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Budget 2013: Focus to be on economic revival, fiscal health and boosting India as attractive investment destination
January, 21st 2013

P Chidambaram's first budget in his third stint at the finance ministry will go the extra mile to avoid proposals that could run afoul of investors, while keeping a firm focus on economic revival, fiscal consolidation and boosting India's allure as an attractive investment destination.

Early indications of the budget's character gleaned from discussions with finance ministry officials reveal 'clarity' and 'stability' as the buzzwords shaping the exercise, along with a keenness to avoid steps that could unnerve investors and undermine an improving yet fragile sentiment in the country.

"The idea is to avoid surprises as they tend to unnerve investors, so stability will be key," a senior government official told ET.

Steps to Improve Funding

Measures to improve funding for the infrastructure sector, deepening the corporate bond market and steps to improve the regime for foreign capital flows into the country are some of the broad thrust areas being deliberated in North Block these days. Specific proposals include investment tax credit, depreciation benefits, a cut in the withholding tax rate for debt instruments and a holistic policy for foreign investments.

Discussions on policy changes for foreign investors are centered around recommendations by a working group on foreign investments headed by Sebi Chief UK Sinha. The group has recommended removing distinctions between different routes for investments such as venture capital, non-resident Indian and portfolio investments. It also mooted just two investment clearance windows -FDI and qualified foreign investment framework, one involving more than 10% shares and the other less than 10%. It has also suggested removing caps on rupee-denominated corporate debt.

The budget for next year is being prepared against the backdrop of mostly grim economic indicators - industrial production is down, inflation is high and GDP growth rates at 10-year lows. The original budget deficit has been revised upwards and the current account deficit is already at record highs and the rupee yet to erase losses sustained last year. In preparing next year's budget, Chidambaram and finance ministry mandarins will be only too aware of the damage wreaked by this year's budget.

His predecessor's move to include controversial tax proposals such as the General Anti-Avoidance Rules, or GAAR, and a retrospective amendment to rules to enable the government to tax indirect transfer of Indian assets rattled foreign and domestic investors alike last year and hurt the overall investment climate. The government has since diluted or set aside some of the provisions, but the economy is still recovering from the damage.

FDI flows contracted 27% year-on-year between April and October last year to $14.78 b. Portfolio investment flows are up, but with international ratings agencies ready to cut their sovereign rating for India should matters get any worse, these could reverse in no time. Little wonder, experts are urging caution against any move that could hurt sentiment.

"There should be nothing to spook the investment sentiment...It is imperative that the government the chooses the right priority," said Abheek Barua, chief economist at HDFC Bank.

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