Budget 2012: Politics, oil price hold Budget to baby steps
The best thing Prime Minister Manmohan Singh's government has going for it ahead of Friday's Budget unveiling is low expectations.
March 13, 2012 / 14:44 IST
The best thing Prime Minister Manmohan Singh's government has going for it ahead of Friday's Budget unveiling is low expectations.
The ruling party, battered in recent state polls and hamstrung by slowing economic growth and high global oil prices, is in no position to advance bold economic reforms that could unclog flagging growth in Asia's third-largest economy.What it can do is bolster tax collections by rolling back what remains of Lehman crisis-era stimulus and restoring excise taxes to earlier levels. It can also expand the scope of service tax coverage and keep a lid on populist spending -- no small feat for a government whose base tends to be rural and poor.Grappling with a yawning fiscal deficit will be crucial to restoring credibility that was stretched in the last budget by unrealistic assumptions."Big steps will not be taken, but baby steps will be taken. They will try to show they are trying to do things," M. Govinda Rao, a member of the Prime Minister's Economic Advisory Council, told Reuters.The Reserve Bank of India (RBI), investors and rating agencies are all clamouring for cuts to a deficit that forces heavy government borrowing, driving up interest costs and deterring investment.Including shortfalls at the state level, India's fiscal deficit is around 8 percent of GDP, the highest in emerging Asia.Economists expect Finance Minister Pranab Mukherjee to target a fiscal deficit of about 4.8 to 5.3% of GDP for the fiscal year that starts next month, higher than last year's 4.6% target but less than the roughly 6% it is actually on track to chalk up.In last year's budget, Mukherjee's projections for growth, asset sales and the deficit proved wildly optimistic."I just hope that the finance minister realises that credibility is just as important as representing an aggressive number," said Abheek Barua, chief economist at HDFC Bank in New Delhi, who said a deficit goal of 5% of GDP is feasible._PAGEBREAK_Subsidy restraintThe biggest budget challenge for the Congress government, however, will be taming its populist urge to spend, especially on subsidies for fuel and other essentials that, once adopted, are hard to cut without being punished at the polls.The government's subsidy bill is expected to top USD 50 billion this year, exceeding the budget's initial estimates by more than USD 20 billion. Oil subsidies alone overshot by three-fold and there is little relief in sight, with Brent crude trading above USD 125 a barrel after rising nearly 10% this fiscal year, while a weakening rupee amplified the costs.The government bit the bullet in 2010 and freed up petrol prices but continues to subsidise diesel and cooking fuels and has raised the price of diesel only in grudging increments.Even if the government had the political wherewithal to reduce subsidies or deregulate prices, the inflationary effects would make this infeasible at a time when the central bank is looking to cut rates, as it confronts the slowest quarterly growth rates since the aftermath of the Lehman crisis."It would be remarkably difficult to start to cut rates right now if you were to deregulate fuel prices," said Sanjay Mathur, an economist with Royal Bank of Scotland in Singapore.And expected savings from lower fertiliser subsidies will also likely be offset by a new food security law, which may be implemented later in the year as the government tries to drum up support after this month's drubbing in state elections and as it prepares for national elections in 2014.Still, with the general elections more than two years off, the new budget offers a window of opportunity to rein in subsidies without immediate political consequences.Bolder reforms to kick-start growth, like those pushed by Singh when he was finance minister in the 1990s, are unlikely.New Delhi has shelved a plan to open the country to foreign supermarkets, while any sweeping subsidy cuts or tax reforms, such as the introduction of a goods and services tax, are on hold, with the Congress party unsure about support even from coalition allies.Year to forgetIndia's economic planners hope to improve on what has been a fiscal year to forget.A year ago New Delhi targeted economic growth at nearly 9 percent but the actual figure is likely to come in around 7 percent, with the December quarter's 6.1% growth the weakest in nearly three years.That disappointing growth, combined with high energy and food prices that boosted subsidy spending and weak markets that thwarted a sell-down of state assets, led it to miss by a mile on the deficit target.Headline inflation remained high, although a high base effect and easing food inflation brought the January figure down to 6.55%, its lowest since November 2009.New Delhi is expected to pencil in revenue of roughly Rs 300 billion from asset sales, some economists say. Telecom spectrum sales could fetch a further Rs 350 billion, Nomura wrote.The government is expected to set a borrowing target of Rs 5.3 trillion for the new fiscal year, up from an expected Rs 5.1 trillion in the current year, a Reuters poll showed.Failure to stick within the target would be viewed unkindly by investors fed up with a government that twice in the current fiscal year increased its borrowing target."The government is borrowing from the market so much that there is no liquidity for the private sector," the Economic Advisory Council's Rao said. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
