When Mr Chidambaram presents the Union Budget for 2013/14, he will neither have room for flagrant populism, given the unfavorable fiscal conditions, nor for radical policy shifts, given the political compulsions ahead of the 2014 elections. Nevertheless, I believe he will choose to tilt towards the latter and take decisive steps to turn the economy around and create a more investment-friendly climate. Having woken up from its policy stupor, the government has already announced a slew of reforms and I expect Mr Chidambaram to continue treading the same path.
I expect that he will carry forward fiscal consolidation in terms of the road-map he had chalked out in November last year, under which the fiscal deficit has to be pegged at 4.8 per cent of GDP (gross domestic product) in 2013/14. Given the faltering economic growth and the possibility that the fiscal deficit for 2012/13 could exceed the initial target of 5.3 per cent of GDP by as much as 0.7 per cent, I believe attempting to peg the fiscal deficit at five per cent of GDP in 2013/14 would be more realistic. Mr Chidambaram will have to deploy a judicious mix of measures to curtail expenditure and enhance revenues.
Given the fall in tax collections during the first nine months of 2012/13, one can expect that the finance minister would try and increase revenue collections by increasing excise duty and service tax from 12 per cent to 14 per cent. The other sources to raise tax collections may be:
- Increase in import duty on gold and other precious metals by two per cent, especially as part of the widening current account deficit is attributable to rising gold imports
- Increasing taxes on cigarettes and alcoholic beverages to improve human and fiscal health
- Increasing import duty on crude oil from 0 per cent to five per cent
- Though a bit of a stretch, abolition of subsidies on LPG and kerosene
- Increase in excise duty on diesel SUVs and other diesel passenger vehicles by Rs 1 lakh
- Rationalisation/simplification of some tax measures, withdrawal of some tax exemptions and increase in the rate of minimum alternate tax
On the personal taxation front, the marginal rate of tax for the ‘super rich’ could go up to 40 per cent. Inheritance tax and wealth tax could be introduced.
However, in light of the hardships caused by inflation, some tax concessions/benefits are likely for the masses. Deductions under section 80C may be revised to Rs 1.5 lakh from the existing limit of Rs1 lakh to provide enhanced investment options. There could also be some concessions given to interest on bank deposits to encourage savings. The limit of deduction on interest paid against self-occupied property may be revised up to Rs 3.5 lakh. The Rajiv Gandhi Equity Savings Scheme could be made more attractive and extended to old/experienced investors as well.
Coming to the steps the finance minister could take to create a more investment friendly climate from the capital market perspective, the most important step relates to the securities transaction tax – I would expect some rationalisation, if not complete withdrawal of this tax. This would help buoy the languishing volumes on Indian bourses.
Dividend distribution tax needs to go. This would put an end to the prevalent double taxation, remove the bias against distributed profits, and help ensure that shareholders get a fair return on their equity holdings. Also, to really boost investor confidence in India, Mr Chidambaram needs to immediately drop the retrospective amendments to tax laws made by his predecessor. Only then will India receive its fair share of global investments.