Budget 2012: The loudest cry is for fiscal consolidation: DNA 17th March 2012

Much has been expected form this Budget given that growth conditions have turned out to be much lower than what was expected at the start of FY12. The problems at hand before this Budget were as follows: low demand conditions; low investment due to lower government spending as well as high interest rates; limited reforms during the year; declining growth in exports and industrial production; and high inflation and low investment in an environment when fiscal slippage has been sharp. The ambitious target of 4.6% of GDP has gotten finally revised to 5.9%. The loudest cry has been for fiscal consolidation.

While the finance minister has spoken about the main objectives being stimulating demand and investment, delivery systems, malnutrition and infrastructure, the thrust appears to be on bringing about fiscal consolidation while providing incentives to all the constituents of the economy without impinging on revenue collections and adding little to inflation. More importantly, there have been some attempts made to better rationalise the subsidies on fuel and fertiliser, though the details have not been spelt out. Their levels are expected to decline this year.Revenue increase of around 22% is to come from higher indirect taxes and supported by disinvestment of Rs30,000 crore. Working backwards, the government has targeted a lower fiscal deficit ratio which will be contingent on the various growth projections as well as revenue collection working out on disinvestment.

On the expenditure side, there has been a strong bias towards infrastructure - both rural / agriculture and general. The former is encouraging when juxtaposed with the rural development programmes that have been enhanced for this year. These allocations, however, have been on for quite some time now and it is time for the government to actually assess in detail the efficacy of these allocations. An audit of these programmes would be seriously called for to assess whether these piecemeal allocations have really worked or not.

On the revenue side, Pranab Mukherjee has played a balancing game in trying to give a little everywhere with the focus on getting in some additional revenue. Individuals are better off in a way as they will pay less tax, though the gain is lower at higher levels. Certain tax saving schemes will benefit those with lower incomes.

Although there is nothing for corporates on the tax front, though there are sector specific benefits, there is an expected loss on direct taxes for the government.

The excise and service tax increases may be considered to be reversals from the time of the fiscal stimulus. But more importantly, we need to move faster to the goods and sales tax and direct taxes code so that the tax rates and collections are rationalised. But the fact that these indirect taxes have been increased is indicative that there could be some pressure on prices. More so since the rail freight rates have also been increased just before the Railways budget.

The fiscal deficit ratio is, of course, a concern. At 5.1%, it has been projected to be lower than that in FY12, but there are two issues here.

First, the number by itself is quite large at Rs5.1 lakh crore which has been the case in the last few years since FY09. This puts a lot of pressure on the liquidity in the system, and given that we could expect a revival in industry, there will be demand for funds from this end which has to be supported by the system. This may not have mattered in FY12, but could do so in the new financial.
Second, whether this number (5.1%) is credible enough. While the scaling down of the deficit ratio from 5.9% to 5.1% looks reasonable, there are some assumptions behind this number. We are assuming a stable global and domestic environment with some recovery in output. The joker in the pack would be oil prices because presently the Budget expects this subsidy to come down by around Rs25,000 crore. But, what happens in case crude oil price spikes due to the Iranian crisis?

Does the Budget actually meet the concerns of the economy? Growth is an assumption made in the budget and the fact that it talks of encouraging investment, it is possible to conclude that it is supporting growth. Inflation is an uncertain element here, which cannot be avoided considering that any kind of fiscal consolidation has to necessarily be done through additional taxation. The corporate sector does not get any direct benefits as such, as it is involved with higher customs and excise duties.

To the extent that the focus is on infrastructure, however, there is a positive there.Oil companies too would be better off hopefully. Public sector banks will be better capitalised while the capital market has something to cheer with the securities transaction tax being reduced. The Budget is silent on reforms though it talks a bit of what could be done on foreign direct investment in retail.

Maybe, nothing wrong here given that this may not be an objective of the Budget. Therefore, a little bit for everyone seems to be the ideology while hoping that the assumptions hold and the deficit is reined in.