Budget 2012-13 reflects the pragmatism of the man who presented it. You will need to appreciate the tough macroeconomic background and political instability in which this Budget has been presented. No one expected big bang reforms given the political constraints. The finance minister has done well given the cards that have been dealt to him. The arithmetic behind the Budget looks more credible than last year. There is focus in controlling revenue deficit.

The fiscal deficit target at 5.1 per cent looks realistic and reflects a more honest assessment of situation on the ground. It is backed by the increase in excise and service tax from 10 to 12 per cent and other revenue targets that the finance minister has set up from disinvestment (Rs 30,000 crore) and spectrum and telecom license sales (Rs 58,000 crore). The increase in excise and service tax rates is directionally in line with the rates suggested in Goods and Services Tax (GST).
Let’s also remember that the excise rates were at 14 per cent a couple of years ago. I hope there is a clear date for GST finalisation that is announced soon. The negative list in service tax will broaden the tax base. There is a clear intent to increase the tax to GDP ratio, which is still low in India. The income tax concession is minor while there’s hope for a longer term plan for increasing the income tax base based on Direct Tax Code (DTC) to come in next year.
Despite fears of the populist streak coming into the Budget, the subsidy bill has been capped at two per cent of the GDP. That’s a very strong statement of purpose from the finance minister. It will have to be seen how he fares on this considering the subsidy bill was planned to be at 1.6 per cent this year while it ballooned to about 2.6 per cent.
The continued support to Aadhar will yield long-term dividends in terms of reduction in leakage in government spends on welfare programmes. There’s greater focus on agriculture and infrastructure, which is good. The decision to inject Rs 16,000 crore in the banking sector is a positive one as well. The reduction in securities transaction tax by 25 per cent will also help the capital market. The increase in import duty on gold from two per cent to four per cent and tax exemption on gains on sale of property if invested in SMEs makes a strong case for government’s desire to move savings into more productive assets in the economy.
The spoiler in the finance minister’s plan for next year could be petroleum prices. The government will have to control the spiralling petroleum subsidy bill. This can be done only by increasing oil prices and deregulating diesel prices. There’s also the external risk in Iran turning worse, which can further worsen the petroleum subsidy bill. This seems to be a significant risk on the planned fiscal deficit target. The other area of concern is the finance minister’s encouragement for more External Commercial Borrowing (ECB) to meet funding requirements in some sectors. The short-term external debt has been going up sharply in the past couple of years and further exposure could make us vulnerable to external shocks. The government’s market borrowing will increase over the next couple of years so there’s low possibility of any significant lowering of interest rates in this period. This will continue to stymie growth unless fiscal consolidation goals are aggressively pursued. The domestic consumption story will keep India on a seven per cent GDP growth track but the dream of a nine per cent or a double-digit growth rate looks distant.
The finance minister could have done more in a few areas. There could have been a stronger statement of intent on FDI in retail, insurance or airlines. A more specific timeline could have been provided for GST and DTC implementation, which would have signalled a government that is intent on execution. He has also stated his intent to introduce a number of finance bills in this session — but it remains to be seen how many will see the light of the day.
There was also no mention of other landmark bills that have been in the works for a long time (land, mining, companies, etc). The proposal to introduce a retrospective amendment to Section 9 of IT Act that deals with taxability of foreign firms in India could have been avoided at this stage. This proposal, if it comes through, will potentially add about Rs 30,000 crore to the revenue kitty of the government but will have a strong negative impact on foreign investment sentiment. The retrospective aspect of this change needs further debate and I hope it will be done before the amendment proposal is finalised.
The good news with this Budget is that it’s low on bad news. In these times, I am happy to live with that.

The writer is managing director and chief executive officer, HDFC Life Insurance

By arrangement with Financial Chronicle