Balancing act likely on budget proposals.
By R. Chandrasekaran
CHENNAI: As the D-date for the Union Budget nears, there are number of trade bodies or associations scrambling for an audience with the Finance Minister P. Chidambaram or at least with the finance ministry to present their side of the case for favorable considerations in the proposed budget for the fiscal year 2013-14.
However, the question everybody is asking is, even as the pressure builds up, can the finance minister meet the demands of various sectors of people or will he get bogged down to announce populist schemes ahead of the Lok Sabha elections slated for next year?
The current indications seem to be that the finance minister will likely do a balancing act as everyone is looking for the budget proposals for a direction. The upcoming budget presentation will be one of the arduous tests for Chidambaram as the India’s GDP is headed towards one of the slowest growth in a decade. While the corporate world will be looking for some sops or stimulus to stimulate growth, the common man is looking for efforts to cut down spiraling price that is hurting the household budget. The available data and the conditions present an interesting scenario.
One of the top priorities before the government is fiscal deficit. This has become necessary for the ruling coalition as the rising deficit could threaten downgrading of sovereign credit rating from the rating agencies such as Moody’s or Standard & Poor’s. This puts the finance ministry on the mat to come with some actionable proposals without inviting political bottlenecks.
Earlier this year, the government reiterated its commitment of fiscal consolidation besides imposing some fiscal targets and policies in order to allow essential fiscal correction required for the economy and takes the economy back to the accelerated growth path. The finance ministry has unveiled a five-year plan in October last year to cut fiscal deficit. The ambitious fiscal deficit target calls for a 5.3% of GDP in the current fiscal year ending March and 4.8% in the next fiscal year ending March 2014. By March 2017, the plan is to bring down deficit to 3% of the GDP.
Given the history, it is anyone’s guess whether this ambitious target is possible within the specified period as various state governments are gracious in announcing more and more populist schemes to lure votes. Additionally, the subsidies bill will also worry the policy makers. For the fiscal year ending March 2013, Rs.1.9 trillion is estimated to be accounted for subsidies. This is on top of a revised estimate of Rs.2.16 trillion for the year ended March 2012 compared to budgeted estimation of Rs.1.43 trillion.
Subsidy for petroleum products were projected at Rs.435.8 billion for the current fiscal year March 2013 compared to the revised estimate of Rs.684.8 billion in the preceding fiscal year ended March 2012 on top of an original estimate of Rs.236.4 billion. While the government has taken some steps in allowing oil companies to fix prices in tune with the international prices gradually, this is not likely to have any major impact on reducing deficit at least in the current fiscal year. Therefore, the subsidy burdens on petroleum will not likely get over at least till the end of the current calendar year. However, the move could likely to bring down the subsidy on petroleum to some extent.
The food subsidy was estimated at Rs.750 billion on top of a revised estimate of Rs.728.2 billion in the preceding fiscal year. The government is unlikely to make any big changes in food subsidy as it will directly affect the common man and the possibility of announcing some sops to cool their tempers of rising prices will not be ruled out. Therefore, the food subsidy is likely to be more than what was budgeted last time.
Another major spending on subsidy is Fertilizer, which accounted for Rs.609.7 billion in the current year’s budget estimate. This is compared to the Rs.671.98 billion revised estimate in the previous year. A Reuters report indicated that the government may announce 15 percent cut in fertilizer subsidy bill in the proposed budget for the fiscal year 2013-14 taking advantage of the drop in global prices to bridge the fiscal deficit to some extent. While the government is likely to continue subsidy for urea, which is being used widely by farmers, subsidy on potash and diammonium phosphate or DAP will likely to be lower as the global prices are currently down by around 10 percent.
While there is a strong pressure on the finance minister to cut down subsidy bill, it remains to be seen as to how well he is going to balance the scheme of things especially this is going to be the last full-fledged budget before the next general elections to the parliament next year.
On the GDP front too, the finance minister is on a sticky wicket. The economy is growing at the slowest pace probably in a decade. The slower GDP certainly hurts government’s calculation of fiscal deficit. The government itself has reduced its economy target from time to time. The government had set an ambitious GDP target of 7.3 percent only to reduce it to 6.5 percent in July and to 5.8 percent in October last year compared to last year’s 6.2 percent.
The International Monetary Fund too has cut its forecast on Indian economy to 5.4 percent from 6.2 percent. Worst is that IMF sees Indian economy to decelerate further blaming slower investments, higher inflation and expansion of potential populist schemes. However, the rulers have been claiming that India could return to higher growth path, which was witnessed a couple of years back. Therefore, how Chidambaram is going to do the balancing is keenly watched by both the politicians and economists.
Trade bodies and corporate houses have already made a beeline before the finance ministry to present their cases for favorable sops in the ensuing budget. While the government has initiated some steps like bumping up of foreign direct investment or FDI in the aviation and allowing FDI in retail, the business community will be looking for some excise duty concessions to attract more buyers, be it automobile or consumer goods such as air conditioners, fridges and electronic items. Aside from this, realty will expect the government to cut down excise duty on cement, steel and other items to stimulate growth. The exemption cap on home loan interest and a cut in interest rates will allow the sector to bounce back from the sluggishness.
However, there are reports indicating that a reduction in capital spending is in the cards. The Reserve Bank of India is concerned about such reports as this could only hurt growth prospects and could even prevent it from reducing the interest rates to spur growth.
What is causing more concern is the reported intention of spending towards social or populist schemes at the cost of capital spending to pave way for an accelerated growth. Moreover, there seems to be no intention to cut down non-plan expenditure, which increased around 8.7 percent for the fiscal year 2012-13 from the revised estimate. However, the non-plan expenditure increase was 18.88 percent if it was compared with the budgeted estimate.
This is where the concern is for economists. They seem to be worried over the rising non-plan expenditure and the government’s reported plan to cut capital spending. If this is true, this is a clear indication of the government’s intention to retain its vote bank.
The spiraling price rice has hurt the common man’s household budget very badly resulting in no savings in some cases and lower savings in some other and forcing a section to borrow to meet ends. The government and the finance minister are well aware of this and will have to come out with some proposals to limit the damage caused by its recent actions, including gradual decontrol of diesel prices and the cap on gas supply to households. While the income tax limit may likely be raised, Chidambaram will face difficulties in satisfying the people’s expectations, especially the lower slab. However, higher taxation for super rich is not ruled out.
Additionally, the government may lift the cap on interest on home loan that will benefit both the consumers as well as the seller to lift its sale. The other possible expectation is rolling out of goods and services tax and direct tax code. Both should have been implemented by now, but has been dragging under one pretext or the other.
The last but not the least is the populist or social schemes. The Congress-headed United Progressive Alliance is very well aware that this is going to be the final full-fledged budget before the next general elections to parliament. Therefore, efforts would have definitely been there to announce some schemes that could limit the anger of the people on the price rice. The Congress party is facing serious corruption charges and the party men wants to take the coming year to erase such memories by talking on some new budget proposals.
Chidambaram will be hard-pressed this time not just because of the scheduled elections next year, but the ground prepared for positioning Rahul Gandhi as the next prime ministerial candidate. When Rahul was made vice president of the Congress party a couple of months back, it was a clear indication that the stage is set to announce his name as the next prime ministerial candidate for the upcoming Lok Sabha elections. Party men will be more interested to arm with more populist schemes so as to project their leader as champion of the masses.
This makes the priorities clear. The ground realities suggest that the finance minister is facing one of the strenuous tasks in his political career. While balancing act is certainly in the cards, the tilt could likely to be more towards proposals that will help project Rahul Gandhi as the next prime ministerial candidate. The return of the economy to the 8 – 9 percent growth path in the next fiscal year will mostly be kept in abeyance and the government may settle for a higher growth rate for the next fiscal year than the current one.