Fiscal deficit will remain at 5.2 percent of GDP for 2012-13.
R. Chandrasekaran
CHENNAI: The Indian finance minister P. Chidambaram has focused on consolidation of fiscal deficit in his budget proposals for the next fiscal year presented in the Parliament, today.
In the process, he has set a stiff financial target raising a question mark on the credibility of such targets. The focus on fiscal consolidation suggests the government’s seriousness in fiscal discipline following the debt crisis faced in the Euro Zone. However, the methodology adopted by it seems to concern the economists.
The government seemed to have been worried over a possible credit rating downgrade from the rating agencies. However, Standard & Poor’s quickly reacted to the budget proposals and viewed no impact on India’s sovereign credit rating and warned of a possible budgeted spending excess. The rating agency’s grouse is that there was little progress in structural reforms to cut vulnerability in India’s fiscal position.
The latest budget presentation indicates that the fiscal deficit will remain at 5.2 percent of GDP for the fiscal year 2012-13 and the government sees potential to bring it down to 4.8 percent of GDP in the next fiscal year. The fact is that the government’s revised plan expenditure is Rs.4.29 trillion, which is lower than the originally budgeted figure of Rs.5.21 trillion for the fiscal year 2012-13. The revised estimate is about 2.7 percent lower than the Rs.4.41 trillion revised budget estimate in the previous year.
The plan expenditure for the next fiscal year is proposed to be increased by 6.58 percent from the original budgeted amount of last year. However, it represents 29.4 percent increase from the revised estimate for the current fiscal year.
On the other hand, non-plan expenditure estimate has been revised upward for the current fiscal year to Rs.10.01 trillion from Rs.9.69 trillion originally projected in the budget. For the next fiscal year too, this has been increased by 14.5 percent from the budgeted figure and 10.8 percent from the revised estimate to Rs.11.1 trillion.
This is a concern reportedly raised by the Reserve Bank of India recently. The reduction in plan expenditure in the current fiscal year contributed to the retention of fiscal deficit at 5.2 percent. However, reducing plan expenditure means cutting down capital expenditure, which is not considered a favorable sign for growth prospects.
Looking at some of the financial budget proposals, it does seem that the government has set too ambitious or aggressive target. For instance, the finance ministry has set a disinvestment target of Rs.558 billion that includes Rs.140 billion from the non-government companies’ stake sale. The next fiscal year target is more than double of Rs.240 billion raised in the current fiscal year.
Similarly, revenue from spectrum sale is projected at Rs.408.5 billion, whereas the government could generate only Rs.194.4 billion in the current fiscal year. Subsidy for oil is estimated at Rs.650 billion though the actual subsidy was Rs.968.8 billion in the previous year. Interestingly, of the Rs.650 billion, Rs.500 billion will go for the current year’s expenses as the cash outflow will happen only next year. Therefore, the balance Rs.150 billion seems to be not adequate to foot the bill.
Though the government has increased the minimum support price of agricultural commodities, it has increased food subsidy less than 6 percent. An upward revision in the subsidy at a later date cannot be ruled out. However, this may come from non-plan expenditure.
Overall, the budget estimate 19 percent increase in revenue from tax, while the expenditure is predicted to grow approximately 16 percent. These are ambitious figures and given the past performance, the targets pose a real challenge for the government. Any deviation from the target will certainly upset the government’s GDP as well as fiscal deficit.
Aside from these, the automobile sector, especially the four-wheelers, seem to be the biggest disappointment. Even as the sector is struggling to sell new cars in the face of higher interest rates, the government has increased excise duty inviting the automobile companies’ displeasure at a difficult time. This is set to hurt SUV cars sale.
The budget proposals also disappointed the salaried section, who expected increasing of tax exemption limit at least in the lower slab to cool the tempers as the food prices have gone up sharply in the recent time. This has dented household budget badly. Only last week, labor unions struck work for two days thereby losing over Rs.200 billion.
The much awaited sops on the eve of election year also failed to find a place in the budget proposals. In stead, the finance minister slapped a tax surcharge on the super-rich besides hiking excise duties on mobile phones and luxury vehicles. The introduction of TDS on property sale of above Rs.5 million is bound to generate some heat among the property owners as the entry level seems to be at the lower end given the sharp increase in prices in recent years.
The ear-marking of Rs.10 billion for Nibhaya Fund is an indication of the government’s follow up action after the gang rape incident rocked the capital. The finance minister disclosed that details of the structure, scope and application of the fund will be worked out. Another area of focus is on youth. Chidambaram had set up another Rs.10 billion for skill-trained youth, who “will give an enormous boost to employability and productivity.” The funds were ear marked on the assumption of one million youth to be motivated.
Meanwhile, in a research note to clients, Scotiabank said, “In general, the budget maintained relative stability in tax policies, acknowledging that given the constrained economy, there is little room to either lower taxes or raise them. The budget’s key tax measures were benefits for the lowest tax bracket, temporary one-year tax increases on personal incomes of very wealthy individuals, and corporate tax raises for companies whose annual taxable income is over 100 million rupees. Additionally, indirect tax changes were implemented to either protect domestic industries or support them through tax relief. Finance Minister Chidambaram highlighted that the Goods and Services tax proposal is expected to be taken forward in the near future.”
However, Jawaharlal Nehru University economics professor Dr. Jayati Ghosh has summed up the budget, writing in an article, “This budget will not deliver growth because it is getting into fiscal contraction at a time of already slowing growth, when private investment is unlikely to take up the slack. And it will add to inflation because of the impact on energy prices and because its own lack of investment will affect supply shortages.”