, this devaluation will push up the cost of raw materials we use, especially imported oil. We are, therefore, raising the prices of diesel by Rs 5 a litre from tonight, and a further Rs 5 from July 2013. This will eliminate the diesel subsidy completely if global oil prices remain where they are. Since the hike in prices will mute domestic demand, we expect our import bills and current account deficits to come down. Over time, this will improve our dollar
Copyright 2012 Firstpost

inflows, and take the rupee higher, and bring further relief on the inflation front. We have to face short-term inflation in order to bring more stability to prices in the long run. Third, we have a problem in all our energy pricing, from oil to gas to power and coal. Starting immediately after this budget, we will be freeing prices of coal and gas in stages. We will also be bringing a separate legislation to end the monopoly of Coal India in coal mining and open up more areas for private and public sector energy exploration. The Cabinet Committee on Investment headed by the Prime Minister is expeditiously clearing all pending coal and other projects from an environmental angle with due safeguards it is a one-time quick clearance - so that investment can quickly get off the ground. The petroleum and coal ministers will be making separate announcements in this regard later today. The net result of all these changes will be to raise energy prices substantially, but in a year or two, we will see supplies rising as more supplies come on stream. We only need to note the example of the US, which has managed to achieve near energy self-sufficiency by opening up shale gas supplies. The US is no longer as dependent on Gulf oil as it was a decade ago; unfortunately, we are. Our policy has the medium-term goal of reducing oil imports to 50 percent by 2018 compared to 80 percent today. Fourth, we are winding up all centrallysponsored schemes and instead handing over the savings to states for use in their own social sector schemes. I know in the last budget my predecessor talked about the Food Security Bill and other such plans, but I find that the states are capable of doing the same job. They should know best where food security is really required. While Tamil Nadu has opposed our version of the Food Security Bill, Chhattisgarh has already gone ahead and implemented it. The centre has over a 100 schemes, of which around 15 are major ones. These include the MNREGS, the Integrated Child Development Scheme, the National Health Mission, the JN National Urban Renewal Mission, the Sarva Siksha Abhiyan, the Mid-Day Meal scheme, the Indira Awaas Yojana, and others which col-

lectively have an outlay of Rs 15 lakh crore in the 12th plan. Thats around Rs 3,00,000 crore every year. What we propose to do is distribute our share of this funding of centrally-sponsored schemes to states for use in the relevant areas. We will only indicate the areas where the money should go to. With this move we will not only be striking a blow for federalism, but also ensure that the money is better spent on schemes that are designed from the ground up and not top-down. Fifth, we are always grappling with the issue of bloating subsidies. With this budget, we are seeking to wean ourselves away from unnecessary subsidies. The changes in energy pricing will eliminate subsidies in fuel by the end of this financial year. That still leaves subsidies in fertiliser and food, the other big areas. This is what we propose to do. The fertiliser subsidy was intended to be a benefit for small farmers, but it has ended up being a subsidy for the fertiliser industry. From this year onwards, we plan to eliminate the fertiliser subsidy altogether by freeing all prices, but this increase in fertiliser costs will be captured in higher food prices where the subsidy bill will rise. Farmers will not be affected at all since their support prices will be adjusted to absorb the higher fertiliser prices. The Commission on Agricultural Costs and Prices will work out reasonable use rates for fertiliser in various crops and make appropriate recommendations on minimum support prices for the 10 most crucial crops. This decision will push up food subsidies in the short run, but will have two major benefits for the economy: a better fiscal deficit, and improved and balanced usage of various nutrients by Indian agriculturists. Balanced usage will have beneficial effects on agriculture, making the soil less vulnerable and improving farmers profits. That leaves us with a food subsidy that could run into Rs 2,00,000 crore this year. We propose to restrict food subsidies only to those below the poverty line (BPL) in two years. Once Aadhaar is universal, we will identify the poor and restrict the subsidy to them. In the transitional phase, all ration and BPL card holders will continue to get subsidies as at present. We expect to cover the entire country with AadCopyright 2012 Firstpost

haar by end-2014, and the identification of BPL families will be completed by that time. Once that is done, we will also offer the identified poor the option of receiving subsidies in kind as foodgrain or as direct cash transfers. Subsidies in kerosene will also be given only to the poor, and direct cash transfers will be on offer here too. Now, let me come to investment climate. We cant revive the economy without boosting investment sentiment, but that is not a job for the budget alone to accomplish. What happens outside the budget is as important, but we will indicate the direction through this budget speech. Madam Speaker, no country can hope to grow its GDP faster without serious efforts to cut red tape and unnecessary regulations. With this in mind, I am announcing the following reforms to boost investment and market sentiment. FDI: Our approach to foreign direct investment in industry and services has been selective and sporadic. In future, we want to be clear that all foreign investment in welcome. Barring a small list of sensitive industries like defence, nuclear energy and high-technology, we are now opening up all industries to 51 percent FDI through the automatic route. There will be no need for FIPB clearance. Foreign investors will no longer look at our rules as some kind of lottery or hurdle race. Deregulation: We are conscious that India can be built only by Indians. But two decades after our 1991 reforms, Indian industry is still complaining of red tape and delays in clearances from multiple authorities. In real estate, for example, a builder needs 57 approvals before he can start constructing. The World Bank says India ranks 132 in terms of ease of doing business. We do not want to make life hell for our businessmen. We are, therefore, setting up a permanent Deregulation and Procedural Simplification Commission, headed by an industry veteran and not a bureaucrat, to vet all rules, procedures, and laws that impact the ease of doing business and keep reducing the

paperwork and delays month-by-month. I invite every industry to take its problems to the commission, and I assure you that we will act on all suggestions within one month of their receipt. We have also requested NR Narayana Murthy to head this commission, and he will be given full freedom to make his recommendations. The task we have set for Mr Murthy is very simple but onerous: he has to get Indias ranking in terms of ease of doing business from 132 to under 100 in three years. In the long term, we want to be among the top 10 investment destinations not merely for reasons of demographic advantge, but ease of doing business. Factors markets: In 1991, we opened up licensing and businesss access to capital. However, we left two vital factors markets totally unreformed: labour and land. In a market-driven economy, business needs flexibility to employ labour depending on demand. In the absence of the freedom to hire and fire, we find the business is simply not hiring. We have seen jobless growth in our organised sector. Last years violence at Maruti shows one ugly consequence of our failure to reform labour laws, which forces industry to hire contract labour at low cost, leading to both exploitation of employees and poor quality job creation. In the labour laws we are now proposing, any management will be able to lay off workers with six months pay. But they also have to pay for six months of retraining for the laid off worker. We are additionally levying a 1 percent unemployment surcharge on corporate taxes to finance three years of unemployment allowance for fired workers. This is the most humane way to make our labour laws flexible and I invite our political opposition to make this a reality. The Labour Minister will discuss the changes proposed at a separate briefing later today. But we need an exit policy not only for labour, but management as well. Managements in some aviation companies, for example, have been broke for years, but they were funded by public sector banks and taxpayers. Bad companies must die if good companies have to survive. I, therefore, propose to set up a new bankruptcy law modelled on Americas Chapter 11 under which any beleaguered management can seek
Copyright 2012 Firstpost

temporary shelter, but they have to emerge from it either with their viability intact or be shut down. We want to set a time limit of three months for such revival packages to be worked out between lenders and companies, and a special legal authority to clear or reject the deals worked out. We are permanently winding up the Board for Industrial and Financial Reconstruction and replacing it a new entity to manage bankruptcies and potentially unviable entities. The Minister for Commerce and Industry will brief you later on the details. Which brings me to another factor, land. Our land laws are the most archaic in the world, and so are our acquisition laws. We are undertaking on a war-footing the computerisation and registration of all property titles in India, and urge the states to use the same network, which comes free of cost to them. Existing computerised systems can also be plugged into our new system. Once this is done, anyone can check property titles at the click of a button for a small fee, and land can be freely bought and sold by anybody. As for acquisitions, we have abandoned the Land Acquisition Bill and instead opted for a simple one where the key elements are the following: payment of full market price based on arms-length price discovery; sale by 50 percent of landowners for any public purpose project, big or small, will mean automatic approval by the rest and compulsory acquisition; land sellers will be given 25 percent economic equity in the developed project; and every family losing land will be trained and given at least one job, or rehabilitated under the supervision of a public-private entity which will have community representatives on it. With these changes, which we hope the states will also adopt, industry should find it easier to buy land for infrastructure, building factories and homes. A separate bill will be moved by the Rural Development Minister during the budget session to enable these changes. Sound money: One of the reasons for rampant inflation is excess borrowing and monetisation of the fiscal deficit. We want to move away from this tendency of all governments to live beyond their means by not only sticking to the new Fiscal Responsibility and Budget Management Act but by mandating that if certain

deficit limits are breached, there will be automatic cuts on all non-capital expenditures. On the external front, we plan to ensure that gold forms at least 15-20 percent of our total reserves its currently around 10 percent. This will not only give foreign investors confidence, but also prove that we mean business. In this context, we would like to withdraw the special import taxes on gold and have asked the Reserve Bank to allow banks to offer two-way quotes on gold, by both buying and selling gold. You cant detach our citizens from their love of gold by making it difficult for them. Scarcity makes gold even more valuable than it should be.

However, I do believe that if gold is to be ultimately replaced by more productive investment avenues, we need to offer our citizens a real alternative that will at least beat inflation. To give the middle class an inflation-resistant savings instrument, the government of India will launch inflation-indexed bonds where the rate of interest, to be reset quarterly, will be the previous years average inflation rate plus 2 percent. Both the principal and interest rates will be indexed. This brings me to taxation. In my 2008 budget speech, I said: Many people are surprised by the buoyancy in tax revenues, especially in direct taxes. I am not. I have always maintained that moderate and stable tax rates coupled with a tax administration that shows no fear or favour will bring high revenues to the exchequer.
Copyright 2012 Firstpost

I still believe in this maxim, but revenues have not been buoyant for reasons that go beyond the taxpayers willingness to pay. The problems, of the loss of business confidence and related factors, I have addressed separately. But I plan to look at taxpayer issues more holistically this year. The proposals in the Direct Taxes Code (DTC) have undergone a lot of change due to the lack of revenue buoyancy in recent years. However, we cant have a tax system that changes year to year. I thus propose several changes which will be incorporated into the DTC, which will be legislated later this year. Let me first come to personal tax. The message of the budget is short-term austerity, long-term growth and stability. In keeping with this goal, I may disappoint my middle class taxpayers by not offering any tax reliefs this year. We have to tighten belts, and by not raising tax exemption limits, more taxes will be collected from all of you. But I promise a reward for this austerity next year. For the first time, I am breaking with tradition and am putting down the exemptions that will be applicable from next year through the Direct Taxes Code. Given rising costs of living, I will be raising the tax-free income limit to Rs 3,00,000 (Rs 3 lakh per annum) for all Indians from fiscal year 2014-15 (AY 2015-16). There will be no separate limits for women or senior citizens, but since the limit has been raised for all substantially, everyone will benefit. To promote saving, I propose to club all investments currently deductible from income provident fund contributions, equity-linked savings schemes (ELSS), post office savings schemes, medical insurance, insurance premia, infrastructure bonds, interest payments on home loan EMIs, etc under an omnibus Section 80 C with a total limit of Rs 3,00,000. In other words, if you want to take the whole Rs 3 lakh as deduction on home loan interest, you can. If you want to claim all of it as ELSS investment, you can. The choice is yours. This means anyone earning up to Rs 6,00,000

per annum and who invests half of it in various savings schemes will be free from tax from next year. For this year, I plan to focus on savings, not consumption. Inflation is the scourge of fixed income groups. Since there is no chance that we can abolish inflation in the foreseeable future and it may not even be advisable to have a zero-inflation economy henceforth the tax slabs will be automatically indexed to inflation. Not entirely, but the tax-free bracket will be raised each year at the previous years average inflation rate minus 2 percent. Before presenting the budget, I had raised the issue of whether the rich should pay more. I had also raised the question of inter-generational equity and the levy of estate duty on inherited estates. My own answer is yes, but many others said that the aim of tax policy should be to expand the taxpayer base and not merely get more from existing taxpayers. I agree with both positions. I propose to get the rich to pay more by recognising that it is dividends and capital gains that contribute to their low tax status. So, I propose to shift the basis of taxation from companies to the receiver of dividends. Companies now pay 15 percent dividend distribution tax, plus cess on payouts. In future, they will pay less, and thus can be more generous with their payouts. But the rich will pay tax on the dividends they receive at their marginal rates of 30 percent plus surcharge and cess. In order to ensure that this does not result in evasion, I am making changes in the law to require companies to deduct tax at source. Those receiving more than Rs 5,000 annually in dividends will be taxed at the 30 percent marginal rate. Taxpayers falling outside the 30 percent bracket can submit a modified form 15G to companies to indicate which bracket they think they should be taxed at. They can also claim refunds through their tax returns. I, however, propose to leave capital gains taxes unchanged for now because they can have a larger bearing on market sentiment. About estate duty, I have thought about it at
Copyright 2012 Firstpost

length and discussed the issue with experts. I am advised that the difficulties in collecting it may outweigh the amounts collected and cause needless taxpayer heartburn. Instead, I have a different idea for incentivising a voluntary use of private wealth for social purposes. This budget will propose the creation of a new sort of Trust by the wealthy which will offer a one percent personal income-tax rebate for the wealthy for every 10 percent transfer of personal wealth to charitable trusts established for an approved list of acceptable purposes. There will be minimum threshold limits for this kind of charity. The purposes for which trust funds can be used include primary schooling, skill and career development, running food kitchens in specific high-poverty districts, provision of drinking water in remote areas, etc. These purposes will be changed from time to time, depending on our social challenges. The trusts will have representatives from government and NGOs, and will be subject to annual social audits to ensure that the money is used for the defined purposes. Rules in this regard will be separately announced by the Ministry of Company Affairs. On corporate taxes, I propose to make no changes here whatsoever. b>As for indirect taxes, I propose only two changes. One for this year, and another for next year. I propose to hike excise and service taxes to 14 percent this year, which was the rate before the Lehman crisis. Between them, the hike in excise and service taxes will raise more revenues than I will lose in other concessions to individuals and companies. I, of course, do not expect even direct tax collections to fall since better compliance and economic buoyancy will improve my revenues. With this done, we are ready to introduce the goods and services taxes from next year. I know many states are anxious about the potential loss of revenue. I believe they will gain, not lose, from a shift to GST. But to allay their fears completely, I propose to compensate them fully for any loss of revenue on account of GST in the first three years, after which we can review the scheme. I hope they will now agree to introduce GST

from next year and make the necessary investments in IT infrastructure this year. Taking all my tax and non-tax proposals into account, I expect to reduce my fiscal deficit to 4.5 percent in 2013-14. I propose to bring it down steadily to 2 percent by 2018-19. The FRBM Act will be amended for this purpose with new targets. The revenue deficit will fall to zero two years before that.

The job of the finance minister begins not with the budget, but after it. I promise to be vigilant and make any changes needed in case my projections look like going wrong. I will not wait for the next budget to make amends. One more break with tradition. I am not making any growth forecasts in the belief that if you do the right things, the right results will follow. The Bhagavad Gita advises thus: Karmanye Vadhikaraste Ma Phaleshu Kadachana, Ma Karma Phala Hetur Bhurmatey Sangostva Akarmani (You have the right to perform your actions, but you are not entitled to the fruits of the actions. Do not let the fruit be the purpose of your actions, and therefore you wont be attached to not doing your duty.) I dont think I can go wrong with this advice. I have consciously tried not to make this a preelection budget. I believe have done my duty to this country and the Indian economy. And with that, Madam Speaker, I commend the budget to the House.

Copyright 2012 Firstpost

Scan or click to download our Android, iPad/ iPhone apps

iPad

Android

iPhone

Copyright 2011-12 Firstpost All rights reserved Copyright Network18. All rights reserved.
Copyright 2012 Firstpost