Union Budget 2013: A Crucial Task Ahead

Dr VK Vijayakumar, Investment Strategist at Geojit BNP Paribas Financial Services, shares his views on the current state of the Indian economy and states his expectations from the upcoming Union Budget 2013.

The Union budget for FY 2013-14 is a pretty crucial one, since the Indian economy is seriously challenged at this point of time and an inventive budget can be a way out of the difficult times. The tricky global environment has aggravated the challenges being faced by the economy.

The Indian economy grew only by 6.2 % in 2011-12. For FY13, the CSO estimates a growth rate of a mere 5 %. If this happens, it will be a ten-year low for India’s economic growth. A low growth and a slower increase in tax collections will render macro management extremely problematic. It is crucially important to get economic growth back on track. This entails a reversal of the declining trend in savings and investment rates.

The basic reason of the growth rate slipping is that savings and investment rates have fallen from 36.8% and 38.1% respectively in 2007-08 to 30.8% and 34 % correspondingly by 2011-12. The savage monetary tightening resorted to by the RBI to control inflation, has also contributed to the slowdown. Adding to the worries, a poor global environment has adversely affected exports. In such a situation, the twin deficits - fiscal deficit at 5.9 % and current account deficit at 5 % - unless quickly managed might invite a credit rating downgrade. 

The Finance Minister P Chidambaram has an onerous responsibility to manage this difficult scenario. It is now for us to see if the FM, well known for his vision and competence, delivers the best possible solution.

First and foremost, economists expect a fiscal prudence in the budget. The FM is likely to contain this year's fiscal deficit at 5.3 % and make a projection of 4.8% for 2013-14 as he has already gone on record on this in his road shows abroad. To achieve this target for 2013-14, he may go in for additional resource mobilisation. A further 2% increase in the excise duty cannot be ruled out, in spite of it being inflationary. 

There have been suggestions regarding the introduction of a new tax rate for the super rich - 40% for those earning above Rs 25 lakh. This may be seen materialising in the forthcoming budget. 

Our expectations regarding the budget are summarised below:

• Measures to boost savings and tax concessions to boosting savings.

• Raising the exemption limit for personal income tax to Rs 2.5 lakh.  

• Widening the scope of the Rajiv Gandhi Equity Savings Scheme.

• A disinvestment target of Rs 50,000 crore. 

• Rationalisation of STT i.e. reduction of STT on deliveries. 

It is quite likely that the budget will show some indications regarding DTC and GST and a time-table for their role out.