S&P, Fitch say India rating unaffected by Budget 2013
Budget 2013: How Chidambaram 'wasted' the crisis

Economy Mar 1, 2013

Budget 2013: Why investors aren’t buying FM’s ‘balancing act’

By Uttara Choudhury

New York: Finance Minister P Chidambaram's annual budget failed to excite investors and sent India's stock market to a three-month low on Thursday. Chidambaram's "balancing act" aimed at reviving growth amid India's worst slowdown in a decade ahead of the 2014 election didn't give foreign investors the old razzle dazzle.

The benchmark Bombay Sensex closed 1.2 percent down on Thursday and the rupee slipped 1 percent against the US dollar.

The budget delivered on broad market expectations of keeping the fiscal deficit in check. But some analysts said Chidambaram's vow to cut next year's fiscal deficit to 4.8 percent of GDP counted on ambitious revenue assumptions given the hefty spending targets. Total budget expenditure will rise by an unexpectedly high 16 percent in the 2013 fiscal year that begins on 1 April to Rs 16.65 trillion.

"From a macro perspective, the budget is disappointing in our opinion as it lacks any expenditure control," said Sonal Varma, India economist at Nomura.

Foreign investors are nervous of the fine print in  P Chidambaram's Budget.

Foreign investors are nervous of the fine print in P Chidambaram's Budget.

"If the current environment persists, next year's target of 19.1 percent growth in gross tax revenue might not be achievable," added the Nomura analyst.

Clearly, Chidambaram may be counting his chickens before they are hatched by assuming revenue of Rs 408.5 billion from telecom sector fees, more than double what it will generate this year. It's no secret that the next auction of mobile airwaves is lacklustre, having attracted just one bidder so far.

"Fiscal consolidation cannot be effective only by cutting expenditure," Chidambaram said defensively in his budget speech, seen as a balancing act to stave off a credit rating downgrade while meeting demands from the Congress Party for populist spending heading into an election year.

Standard & Poor's, which has been warning India of a possible credit downgrade, on Thursday termed the budget as "relatively prudent," but said there is potential for the government to exceed its expenditure target.

Both S&P and Fitch are maintaining India's credit rating at triple-B-minus, the lowest investment-grade rating. In April last year, S&P said there was a one-in-three chance that India could be downgraded to "junk" status if it fails to demonstrate better restraint with spending.

In a dampener, foreign companies that pay tax at 40 percent rate have had their surcharge doubled for a year. Chidambaram announced a cut in the securities-transaction tax, but didn't have an ace up his sleeve to animate foreign investors.

"Chidambaram could have scrapped short-term capital gains at 15 percent and made India one of the most attractive tax regimes in the world," Ranjit Dongre, founder director of portfolio management company Bellwether Capital, told Firstpost."This would have attracted inflows into the stock market. That 15 percent collects only Rs 3,000 crore for India which could have been offset in other ways."

"There is zero dynamism in this budget. In today's cycle of soaring inflation, stagnating growth and dead investment cycle, Chidambaram should have delivered a dynamic budget along the lines of opening up FDI in key sectors," added Dongre. "He has just done a balancing act."

"He hasn't done anything for FDI, for the markets or FII inflows into the secondary markets," added Dongre.

The chief economist at Deutsche Bank called the budget a "do-no-harm" budget that fell short of high expectations. Still, Chidambaram has done a better job of winning back foreign investors unnerved by the proposals of his predecessor, Pranab Mukherjee, to tax merger deals retrospectively.

"On the tax front, the US-India Business Council welcomes the clarity now emerging by India's adoption of the Shome Committee recommendations, which stipulate clear guidelines defining legitimate tax planning for foreign investors," said Ron Somers, president of the US-India Business Council.

The Shome Committee suggested that the Indian government defer implementation of the controversial General Anti-Avoidance Rules (GAAR) until fiscal 2016-17 and abolish capital gains tax on transfer of securities to ensure investment.

The government expects the economy to grow between 6.1 percent and 6.7 percent next year, up from about 5.5 percent forecast for this year.

"They are assuming a V-shaped economic recovery, but India is vulnerable to global shocks. I think long-term investors in India aren't increasing their exposure until the 2014 election as they want more clarity and continuity in India's economic policies," said hedge fund manager Gregory Turza.

by Uttara Choudhury

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