By March 2, 2013 October 7th, 2014 Blog

Mr. Gerard Colaco: The problem with Indian finance ministers is that they are tinkers, not leaders, much less visionaries. If a man of Mr. P Chidambaram’s learning, knowledge, experience and ability could present a budget as insipid as the one tabled on 28th February 2013, then there is not much hope for this country.

There has been needless tinkering with surcharges both at the individual and corporate income-tax levels. These are short-sighted methods to raise revenues. The best way to shore up government revenues and the country’s economy is by bold economic reforms aimed at stimulating growth. Revenues will automatically rise in a resurgent economy.

On the other hand, if revenues are sought to be increased by tinkering with surcharges, the only result will be that the affected individuals and entities will employ avoidance strategies. For example, if the surcharge on dividend distribution tax is raised, companies may either lower dividends or withhold dividends or resort to methods such as share buyback to neutralise the increased surcharge.

As for the surcharge on high income individuals earning more than Rs 1 crore per annum, the finance minister appears to have overlooked one simple and obvious fact. These individuals have the wherewithal to hire the best consultants to advise them on tax avoidance and tax reduction strategies. In short, revenue-raising by tweaking existing tax provisions is short-sighted to say the least.

The relief in the form of a tax rebate of Rs 2,000/- for tax payers with taxable income up to Rs 5 lakhs, though small, is welcome. I would not take the finance minister’s assurance that all additional surcharges on income-tax are only for a period of one year. Such promises have been made in the past and what was supposed to be temporary has been made more or less permanent. A classic case is the education cess of 3% on income-tax that has been in force for several years now. The old licence-permit-quota raj has now well and truly been replaced with a cess-and-surcharge raj.

On the positive side, the finance minister has ensured that sufficient funds have been provided for all existing flagship welfare schemes, particularly those designed to benefit the weaker sections of society, women, children, the disabled, health, education, providing of drinking water, rural development, infrastructure and agriculture. The government cannot be faulted on intent in these areas.

The difficulty is in implementation and in ensuring that the funds spent actually result in the desired outcomes. The bane of this country with its high levels of corruption is that there is a huge difference between funds sanctioned and funds utilised. Funds ultimately utilised tend to be only a fraction of funds sanctioned thanks to a depressingly alarming quantum of leakages along the way. No budget can plug this.

On the other hand, technology can be harnessed to eradicate corruption. But bureaucrats will always attempt to scuttle speed and transparency in the delivery of government services through technology, given their love of rent seeking at all levels.

Despite the rampant rise of materialism, there is still an appreciable amount of thrift left in Indians. This should be harnessed and exploited by the government. Meaningful, attractive and substantial incentives must be given for savings. Some good, some bad and some mad measures in this area are visible in the budget.

The proposal to issue inflation index bonds is laudable. But I can finally comment on these bonds only after their terms and conditions are known. The income-tax provisions applicable to these bonds will be of vital importance in judging whether they are of real value to investors. If the said bonds are heavily taxed, the very idea of protection against inflation will be defeated. It will also be interesting to see against which inflation measure the bonds are benchmarked, given that rates of inflation put out by the Indian government are largely a work of fiction, as every prudent Indian housewife knows.

The additional deduction of Rs 1 lakh on interest for a person taking a housing loan to finance the purchase of a house for the first time is undoubtedly good.

But the Rajiv Gandhi Equity Savings Scheme (RGESS) has been and will continue to be a dismal failure. The tax saving is insignificant and the target investor group is pathetically small, because it is only for first time savers in equity and equity mutual funds. When a much more attractive provision like total exemption on long-term capital gains on investments in equity and equity mutual funds has been in existence for years, but failed to bring investors into the stock market, I wonder by which flight of fancy the government imagines that an unattractive scheme like the RGESS will suddenly and magically cause an investor stampede into the equity market.

Neither the government nor SEBI has realized that the stifling documentation in the form of KYC and KYC updating procedures are what are driving investors away from equity and mutual fund investments. Similarly, in financial services firms, the main activity is compliance with needlessly complex bureaucratic procedures, rather than business and client service.

Unfortunately, when analysing modern Indian budgets, we consider a budget good not if it is full of vision, leadership and reform, but merely if it does no harm. From that point of view at least, we must be thankful that the union budget of 2013 has not
done any serious damage.

On one front, the budget proposals must be appreciated. The finance minister has resisted the temptation to announce a slew of populist measures in an election year. Had this been done, it would have weighed heavily on the exchequer and exacerbated an already unenviable fiscal position. The commitment of finance minister to give some priority to fiscal discipline and consolidation, thereby attempting to control inflation, has to be admired and appreciated.

In the ultimate analysis, the union budget 2013 is like the curate’s egg – good in parts. Writing in The Economic Times, veteran journalist Swaminathan S Anklesaria Aiyar put things in lucid perspective: “A budget is just one element in the broad framework needed to improve the investment climate and rejuvenate growth. Much more is needed outside the budget to cut red tape, expedite clearances and improve governance.”

In the one year that he has left, if Mr. P Chidambaram can get his act together on the reforms, decontrol and clear and speedy decisions fronts, he may yet redeem himself.

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