Even before P Chidambaram had walked into the Lok Sabha, the Finance Ministry had given clear indications that tax slabs will not be changed and that there was likely to be only minor tinkering with excise duties.
While the cues on income-tax slabs were bang on, the surprise has been the fairly dramatic excise duty cuts, particularly related to the auto sector. The slab for small cars has been slashed from 12% to 8%, medium cars from 24% to 20%, large cars from 27% to 24% and on SUVs from 30% to 24%.
This may seem like a bonanza for the auto industry, but auto stocks did not respond with any bullish zoom, indicating in one instance the mood surrounding the Indian economy and its expectations from the current government.
Mobiles are likely to be cheaper with the now standard 6% duty; and capital and consumer durable goods industries would also benefit with a 2% duty cut. But all in all, these are unlikely to provide a real shot in the arm to the manufacturing sector, which is seen slackening.
What is interesting to note, however, is that the sops mentioned above are not really meant for the Aam Aadmi (common people and not the eponymous party!). The prices of cars or mobiles will have a limited benefit for the people, but are not in the league of the super populist food or fuel subsidies, which are still alarmingly high.
What the measures do show is that Chidambaram is a man worried more about how world and national economists and credit agencies view India than what the population, particularly the lower strata, thinks of the government.
By showing that the Indian economy is moving on the path of fiscal consolidation – having brought the fiscal deficit to 4.6% of GDP – with the aim to bring it down further to 4.1%, the Finance Minister is not only playing to the global gallery (yelling – don’t downgrade us please), but putting the onus of achieving ambitious targets on the next government, which he knows is unlikely to be Congress-led.
This is a clever strategy considering that targets are announced with no clear roadmaps or responsibility.
The excise cut would in addition put pressure on indirect tax collections at a time when tax to GDP ratio leaves much to be desired.
And for all the accolades he handed the UPA for delivering up to 9% versus NDA’s 6%, his ending the 10-year tenure of UPA at about 5% growth rate is very disappointing. Revival that has been promised for 3 years is just not in sight.
Despite being feel good, the announcements on education loans as well as one rank one pension policy are also unlikely to get any real votes.
On the positive side, public expenditure and government borrowing is more controlled and there is a pattern about where we are headed on this account. There are also some green shoots of growth in terms of quarterly GDP figures and exports, but the overall problem of sentiment will stay.
The perception of paralysis more than any actual structural impediment is a headache that is unlikely go without the UPA government exiting.
And for all the good that may have been done in the last two budgets to show fiscal prudence or instil confidence, Chidambaram will unfortunately not quite make the mark that he meant to when he extolled the virtues of heeding his mother’s advice on hard work.