UNION BUDGET 2013 -2014

Final takeout: Chidambaram has kept his macro promises on the fiscal deficit; he has taxed the rich in a token way, but nothing significant. His revenue take of Rs 18,000 crore is not a big blow for the economy, but this means one can`t be sure how good his estimates are. His assumptions will tell us whether his budget outlays are based on reality or just built on hope and hype. We have to wait for the fineprint to figure out whether he has delivered a clean budget or one with gaping holes and doubtful arithmetic. Given the huge expectations before the budget, Chidambaram has done nothing to rattle the markets or business. But he has not excited the jholawala crowd either before the elections. It is a "responsible" budget, for the simple reason that he has done little for anybody. Compared to expectations, he has delivered a mouse. But that may be better than promising the moon and not delivering.

The total tax changes will earn government Rs 13,300 crore from direct taxes, and Rs 4,700 crore from indirect taxes. That`s Rs 18,000 crore in all. Chidu calls for voluntary compliance to ensure all service tax payers to start filing returns.

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 don`t serve liquor. The markets have taken the increase in corporate surcharge, and the hike in dividend distribution tax badly despite cut in STT.

Peak rate of customs duty remains the same. Some sops for exports.

DTC- direct taxes code- to be introduced before end of budget session.

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 derivatives too. Commodity transaction tax coming up only on non-agricultural commodities. Stock markets should be happy, but not commodity markets.

Here comes the tax blow. Only 42,000 people with incomes of over Rs 1 crore. Surcharge of 10 percen 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 won稚 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.

Fiscal deficit is 5.2 percent; for 2013-14, it is 4.8 percent. Revenue deficit at 3.9 percent and 3.3 percent for next year. Now, taxes.

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.

Post offices to become part of banks core banking. This means POs can`t become banks, but can offer bank-like services.

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. Markets still under the weather.

First women`s bank with Rs 1,000 crore capital is more pandering to optics. Congress trying to retrieve its image after Delhi 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.

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 Chidu`s speech as mere tinkering. Did they expect too much?

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.

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. There`s more for savers. An inflation-linked instrument through PO savings from 1 June.

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.

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, since this year he says he will give this benefit only selectively.

In the first part of the speech, Chidu is focusing on wooing politicians and voters. There`s nothing in it to cheer business and markets.Chidu has to do something, the markets are moping and declining. Nifty gain down to 10 pts at this hour. So far, nothing is music to the ears of bulls. UPA`s flagship scheme NREGA, tha make-work scheme that is mired in corruption and poor implementation, gets Rs 33,000 crore next year- same as last year. Actual spends may have been lower. The flagship is flagging?

Now we know where the money for next year plan expenditure has come from. It is entirely by cutting this year`s 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 year`s number to Rs 5,55,320 crore. He has cut muscle this year to feed next year`s spending.

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 he`s 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 don`t be too impressed with that. He has merely cut expenses in 2012-13 to next year. Neat trick

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.

Chidu is talking of inclusive and sustainable development. Emphasises growth as necessary for inclusiveness. The jholawalas won`t like this. They think inclusiveness should precede talk of growth. They may be disappointed by Chidu.

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.

Just minutes before the budget 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, UPA痴 two Finance Ministers have simply failed to impress. Last year, Pranab Mukherjee said: India痴 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 supply 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: 摘levated 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 result of the government痴 MSP policy, but this is vital to the Congress party痴 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.

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 渡ew growth settles into a comfortable 6-7 per cent, the new 渡ormalBAD+942E 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.

More musings on the budget: A big surprise, which is no surprise to money 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 Moody痴, the rating agencies who are watching the deficit numbers with a hawk痴 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 exchequer痴 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. 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 year痴 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 doesn稚 like money in the bank, even if it is only for a fleeting moment?

More musings before the budget: An interesting thing to speculate on is which 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. 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 don稚 exist. One should expect the finance minister to say something on this. Let痴 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.

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 minister痴 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. Here痴 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 途esponsible budget by curbing subsidies and expenditure. But back home he has been muttering darkly about why the rich must pay more and 妬nter-generational 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. Chidambaram痴 dilemma is this: how do you prove you are 途esponsible to the raters and still be 妬rresponsible 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 can稚 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 man痴 lobby: one is by throwing a few shekels into his bowl, and the other is to rail against the rich. If you can稚 help the poor since you don稚 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.