Chidambaram’s budget prescription

The reformer-crusader Finance Minister, Palaniappan Chidambaram, didn’t waste his eighth opportunity to present the Union Budget, the last full budget before 2014 elections, by helping the rich and giving peanuts to the rest of India.

In the week before the budget, rumour mills were rife with speculation. Some in the mainstream media expected a growth-oriented budget, while others in the business community feared a populist budget. In order to reclaim macroeconomic balance, as the FM claims he has set out to, he had to address a falling GDP growth, an appreciating rupee, junk status of India’s sovereign bonds, plunging investor morale, prolonged stagflation, constant fear of credit downgrade and many more demons haunting big capital. On the other hand, large majority of Indians remain mired in high prices, unemployment and general economic collapse. As it turns out his suitcase was filled with files of gimmicks and magic potions for the ailing economy.

Key highlights

Let us recap some of the major highlights of the 2013 Union Budget

  • Fiscal Deficit for 2013-14 is pegged at 4.8 percent of GDP. The Revenue Deficit will be 3.3 percent for the same period.
  • Plan Expenditure placed at Rs. 5,55,322 crore. It is 33.3 percent of the total expenditure while Non-Plan Expenditure is estimated at Rs.11,09,975 crore. The plan expenditure in 2013-14 will be 29.4 percent more than the revised estimates (RE) of the year 2012-13.
  • Tax credit of Rs. 2,000 for income upto Rs. 5 lakh. Surcharge of 10 percent for taxable incomes above Rs. 1 crore, no review of tax slabs
  • 11 lakh beneficiaries have received benefit under Direct Benefit Transfer scheme which is to be rolled out throughout the country during the term of UPA Government.
  • Proposal to launch Inflation Indexed Bonds (IIB) or Inflation Indexed National Security Certificates to protect savings from inflation.
  • India Infrastructure Finance Corporation (IIFC), in partnership with Asian Development bank (ADB), will help infrastructure companies access bond market to tap long-term funds.

Because of obvious reasons this budget has by and large pleased the business community. Perhaps the measured approval hanging around FICCI’s 7.5/10 rating for the budget substantiates FM’s priorities. Many experts have opined that the budget’s most distinguishing feature is the determination to narrow down the fiscal deficit and to outline the long term policy stance, while maintaining a so-called “balancing act”. So how can we analyse UPA’s budget? Are critics on the left justified in calling this a pro-finance capital budget? Any honest analysis will make one thing clear - contrary to the consensus in mainstream media, this is not a “compromise budget”. While it’s true that it has a number of expenditure allocations to different groups to establish an inclusive tone, the budget has not tried to address any of the major issues that affect people in the longer run. Notwithstanding next year’s election, a hawkish FM has chosen to help finance capital rather than to address the core issues affecting much of the population.

The tax on super rich is a big farce

India’s tax to GDP ratio was already one of the lowest in large developing countries. Rich were enjoying the benefits of lower tax rates for a long time. Imposition of a 10% surcharge on individuals and corporations with taxable income exceeding Rs 1 crore has been presented as a prudent suggestion to tax the super rich. FM himself provides the figure of 42,800 individuals or 0.005% of the total population who qualify for this. Thus far, they were being taxed at 30% on their taxable incomes in excess of Rs. 10 lakhs. Now they would pay the new rate of just 33.99%. The effects of revenues from this would be minimal. Moreover, the 10% surcharge is temporary. After 1 year this will go for a revision. It's clear that the minister wants to create an illusion that he is a modern day Robin Hood.

Inflation linked bonds, a recipe for disaster

The government claims that the inspiration behind introduction of inflation linked bonds is to give the 'common man' an investment option which is a safe hedge against inflation. For argument’s sake, let’s estimate the proportion of people having access to (or interest in) a bond market as less than 1%. Not only is it applicable to the vast majority of the people, more importantly, there are strong reasons to believe that it will lead to speculation on inflation.


We must remember that speculation on agricultural commodity prices is attributed by many experts as a major reason for the increase in global food prices. Increased money inflow into secondary bond market through this financial instrument is claimed to be capable of revamping Indian bond market. We have to see this decision against the backdrop of international finance community’s plea to create more options for investors. Investors especially the middle class invest their savings in gold which in turn has resulted in widening the fiscal deficit because India imports gold. RBI had induced the concept of inflation indexed bonds some years ago which had turned to be a flop. It did not take off due to poor investor response. If it is a success this time it will surely increase the use of derivatives as a financial instrument, with Government’s patronage. In this case, the underlying asset would be inflation. Profit hungry investors will indulge in wild and unregulated speculation that might lead to a financial market collapse.

FII, FDI and more derivatives

Currency derivative trading will make rupee more prone to market volatility and ultimately lead to a slump in economy.

This time FM intends to clear the air around Foreign Institutional Investors (FII) and Foreign Direct Investments (FDI). He proposes to follow international practices where an investor has a stake of 10% or less in a company it will be regarded as FII and where an investor has a stake of more than 10% it will be graded as FDI. In India, as per FM’s ambitious plan, FII would be allowed to participate in the exchange traded currency derivatives segments to the extent of their Indian rupee exposure. It is clear that in order to reduce fiscal deficit FM has only one solution – bring in more FIIs. Currency derivative trading will make rupee more prone to market volatility and ultimately lead to a slump in economy.

This budget is a nail in the coffin of the poor in India. The only agenda UPA consistently wants to pursue is neo-liberalism. FM has once again done all he could have done to please the rich. It almost does not matter who among UPA or BJP will clinch the 2014 elections. For the coming years, India's plight has already been decided – that of completing its transformation into an open and free market economy falling in line with the ambitions of the super rich.