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Will The Budget Deliver?

Monday, February 25, 2013

Three days to go before the nation realises whether the economy and its fiscal management is in good hands. All will depend on the prudence displayed by the finance minister and his team. That times are tough is well known, but the catch lies in the government’s attitude. Will it bail itself out by burdening the common man and India’s corporate sector to cover its shortcomings or will it bite the bullet and adopt a disciplined approach to public spending that could ensure less seepage and proper use of government monies?  Thursday will tell, says Mayura Shanbaug, who brings this report on what can be expected...

Budgeting for a country like India has never been an easy task for finance ministers of this country. The predicament of this customary exercise of managing large social spending offset with falling revenue receipts is, this time, compounded by an economic slowdown, a threat of a sovereign downgrade, coalition politics and an upcoming Lok Sabha election. The budget document by now is perhaps, sealed in that brown leather briefcase which has become synonymous with the presentation of the yearly document itself. So what will get Palaniappan Chidambaram some brownie points this time?   

“What will determine whether Chidambaram presents a responsible or irresponsible budget will to a very large degree depend on what he proposes to do about subsidies?” says Dr. Surjit S Bhalla, Chairman, Oxus Investments.

A “Reduction in fiscal deficit in 2013-14 will primarily be about reduction in subsidies. Will inefficient dole-outs be reduced? How much will cash transfers, an efficient basis for redistributing income, be implemented? Regarding welfare schemes such as MGNREGA, a curious little-emphasized fact is that the government finds it difficult to spend the entire money it allocates,” he says.

For the last four years, MNREGA spending has averaged less than 70 percent of the budget allocation.

“For 2012-13, it could  look for savings close to Rs. 10,000 crores from MNREGA alone. Will Mr. Chidambaram announce a significant phase out of this program, or is it politically incorrect to do so? Answers to these questions would be out this week,” adds Bhalla. 

The question is: will the daunting task of reining in the fiscal deficit result in a further burdening of taxpayers in this budget, feel many. “There is a high probability that the Finance Ministry would not consider this as option owing to the existing phases of slowdown as well as upcoming Lok Sabha elections,” feels Debopam Chaudhuri, VP-Research, BluFin, a financial Information and Content company. 

Incidentally, the Central Government’s revenue receipts have improved in recent months as a result of a strict mandate adopted to reign in the fiscal deficit. As per CSO estimates, the year on year growth in Central Revenue Receipts was 18% in December 2012 compared to -1.7% in December 2011. However, the collections are still below the projections of the last Budget 2012-13, with tax collections being much less than expected primarily due to the GDP slowdown.

“We see a limited scope to further augment revenue projections in 2013-14 through conventional methods of increasing tax bases and rates,” says Chaudhuri. 

“Unless the FM devises more intelligent means of generating revenue streams, we do not see significant improvement in revenue earnings in 2013-14 compared to 2012-13.  Chidambaram definitely has a difficult task of steering a slowing economy with reduced public expenditure and tax earnings,” he adds.

What are the macro implications if indeed the government makes a serious attempt to meet the fiscal target?

“In choosing between the conflicting objectives of supporting short term demand and pruning the deficit, it seems clear that the finance minister will favour consolidation,” says Abheek Barua, Chief Economist, HDFC Bank.

“Thus the government is likely to follow its initial guidance and target a fiscal deficit target of 4.8% of GDP in FY14, against a fiscal deficit of 5.2% of GDP in FY13,” he says.

“There are two things in my opinion that make putting ‘Budget FY14’ together especially difficult for the Finance minister.  First, domestic growth conditions have deteriorated considerably over the past year and are yet to respond to the slew of measures taken by the government to boost domestic and foreign investor sentiment. Second, there is immense pressure on the government from international credit rating agencies and the RBI alike to check the fiscal deficit and prune unproductive public expenditure,” Barua adds. 

As this will be the last budget before the elections, can we be assured that populism will not be at the expense of prudence? “Yes, the Finance Minister will deliver a reform-centric Budget addressing the fiscal and current account deficits in the wake of the sustained country downgrade scare,” says Amar Ambani, Head of Research, IIFL.

“In my opinion, the FM cannot even afford a Budget which is termed as a non-event, leave alone a bad one. The Budget is likely to be balanced and devoid of any ambiguous provisions to help maintain investor confidence,” he says.

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