Budget 2013: FM allays fears about tax shocks in budget & reaffirms commitment to fiscal discipline

NEW DELHI: Finance Minister P Chidambaram has promised stable taxation rates, more reforms, and committed to fiscal rectitude at all costs, allaying concerns about tax shocks and offering a peek into priorities that will shape next month's budget.

Chidambaram told investors in Hong Kong - the first stop on his four-nation tour to woo investors to India - on Tuesday that the Indian economy would grow "no better than" 5.7% in the current fiscal year as he declared that there was no case to downgrade the country's sovereign rating.

"The market has been cautious leading into what is seen as an 'election/populist' budget in February 2013. The finance minister was decidedly more positive. He suggests the fiscal deficit target will be met, taxes will not be raised and while policy will and should be biased towards the poor, the budget will offer a lot," said a note put out by Citi, which co-hosted the finance minister's meeting with more than 200 equity and fixed-income investors.

The minister's comments about taxes are significant especially since the global debate over taxing the rich more has landed on Indian shores, with some murmurs about taxes such as inheritance tax or estate duty on the wealthy.

Chidambaram's statement is also important because the previous budget, presented by his predecessor and now President Pranab Mukherjee, had unveiled a host of controversial measures such as the General Anti-Avoidance Rules (GAAR) and retrospective amendments to tax laws that rattled foreign investors and hit business confidence.


The minister, who is due to travel to Singapore, London and Frankfurt next to meet with investors, said while the economic growth would be muted this year, he expected it to pick up momentum in the next fiscal year and grow 6-7%.

Won't breach fiscal deficit target

He also sought to allay apprehensions of a downgrade by global rating agencies. "I was not worried when I took over (as finance minister) in August 2012, and after so many steps that we have taken, I think I should be less worried. In fact, all of us should be less worried. There should no case whatsoever for anybody to downgrade India."

Rating agencies Standard and Poor's and Fitch had last year cut their ratings outlook for India to "negative", citing its slowing growth and high deficit. The warnings and fears of a possible impact of a rating downgrade to junk status on investment flows shook the government, prompting it to unveil a slew of long-stalled reforms. The government opened up the multi-brand retail sector to foreign investments, deregulated diesel prices and capped the subsidy on cooking gas.

Asserting that the government would keep fiscal deficit at 5.3%, Chidambaram said there was room to sell more state assets to ease the strain on state finances and that the government would raise $5 billion from such divestments in the current financial year. "Under no circumstances will I agree to breach the fiscal target of 5.3% (in current fiscal)... The first step is fiscal consolidation and (India is) committed to the path of fiscal prudence... next year I will budget it no more than 4.8%," he told news agency PTI.

Chidambaram said the government had also effectively managed the GAAR issue.

"There is universal acknowledgement that we have handled the GAAR situation fairly effectively and buried the ghost that GAAR will be some kind of a monster," he said.

The Citi note said the finance minister heard the assembled investors patiently and informed them about the long-term reforms picture that includes reducing fiscal deficit by 0.6% every year to bring it down to 3% by 2016, a goods and services tax (GST) regime and faster clearance of infrastructure projects.

"The finance minister was both clear and confident - of what needs to be done, how and when it will be done, and timelines. Importantly, there was also a lot of openness and willingness to take in audience feedback and suggestions. So he was not just talking, but also listening," Citi said.