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Business News/ Politics / News/  Staying the course and keeping fingers crossed
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Staying the course and keeping fingers crossed

Staying the course and keeping fingers crossed

Finance minister Pranab Mukherjee.Premium

Finance minister Pranab Mukherjee.

Set against a weak political backdrop, the budget posted no major surprises. While this was always going to be a difficult budget, given fiscal and political constraints, the finance minister has chosen to play safe. In this context, the thrust areas in this budget are:

Growth: Maintaining it through some investment and funding incentives, rather than accelerating it.

Fiscal: Attempts to widen the tax base and cap the subsidy bill to 2% of gross domestic product (GDP).

Governance: Gradual recourse to more usage of Aadhaar.

Finance minister Pranab Mukherjee.

Looking at the fiscal arithmetic, while the over 100 basis points (one basis point is one-hundredth of a percentage point) slippage in the FY12 deficit to 5.9% against estimates of 4.6% was no surprise, the key is that the numbers do not fully account for fuel subsidy and include disputed telecom-related capital gains. The 2012-13 budgeted estimate of a 5.1% deficit is more credible, but not entirely and we expect slippage of around 40 basis points to 5.5%. The arithmetic is based on nominal growth of 14 % (real GDP of 7.6% and inflation of 6.5%), revenues rising by 22.7% and expenditures growing by 13.1%. While growth assumptions are realistic, we could see slippage on revenues and expenditures.

On the revenue front, the targets appear dependent on growth sustaining and markets holding up. The budget has estimated a 19.5% increase in gross tax collections (excise by 29.1%, customs 22%, services 30.5%, corporate 13.9%, and income 13.9%). Taking into account the increase in excise and service tax rates from 10% to 12%, coupled with the widening of the service tax net, these are achievable provided growth holds up. The key to meeting estimates would be a 32% growth in non-tax revenues to 1.6 trillion (of this telecom revenue is estimated at 40,000 crore), and the 30,000 crore divestment target, which is dependent on market conditions. The budget has estimated a 13.5% rise in expenditure led by a 22.1% rise in Plan and an 8.7% rise in non-Plan expenditure. While the finance minister has attempted to cap the subsidy bill to 2% of GDP, there remains little clarity on who will eventually bear the cost. The key risk on the expenditure front is that similar to last year, the budget has once again factored a 12.2% contraction in the subsidy bill.

Looking at the details, while numbers for food and fertilizer seem realistic, estimates for fuel are conservative as the 43,600 crore outlay projected for 2012-13 includes around 25,000 crore deferred oil subsides from 2011-12. A caveat to a rise in the subsidy bill is the budget proposal to restrict subsidies to 2% of GDP in 2012-13 where it has said it would fully provide for food subsidies while the others would be funded to the extent that they can be borne by the economy without any adverse implications.

The 2012-13 fiscal deficit of 5.136 trillion, or 5.1% of GDP, while slightly higher than market expectations, could overshoot the target by around 40 basis points to 5.4% of GDP. Friday’s non-eventful budget, read in conjunction with Thursday’s rather hawkish monetary policy, has resulted in yields edging slightly higher.

Rohini Malkani is chief economist, Citi India.

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Published: 17 Mar 2012, 12:52 AM IST
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