Indian economy finds itself in stagflation (high inflation, slow economic growth). Growth in GDP has recorded a decade low of 5 (estimated) for the FY 2012-13. Widening Current Account Deficit and Fiscal deficit, coupled with threat alarms from rating agencies is a deep concern. Economy expected to recover.
Fiscal consolidation is the key on how finance ministry attempted to solve the fiscal puzzle. It shows a nominal GDP growth rate of 13.4%, real GDP growth rate of 6-6.5% and inflation to anchor around 7% for FY 2013-2014.
Budget has planned to restrict fiscal deficit to 5.2% of GDP this year and to 4.8% the year next, and promises a zero effective revenue deficit by FY2017. It is very critical for the stability and macro policies of the country.
Increase in tax revenue is projected to grow at 19%, which is due to increase in tax bases. An indirect tax rate is unchanged which is positive for inflation.
Widening current account deficit is a major concern. India is worlds largest gold consumer. A raise in import duty of gold was anticipated to curb the imports. But in budget, jewels and gems were made cheaper. This may not help Indias CAD to reduce its imports, but it will divert investments from financial assets.
Having lowest tax to GDP ratio, increasing the tax bases is most ideal move for increasing the tax revenue. Additional surcharge on super rich and companies, both having annual income of 1 crores or more will definitely help India. In India, 42,000 people are earning more than 1 crores rupees. By imposing surcharge on them, it wouldnt help.
Tax on buy backs, used as a popular method by foreign investors to take out cash from Indian companies without paying taxes. Now a 20% tax on capital gains is introduced. This may reduce investments from foreign investors.
Now FIIs will be allowed to trade in exchange traded currency. However, a tax on royalty is increased to 25% from 10%, treating them on par with dividends.
15% investment allowance on new investment of 100 crores or more will boost the economy. Govt. is allowing some selected institutions to issue tax free bonds so that large funds can be generated which will help in the infrastructure projects. Govt. is giving incentives for generation of renewable energy.
Govt. is investing 1000 crores in banks exclusively for women. Indian women dont have title rights over the property. Also India has 60-70 cooperatives banks that are dedicated to women borrowers and Indian woman doesnt know about these initiatives. Concentrating on these cooperative banks would be better, instead of focusing on opening of new women-only banks.
Inflation is primarily lead by food inflation 30% of food produced is wasted due to improper distribution and storage. Steps to increase food production, better storage and distribution should be initiated to curb food inflation.
Deregulation of fuel prices in long run will be beneficial as the crude oil prices will remain stagnant or may even fall marginally.
Economy has grown at a smaller rate due to decrease in planned investment, savings and tight monetary policies followed by RBI. The budget if supported by complimenting monitory policy from RBI will help India in achieving a decent growth.
By- A R Ravishankar & Lovelesh Garg