Union Budget 2013 - 14: FM's math worked, will the economy follow suit?

By Amar Ambani

Head of Research, India Infoline 
 
Union Budget 2013-14 could be termed prudent but not outright populist. The FM did some things right and while many expectations were met, the Budget has missed out on several counts. For one, it failed to address the problem of the Current Account Deficit, which admittedly was a bigger worry than fiscal deficit.
 
The FM's steps to encourage financial savings faltered. With falling savings rate, the need was a substantial increase to Section 80C to make gold relatively unattractive. Instead, he's only offered an additional interest deduction up to Rs1 lac for those first-time home loan takers up to Rs 25 lacs, besides Rs 2,000 tax credit to income brackets up to Rs 5 lacs.

Not much was done for equity investments including simplifying the Rajiv Gandhi Equity Savings Scheme (RGESS) for retail investors. Securities Transaction Tax was reduced but Commodity Transaction Tax was introduced.
 
By turning a blind eye to expenditure cuts, FM’s only risked a slippage in the said fiscal deficit target. Despite the imminent implementation of the food security bill, FM budgeted for just Rs100 bn increase in food subsidy. Assumption on flat fertiliser subsidy looks unrealistic and prone to slippage in case of good monsoons.
 
We could witness big slippage in non-tax revenues projected to grow at 32.8%. Disinvestment target hinges on sentiment, the Rs 400bn expectation from Communication Services could be way off-target.

Income tax and Wealth tax estimates appear reasonable but corporate taxation growth pegged at 16.9% appears high. Excise and customs duty figures look achievable, but service tax projections seem overstated at 35.8% yoy growth.
 
The stock market fall can be partly blamed on irrational expectation. The proposal to treat Tax Residency Certificate (TRC) as necessary but not enough proof to benefit from Double Tax Avoidance Agreement (DTAA) impacted sentiment. The market fears adverse impact on the FDI as also the FII inflows that are routed through tax haven routes offering lucrative tax treaty benefits.
 
Our calculation of Government finances places a realistic fiscal deficit target for the coming year closer to 5.2% to 5.3% mark. Given limited resources, the Budget promises to kick-start the investment cycle but the key lies in execution. The FM has made his arithmetic work in the Budget. Whether the economy responds or not, remains to be seen.