Union Budget 2013-14: Chidambaram plays it safe

Feb 28, 2013

In this issue:
» Super rich to pay slightly more
» Savings and investments get a small push
» Rural India and agriculture continue to receive full support
» No major fireworks on indirect tax front
» ....and more!

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Whether justified or not, Union Budgets have always generated excitement in India. This time around though, the excitement was more than usual and for two reasons. First, it was to be presented by a man with a reputation for big bang budgets. And secondly, it was to be the last budget before the next general elections. And thus people were keen to know how populist it could possibly be? Especially against the backdrop of stubbornly high inflation and bloated Government finances.

The verdict is out and Mr P Chidambaram has chosen to play very safe we believe. There certainly wasn't any big bang announcement and only minor tweaking here and there. The good news though is that the FM has also managed to keep the populist in him under strict check. In other words, there will be no more fiscal profligacy and fiscal consolidation will be doggedly pursued.

However, committing to fiscal prudence is one thing. And sticking to the target entirely another. Thus, questions have been raised about how exactly the FM and his team would manage to bring down the deficit to below 5% in the next fiscal? A valid question indeed we believe. For while the expenditure has been raised substantially, very little has been done by way of increasing revenues. The optimists in the markets though are willing to give the minister a chance. They contend that whatever incentives have been given by him will help in pushing economic growth further and thus, help him meet his fiscal targets.

And what exactly are these incentives? The important ones that come to mind are the higher allocation towards rural employment and agriculture and greater deductions available for both firms as well as individuals towards promoting consumption and investment.

Thus, while the fiscal deficit targets do look ambitious, they don't seem impossible to achieve as per us. A little help from rain gods and the global economy and we should be there we believe. As far as stock markets are concerned, we've never believed that budgets have the ability to alter the long term story of an economy. More so a budget as neutral as this one. Hence, one would be better off not focusing on it too much. Attention should instead be paid to the fundamentals of the company and the valuations that it is trading at.

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 Chart of the day
We all know how dominant the Foreign Institutional Investors (FIIs) have become when it comes to Indian stock markets. This despite the fact that we have one of the highest savings rate in the world. So what explains this anomaly? The answer lies in today's chart of the day perhaps. As the chart highlights, financial savings as a percent of total household savings have come down dramatically in India over the past few decades. In other words, households have increasingly preferred to invest in physical assets such as real estate and gold rather than financial instruments like mutual funds and equities. And we have no one else but things like lax regulations and low awareness levels to blame for this situation. It is time we come out with products and tools that would help people understand the importance of asset classes like equities and mutual funds so that investments in them go up substantially.

Data Source: Economic Survey 2012-13

For the taxpayers, the Union Budget provided little relief. Given the need to bring down the fiscal deficit, the Finance Minister (FM) threw his hands up saying that there was very little room to provide tax benefits. As such he decided to leave the income tax slabs and rates unchanged. This would give a sigh of relief to those who were expecting an increase. Given the fiscal deficit problem, that is what everyone expected. There was some relief to the first time home buyers in the form of additional deduction.

But the part of the community that will not be rejoicing this year's budget would be the 'super rich' community. People with taxable incomes of over Rs 10 m would have to pay an additional surcharge of 10%. This is akin to what has been done in US as well. Though the idea behind the tax on super rich is good we believe this is not something that can help our fiscal deficit problem. All it does is give more money to the government who till now has not proved to be a very prudential spender. And we are afraid that the government will just find new ways and means to squander away the extra money. Hopefully the government will prove us wrong. But given the increased expenditure proposed in the Budget, we don't think we will be.

For those hoping that Budget 2013-14 will revolutionise savings and investments to pump prime India's GDP growth, it was somewhat of a disappointment. For one, the incentives to save and invest in productive assets were meek. Secondly, the encouragement for big ticket capital expenditure was half hearted. The Rajiv Gandhi Equity Saving Scheme (RGESS) has been a non starter since last year's budget announcement. However, it failed to see any meaningful focus this year as well. We do not think the present state of the scheme will incentivize investors to move away from buying gold. The FM did make a mention of inflation indexed bonds. However, one will have to wait and see if the products prove to be enticing enough.

Capitalising PSU banks to meet Basel norms is something the Finance Ministry has very little option on. Most PSU banks have been stressed with restructured loans in recent quarters. The incremental write-offs are therefore bound to erode their capital. What however surprised us is the proposal for a Women's Bank to be owned and run by the government. Since the bank is unlikely to operate any differently from other banks, the economic virtue of the proposal is lost on us.

The only silver lining to the Budget proposals for the financial sector was the additional deduction to first time home loan borrowers. The sop of Rs 1 lakh meant for home loans up to Rs 25 lakhs will boost demand for home loans from banks as well as housing finance companies.

Finally, the Cabinet Committee on Investment (CCI) will monitor investment proposals and ensure revival of stalled ones. Without any timeline for the implementation of such projects we are not sure if this will have an impact anytime soon. The Budget was also silent about measures to attract more foreign direct investment (FDI).

Development of rural regions has always occupied an important place on the UPA agenda. Towards this, the Budget has set aside Rs 801.9 bn for 2013-14, an increase of 46% over last year. Increase in outlays has been announced for various programs. These include ones that focus on employment guarantee, providing good road connectivity in villages and housing for the rural poor. Not just that, the Government has increased the allocation to the Rural Housing Fund by Rs 20 bn. Similarly, stress has also been laid on increasing the quality of drinking water.

A significant chunk of India's population lives in rural regions. That is why the development of these areas becomes important. What is more, over the past years incomes in the rural sector have been steadily rising. As a result, India's consumption story largely relies on the rural sector taking off. Hence, while Budget announcements for the rural sector are fine, it is the execution where the Government needs serious pulling up of socks.

Another sector that receives a lot of attention is agriculture. And why not? After all it is the key livelihood in India's rural areas that are home to over 70% of the population. With Food Security Bill in the offing, the Ministry of Agriculture got a rise of 22% over the revised estimates for FY13. A further provision of Rs 100 bn was made towards food subsidy that remains a key overhang on country's fiscal health. While the fresh Green Revolution in eastern India has further been given a push, the crop diversification program will likely improve farm yields in areas that bore fruits of green revolution much earlier. The proposal to increase farm credit and extension of 4% interest subvention for short term crop loans to private and scheduled commercial banks is likely to give farmers further relief. Moreover, it is likely to improve loan repayment culture. Despite sufficient farm production, the country faces food inflation. At the root of this problem is huge food wastage and farmers' lack of access to the markets. The budget is likely to address this problem to some extent by extending support to Farmer Producer Organizations and companies that link farmers to markets. All in all, the FM ensured that agriculture continues to receive full Government support.

Availability of finance and administrative bottlenecks were the two main issues plaguing the infrastructure sector. However, today's Union Budget has gone some way to address both these issues. In order to solve liquidity issues, it stressed on the establishment of infrastructure debt funds (IDFs). These funds basically raise money to fund infrastructure projects. Till date 4 IDFs have already been registered with SEBI. And more could be on the anvil. Further, credit enhancement will also be provided to companies who are eager to tap the bond market for long term funds. Many infra financing firms will also be allowed to issue tax free bonds based on the requirements. All these measures are likely to ease the liquidity issues plaguing the sector. In order to resolve matters relating to administrative issues, the Cabinet Committee on Investment will monitor the projects under implementation. Also, there are plans to have a separate regulatory authority for the road sector.

One of the major reasons India is facing a current account deficit is because exports have slowed and imports have increased. Most of the Finance Minister's budget proposals on indirect taxes were to address these concerns. Plus there were a few proposals to protect domestic industries. The duty on machinery to manufacture leather was reduced to 5% from 7.5%. The duty on precious and semi-precious stones was reduced to 2% from 10% earlier. On the other hand duties on imported luxury motor cycles, vehicles and yachts were increased. Domestic production of set-top boxes was encouraged. Protection was also given to the domestic sericulture industry by increasing duties on raw silk. The manufacture of environment-friendly vehicles and the aircraft manufacture, repair and overhaul (MRO) industry was encouraged. No changes were made in the rates of basic customs duty, normal excise duty and service tax. This was as per expectations. All in all there weren't any fireworks on the indirect tax front. We just hope that the economy revives next year, so that taxes don't pinch as much as they do now.

Meanwhile, Indian equity markets fell sharply into the negative territory after the announcement of the Union Budget 2013-14. The BSE Sensex was trading lower by 322 points at the time of writing. Most sectoral indices were in the red with IT and consumer durables being the rare exceptions. Asian stock markets traded in the green while Europe too opened on a positive note.

 Today's investing mantra
"If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes" - Peter Lynch

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7 Responses to "Union Budget 2013-14: Chidambaram plays it safe"


Mar 1, 2013

We can't say it a neutral because when force of upcoming general election driving you for lots of waiver and subsidy to attract vote bank to stay afloat you have to drag yourself to not being hazardous to nation's economy. Though a miracle can't be expected in these circumstances but still there is miss to endeavor could have been shown to curve black money, direct benefit transfer towards less bleeding economy for MangoIndian.


Suresh kumar

Mar 1, 2013

For a salaried person like me, this Budget is " Good for Nothing " when it comes to Individual. Inflation is rising, all commodities prices are shooting up.But there is no increase in Tax Slab. Atleast increasing the Tax slab by inflation rate would have helped us a lot.



Mar 1, 2013




Mar 1, 2013

Nothing considerable will be achieved by this budget



Mar 1, 2013

This is a safely played Budget , no doubt in it, but that does not mean that we the sheep flock out of danger, from current deficit & fiscal deficit & consequently common man`s devil of food inflation,which is at present engulfing most of the daily earning of a daily wager. Here they struggle for their common & simple need But still we talk on Growth enhancing, FDI, bringing in other`s money for their gain & survival has been well highlighted, but the corrupt black money of our nationals have safely buried with out any identity in the budget.



Mar 1, 2013

The Budget presentation for 13-14 is preparation for the next elections and it is a Budget for the people at large.Maximum expenditure has been has been provided for various programmes with a hope that money coolection will come forward.Thai may be a wishful thinking and the deficite may increase instead of comin down as markets are not favouring.


Vijay Chopra

Feb 28, 2013

The Budget should be based on the objectives of growth with more efficiency & higher productivity at every step within the Government and outside the Government. The solution is not to raise to Direct or Indirect taxes. Infact it should look for ways to reduce both but at the same time enhance the revenue for more spending.So the Government has to find ways to enhance the base i.e the number of people paying the Taxes. The Government and the politicians need the will to achieve this. Our present system is punishing the silent honest tax payer.The system is blind towards the corrupt. Can anyone believe that are only about 42000 people with more than Rs. 1 crore income? What has budget done to find out the millions who have a lifestyle and income more than Rs.1 crore but do not pay taxes?? Unless you do this.. the poor and the honest ones will keep paying more all their life and the corrupt ones laughing and enjoying......

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