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Budget 2013-14: from Dilemma to Equilibrium

, March 19, 2013, 1 Comments

Budgets are a complex Prisoner’s Dilemma[1] problem where hidden expectation of the government and the citizen decide whether or not the outcome would be a good equilibrium where everyone gains or a bad equilibrium where everyone loses. For the uninitiated, the Prisoner’s Dilemma is a classic game theoretic problem in which individuals’ rational effort to pursue self-interest may result in positive social consequences when the self-interest are aligned and negative social consequence when the self-interest are not aligned.

Thus in reality budgets go far beyond national accounts and indication of what the government plans to do in the coming fiscal year, it becomes a super-signal made up of different components or signals which could be white (i.e. Can be taken at the face value) or gray (those which may have underlying implications). For each of these signal’s the opposition, industry and common man attach probabilities of it being a white or gray or mix (combination of white and grey) signal and based on these probabilities they try to align their self-interest’s with the signals. It may seem complicated already! But actually the complexities come when the all the stakeholders match their self-interest’s to arrive at the social national consequence.

On February 28, the Finance Minister of India, Mr. P. Chidambaram (a man I admire for his fine implementations of economics) gave the 2013-14 budget speech which in my opinion was a mosaic of white, grey and numerous mixed- signal. He did his best to soot all and sundry. He wanted to “remove any apprehension or mistrust,” and encourage an environment that was “easy, friendly and mutually beneficial” for private investment.

Pro-industry measures included re-jigging of tax regime for the troubled oil and gas exploration industry, simplification of rules for foreign portfolio investment, fiscal consolidation program, broad-based thrust on infrastructure beyond roads and ports to improve electrical grid & rural electrification, development of industrial corridors and national waterways.  The budget also emphasized on many raising-eyebrow initiatives like the establishment of a women-only bank, tax-breaks on home loans, temporary tax surcharge on very high earners. Presumably these are signals to sooth voter’s interest and keep them aligned with the governments in lieu of the up-coming election.

The prelude and aftermath of this budget has been numerous deliberation and discussion on the credibility of fiscal arithmetic, i.e. is the fiscal deficit target of 4.8 percent of GDP realistic? Is the actual likely to miss the target by 0.05 or 0.2 percent of GDP?

However, I would much rather move from this macro issue of fiscal deficit which is based on investment in private and public sector, revenue management, expenditure control; to micro issues or the future of three sectors which are most likely to benefit from this budget as the self-interest of these industries and the government are aligned.

Power Sector: Gain for All
Let’s start with the focus area for the 12thFive-Year plan and 2013-14 budget – Infrastructure and in particular the power sector. This is by far the leading sector with perfect alignment of the self-interest of PPP, private and public players and hence is expected is expected to lead a good equilibrium with positive gains for most, if not all players.

First, the growing demand for electricity is likely to be catered to the additional private sector led power capacity of 75+GW over the 12th Five-Year plan. Second, the sunset clause extension[2] is likely to benefit the power projects expected to commission in 2013-14. Third, credit enhancement by IIFCL and issuance of tax free bond of Rs. 500 billion will result in an improvement in the availability of funding for power projects.Forth, renewable energy players are likely to benefit from the interest subvention for solar projects for a period of five years as a result of National Clean Energy Fund, and reinstatement of the generation-based incentives for wind projects. However, the increase in custom duty by 2 percent, CVD by 1 percent and freight charges by 5.8 percent is likely to increase the generation- cost of coal-based power projects.

This is likely to translate into costlier power for end consumers. Moving on from generation into transmission and distribution – this sector has witnessed some rather successful PPP and privatization as in West Bengal and Orissa. The budget intends to help this sector by pushing forward a financial restructuring programme for state-owned distribution companies who with the states support would be able to revise tariff and implement operational discipline to reduce transmission and distribution losses (T&D).

Textile Manufacturer: Attractive and Profitable
The benefits range from removal of excise duty for ready-made garments, extension of Technology Upgradation Fund Scheme (TUFS) to 12th Five-Year Plan with an investment target of Rs. 1,510 billion, reduction in custom duty on textile machinery to 5 percent.  These are likely to result in higher profit margins and cost-effective production of quality garments. The allocation of funds under the Scheme of Integrated Textile Parks and interest subventions for handloom sector may result of Special Textile Zones flourishing in the near future.

Most importantly, with an impetus to the global economy in 2013 domestic and foreign demand for textile is likely to improve in 2013-14, which is further contributing to the positive returns for this sector. Thus, signals favour the textile sector enabling them to re-surge and create good sentiments for the government. This sector primarily comprises of small and medium enterprises (SMEs) which employs approximately 25% of the labour force. The impetus is expected to translate in growth of the SME sector, job creation. This may also induce positive sentiments towards the governments.

Banking: increased financial penetration
Green signals from the 2013-14 budget for the public sector banks (PSB) might actually be amber in colour for private sector banks. This has paved the way for interest rate cut. The coupled with consumption led spending and pre-election government expenditure on welfare schemes is likely to result in the growth of bank credit. However, Rs 140 billion capital support to PSB in 2013-14 will contribute to demographic and loan book expansion of these PSBs.

Though the private sector banks do not receive the capital support they are now permitted to sell insurance products and increase their fee income. Additionally, credit worthy farmers who have repaid PSB loans in a timely manner can access financial services of the private banks. These should contribute to the increased penetration and size of the book for both public and private sector banks. Even though, the signals seem to marginally favour the PSBs, they will result in increased financial inclusion for the economy.

Disclaimer:The views expressed here are those of the author and do not necessarily reflect those of the author’s employer (The World Bank Group) or any other organisation.[1] The prisoner’s dilemma is a canonical game theory example that shows why two individuals might not cooperate, even if it appears that it is in their best interests to do so
[2] Extension of the sunset clause by one year to avail the 10-year tax holiday.

About author
Mahima Khanna is a B.Sc (Hons.) in Economics from St. Xavier's College, Calcutta and an MPhil in Economic Research from University of Cambridge. Mahima is currently working in The International Finance Corporation, The World Bank Group, where she looks after the assessment and management of development impact for IFC's investments in South Asia.......more ...more
  • Great Insights there Mahima. Glad to be onboard a team with a star like you.