Budget 2012 Expectations – Source:TOI
This year and the previous one - it's been different: The Union budget will be presented on 16th March, 2012. Historically, with the economy running almost on auto pilot, the budget has always taken a back seat when it comes to impact on markets. However, the macro backdrop is certainly different this year and the previous one. This year's budget assumes particular importance due to the ongoing macroeconomic problems within the domestic economy.
Frugal, reformist and pro-growth budget?: Given the investment-led slowdown in the economy, with a need for fiscal pump-priming on one hand, and steadily deteriorating public finances on the other, the budget needs to be frugal, reformist and pro-growth at the same time. Not an easy task, given the (populist) demands of the realpolitik. Moreover, the recent assembly election results in UP, Punjab, Uttarakhand, Goa and Manipur have left the current UPA-2 government at the centre on a back foot. The budget would thus reveal Congress' response and the way forward for the next 18 months - whether it turns more 'populist' or muddles along.
Two most important aspects that are key to the FY13 budget are:
- Roadmap on fiscal consolidation
- Policy measures/proposals aimed at improving overall sentiment and infrastructure investment
Balancing growth with deteriorating finances: The government is walking the tightrope with growth concerns on one hand, and its deteriorating finances on the other. What makes it trickier is the lack of headroom this government has, to provide a fiscal boost to support growth, like the way it did back in 2008-09. On the other hand, it needs to announce enough policy measures to address the visible slowdown in economic activity. Though the Union Budget is not a platform to announce 'non-budgetary' reforms, the government can use the opportunity to do so, as it has in the past, in order to mitigate the prevailing negative sentiment. However, the key need of the hour is for provisions enabling a revival in investment activity in the economy.
Fiscal consolidation is key: Central fiscal deficit is expected at 6.1% of GDP vs. budget estimate of 4.6%. Overall, India's consolidated fiscal deficit (centre plus state and including off-budget items) is also expected to also remain high at 8.5% of GDP in FY12 compared with 9.2% of GDP in FY11 (excluding telecom licence and broadband wireless access - BWA collection). Considering the weak performance of government finances in FY12, the government is expected to move on the path of fiscal consolidation in FY13 and divert productive resources towards fast tracking investment projects and focus on policy reforms.
Rollback in excise duty; no rollback in oil import duty: A 2% rollback in excise duty is expected due to the ongoing pressure on government finances. It is to be noted that the government had cut excise duty by 4% in FY09 as a part of the stimulus measures announced during the credit crisis, of which 2 percentage points were reversed in FY11 budget. However, given the balancing act between slowing growth and fiscal consolidation, the government may spare the rollback on crude import duty, as oil prices have inched up again and the rupee, while having recovered lately, is still weaker compared to last year.
Measures for infrastructure: The government is expected to address the slowdown in infrastructure activity by introducing/extending measures to attract foreign capital in the sector. Last year, the finance minister had raised the FII limit in corporate bonds of infra companies in addition to allowing NHAI, Indian Railway', etc. to raise tax-free bonds. An extension in the scope of and an increase in the limit of these infra bonds to around `40000-50000 is expected. At the very least, the government can maintain the limit of `20000 in tax-free infra bonds and extend it for a few more years.
Oil subsidy will continue to be a big overhang: Total under-recoveries are estimated to be approx. US$27bn, of which the government's burden could be around US$15-16bn, reflecting an increase of around 70-80% from a year ago. Total subsidies are expected to be 2.5% of GDP, up from 1.6% of GDP in FY11.
Clear and realistic roadmap on divestment: The government will likely maintain the same divestment target of `400bn (US$8bn) as it has done in the past two years. Considering the failed effort in raising money through divestment in FY12 on account of weak capital markets, the government needs to announce a clear roadmap for the divestment process over the next five years. Recent news flow has suggested various options under the government's consideration; but the recent announcement by the market regulator SEBI, allowing promoters of the top 100 companies by market cap to auction their stake through stock exchanges, may be considered by the government as a viable option.
Spectrum auction may provide some cushion: The recent cancellation of 2G licences by the Supreme Court has opened up the opportunity for the government to conduct a 3G-like auction for these licences in the next few months and this could potentially fetch the government around US$10bn (about 0.5% of GDP). The government is expected to factor-in some amount from this auction into their budget calculations.
The Goods and Services Tax (GST) constitutes the next step towards comprehensive reform of indirect taxes in India: Since it was first discussed in 2007, the GST has faced opposition - as states argue that they will lose their tax autonomy - and has already missed the government imposed deadline twice. Considering the central and state governments have failed to agree on many of the contentious issues in the bill, it is likely to miss its April 1, 2012 deadline. In addition, the bill requires an amendment to the constitution, which needs two-thirds majority in each House of Parliament and ratification by at least 14 states. The budget is expected to provide some clarity on the timeline for introduction of the GST, which as per budget expectations will likely be launched in 2013.
Expenditure management: To manage expenses, the most critical step is to reduce the subsidy burden. The government's total subsidy expenditure provided in the budget for FY12 stood at 1.5% of GDP. However, the offbudget expenditure on food, fertilizer and oil will amount to an additional 1% of GDP in FY12. While the steps towards stream lining the subsidy mechanism via direct cash transfers are still being worked upon under UID, some measures towards increasing diesel and kerosene prices may be announced post budget. The food security bill could be an overhang as it would increase the food subsidy further by 0.5% of GDP; however, there is a good chance it may be pushed to next year. Overall, it is the credibility of the expenditure management process that will hold the market's attention.
WITH EXPECTATIONS, COMES RISK:
The 2012-13 Union Budget is being seen as the last chance for the government for a course correction towards growth oriented reforms, and prudent expenditure; two years being essential for tangible change before General Elections in 2014: Expectations are therefore high that the Budget may push through long-pending reforms, investments and fiscal consolidation (amidst serious need for it) and this might have increased the risk of a disappointment if the budget fails to deliver. Ultimately, the key for the government would be to follow through on the budget announcement with implementation.
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