FY13 Union Budget - expectations

Budget FY13....focus on growth and vote bank with risk of general election ahead of schedule

The Finance Ministry will be at its back foot post debacle of the Congress party in recent State elections. The stake holders of the economy are not bullish on the ability to roll-out second generation economic reforms to attract foreign investments to support domestic growth momentum. This will be an inward looking budget with the need to pull-in domestic investments while retaining robust domestic consumer demand.  Another balancing act will be to maintain fiscal deficit below 5% of GDP without cutting costs and increase of tax burden. There is also immediate need to keep the focus on the vote bank if there be general election ahead of schedule. Given these complexities, it is not easy for the FM to pull out budget numbers that would be liked by majority of stake holders.

The top-priority agenda for the FM will be to get the growth momentum on track which has direct linkage to other woes on hand. The aspiration will be for growth target above 7.5% and fiscal deficit below 5% of GDP. This would mean setting up of ambitious targets on sequential basis with expectation of end of FY12 GDP growth below 7% and fiscal deficit above 5.75%. There are many critical issues which do not have quick-fix solutions. Can the Government manage costs without cutting subsidies to food; fuel and fertilisers? Can the Government manage higher revenues without tax hikes? Can the Government go in for aggressive disinvestments to bridge fiscal gap? Where are the investments going to come from for cash starved core sectors? It is obvious that the FM has to sacrifice fiscal consolidation and focus on invest to grow. It is also expected that the FM will focus on leakages in subsidy distribution. The belief is that not more than 25% of the subsidy burden reaches the right target audience; efficiency in subsidy management can provide significant relief to the exchequer.

The priority to growth and reversal in interest rate cycle will send bullish signals into the market. It is possible that India Inc will post better FY13 numbers on year-on-year basis and we can safely assume that the worst is behind us taking cues from improved sentiments in the external sector. There will be bit of tax burden on people (and entities) who can afford, to bring in economic inclusion for over all prosperity. It is also necessary to provide higher attention on Energy sector to cut dependence on imports which are funded out of exports. There is immediate need to cut flight of domestic capital to fund trade gap when domestic capital is scarce. The FM is expected to give priority to allocation of funds for development in core sectors; measures to support exports; enforce higher tax burden and dilution in Government ownership to raise monies; all with objective to maintain subsidies at current level and reduce dependence on market for funds. Needless to say, the FM will keep in mind the opposition both from within and outside UPA coalition for smooth pass through of FY13 Union Budget. There can be no big-bang and is expected to be simple and balanced, setting realistic and achievable targets on GDP and fiscal deficit.

Moses Harding