Mr Chidambaram produced a dream Budget sixteen years ago. Many people were hoping for a repeat of the same feat this year. They were clearly disappointed. On the other hand, many people were fearing much worse, given this is the last Budget before the upcoming elections. They are breathing a sigh of relief, especially given the havoc last year?s Budget created. In my view, the lack of any dramatic announcements makes the Budget more credible, given the pressures he was facing from his various stakeholders including the credit agencies and the financial markets, and a challenging macro-economic environment of high fiscal deficit, high current account deficit (CAD), high inflation, high interest rates and slowing consumption and investments.
Mr Chidambaram displayed a deep understanding of the nation?s issues and priorities in his Budget speech. His Budget provisions show a balance of pragmatism and populism, fiscal containment without hurting economic growth, enhancing social justice and sustainability, and balancing short-term and long-term impacts.
In his own words ?the job of the finance minister is to create the economic space?, which he did. The announcement of the investment allowance of 15%, deduction of R2.5 lakh interest for low-cost homes, award of 3,000 km of roads within six months, energy credits for wind energy, announcement of several badly-needed measures to help the infrastructure sector, setting up of a regulatory road authority and extending tax holidays for power plants were steps in the right direction to stimulate growth.
He took a few bold steps towards inclusiveness and improving the rural economy. The announcement of a women-focused bank was a creative move, both symbolically and in substance. Equally creative was the announcement of an enhancement of coal production through a PPP effort.
On the other hand, he has not announced any measures to plough retail savings into financial markets and, most disappointingly, has no plans to address the CAD. I worry a lot more about the CAD than the fiscal deficit in today?s volatile and unpredictable global macro-environment. A record FII inflows of $24 billion in 2012 may not be available in 2013. Also, I expected more aggressive steps towards achieving energy efficiency and demanding managements reduce our energy import bill. The most disappointing announcement was the uncertainty regarding investment through the Mauritius route. Are we resorting to retrospective changes again? I plead with the FM that any changes proposed should be prospective if we want to win the trust of foreign investors.
I hope RBI will follow up with an announcement of a 100 bps rate cut in its next meeting to create a positive sentiment, stimulate investments, and reduce the interest burden on heavily-leveraged companies. At this point, I would rather risk inflation than compromise on growth. The current inflation is not all bad, because it is an effective transfer of wealth from the urban to rural sector and also it reduces our debt-to-GDP ratio. Over to India Inc to move towards a high growth trajectory.
Views are personal