Budget 2013: Coming up short on courage

Ang Lee’s Life of Pi upset Steven Spielberg’s Lincoln to rake it in at the Oscars this year. Not surprising, as everyone loves the underdog; more so when the underdog’s tale has a generous mix of hope and courage. It’s precisely what finance minister P Chidambaram too loves, as he spoke of how “hope gives courage” during the course of his regressive budget speech.

Alas! There was no sign of any courage on Chidam-baram’s part as he shattered the hopes of all those, including me, for whom even a 6% GDP growth rate seems like a distant mirage. This, after tall claims that India is well on its way to becoming a $5 trillion economy, come 2020.

Let me start with the tax proposals. With direct taxes to GDP ratio having virtually doubled to 5.5% in the last decade, clearly, the immediate priority should have been to focus on improving the indirect taxes to GDP ratio.

Remember that just a mere 1% increase in this ratio from the current 4.4% to 5.4% will add at least Rs1 lakh-crore, a whopping 1% more to the GDP growth rate number.

And, having got Wal-Mart and Ikea into the country, the Budget should have done more than simply making a cursory mention of GST (goods and services tax). Without GST, all multi-state retailers, including foreigners, pay huge sums of taxes to even move goods from a central warehouse across states.

Wonder what stopped the finance minister from allowing higher FSIs (floor space indices) to allow modern retailers to set up shops in smaller towns and cities, given that rentals alone eat up almost 40%  of a modern retailer’s top-line. So much for wanting to turn India into the next big retail juggernaut!

Again, the direct tax proposal of levying additional surcharges on the super-rich is retrograde to say the least. Out of a population of 1.2 billion people, less than 1%, that is only, half a million people pay taxes at the highest slab rate of 30% in India. What is even more striking to note is that this 1% accounts for almost 70% of the personal income tax collections. Now, please tell me, is it a crime to be super-rich in this country?

Worse still, is owning a luxury sedan an open invitation to be penalised? Let me remind that poor growth is not the big challenge today. The challenge is the depleting ‘wealth effect’ leading to a declining savings ratio, which, in turn, is fuelling the decline in the investment-to-GDP ratio.
Gross fixed capital formation as a percentage of GDP is down from its peak of 34.5% in 2008 to merely 30.6% currently, thanks to declining household savings and falling private fixed asset creation.

Needless to add, even the current account deficit problem is largely one driven by the yawning savings/ investment gap. Hence, it is absolutely unacceptable to see Chidambaram doing precious little to either boost domestic savings through say innovative schemes like the EET (exempt exempt tax) or boosting private capital formation through, say, brave measures like doing away with minimum alternate tax (MAT) or at least bringing it down from the current high levels of 18.5% to a more reasonable of 15%. What is the use of a tax like MAT that runs contrary to the concept of extending tax holidays like, say, section 80IA (deduction in respect of profits and gains from industrial undertakings) of the Income Tax Act?

Had the finance minister been a tad more imaginative, he could have re-introduced the inheritance tax and death duty, as well as increased the scope of wealth tax. Better still, there was clearly a case for reducing the short-term capital gains tax from 15% to 10%, if not withdrawing it altogether, as the amount collected from this tax is just a modest Rs3,000 crores annually in any case.

Again, while a reduction in securities transaction tax (STT) is welcome, what would have really helped is the abolition of STT on at least one leg (either buy or sell) of derivatives transactions.

By not removing the STT altogether, the FM has only made the cost of transacting in, say, Nifty Futures in India that much more expensive compared to the SGX in Singapore, which has incidentally, seen an upsurge in volumes in the last few years!

What a pity that the STT in India is penalising the Indian trader at home, but is indirectly aiding the wealth creation process in Singapore; a classic case of robbing Peter to pay Paul!

Also, for all his bravado, the FM stopped short of removing the dual levy of STT on Indian mutual funds, paid once when a person buys the units and then again, when the said mutual fund house invests in shares.

Again, the introduction of commodity transaction tax (CTT) on non-agri commodities seems ill-founded as there is no concept of options trading in the commodities segment. Either options should have been allowed, but since that did not happen, introducing CTT will only further shrink the narrow participant base of the commodities market.

I am equally flummoxed by all this hype about the budget being pro-women and doing its bit for gender bias against working women. Surely, Chidambaram could have brought back standard deduction benefits for salaried women, if not more.

Setting up of the Rs1,000-crore ‘Nirbhaya Fund’ is high on rhetoric and low on substance. Far more meaningful would have been the setting up of a skill development fund, especially for rural working womenfolk, who are being priced out of the rural labour market and are increasingly being forced to take shelter in low paying MGNREGA work schemes.

Speaking of subsidies, Chidambaram spoke of the UPA’s commitment to food security. Clearly, there is a need to re-learn the math as the Rs90,000-crore set aside for food subsidies defies logic, when the cost of providing rice and wheat alone, at Rs2 per kg to India’s 800 million poor under the Food Security Act, is a staggering Rs2,50,000 crore annually!

As for providing for oil subsidies at Rs65,000 crore, that again is hogwash because if the price of crude oil rises past $110 a barrel, that number will be much higher. And, there is a good chance of that happening if the Middle East sees part two of the Jasmine Revolution.

In a country struggling with even a 5% GDP growth rate, amidst the ambitious target of raising the share of manufacturing from 16% to 25% of GDP over the next decade or so, against the backdrop of twin deficits, a measly tax to GDP ratio of sub 10%, scam-ridden dealings of an Italian kind, a virulent opposition and a lame-duck Prime Minister, I am reminded of famous words by the iconic Steve Jobs, at an Apple conference in 1997: “I am as proud of the things that I did not do as of the things that I did. After all, innovation is saying no to a 1,000 things.”

In Chidambaram’s case, however, I sincerely hope he does not regret the things that he did, and, more importantly, the things that he should have done but didn’t.
Till then, ahem...

(Sanju Verma is a market expert and group CEO, Violet Arch)