Being delivered at a time when factors like inflation, concerns over growth, high Current Account Deficit, the recent flight of FIIs from the Indian markets and low FDI are at play- there are myriad expectations from the forthcoming Union Budget. The finance minister, this time, has a difficult task in hand of maintaining the current growth momentum and controlling inflation while walking a tight rope on the fiscal front. Although the government is expected to meet the fiscal deficit target of 5.5% for FY11, thanks to the largesse from the spectrum auction, meeting the deficit target of 4.8% for FY12 articulated by the thirteenth finance commission would be difficult, especially in the current scenario. We expect fiscal deficit to be slightly more than 5.0% during FY12. Ensuring fiscal prudence not only calls for substantial revenue mobilisation but also requires appropriate rationalisation of expenditure.
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With significant upside risks to inflation, we expect that the government would abstain from a complete rollback of fiscal stimulus provided during 2008 that was partially withdrawn during the previous budget. We expect the standard central excise rate on all non-petroleum products to be maintained at 10%, which will also be in tandem with the plan of levying Central GST at 10%. These measures if proposed would provide some respite to the common man, but might increase strain on the revenue front warranting calibrated measures to consolidate the fiscal deficit. With export sector witnessing a turnaround in the recent months, the government should consider limiting the export stimulus, provided earlier, only to certain sectors that are still under pressure. Nonetheless, the budget should focus on measures that are aimed at improving the competitiveness of Indian exporters. The Government needs to focus on policies that reduces transaction costs and improves productivity of Indian exporters. With the inflation pinching the pockets of the common man for a long time now, the government might consider providing some relief on the tax front by advancing some of the income tax measures proposed in the DTC, if not implementing it fully.
ReplyDeleteRationalisation of expenditure, though critical, would be a difficult task given that flagship programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the Food Security Act would require substantial increase in their allocation. MGNREGA expenditure is expected to go up with increase in wage rates by around 17-30% with effect from 1st January 2011 under MGNREGA by the Ministry of Rural Development. On the subsidy front, the government might get some respite given the partial deregulation of oil prices. The upside risks, however, cannot be undermined in case the oil and food prices continue to rise unabated.
Infrastructure and agriculture are expected to receive major focus from the forthcoming budget. However, it would be challenging for the government to appropriate more funds in these directions given pressures for fiscal prudence. Therefore, the budget must enhance the policy environment towards attracting private participation in both these sectors. The government will have to take significant steps to reform areas such as land, insurance, modern retail et al to attract private investment, especially in the agriculture sector. Improving agriculture productivity and removing bottlenecks in the food supply chain would be extremely important for providing long term solutions to the prolonged food inflation issue. On the infrastructure front, policy must be geared towards attaining optimum results from the expenditure that has already been announced towards infrastructure development and the pace at which infrastructure projects are implemented must be improved. It is necessary to initiate comprehensive expenditure reform programmes that focus on enhancing the efficiency and accountability of public expenditure and bring about greater transparency of public expenditure. This budget, thus, would not only be important from the point of anchoring short term business expectations but also would play a crucial role in determining the long term growth prospects.
Dr. Arun Singh, Senior Economist, Dun & Bradstreet India