Budget 2013: Eye on short-term and long-term objectives

February 22, 2013

(Any opinions expressed here are those of the author and not of Reuters)

India’s annual budget always attracts a lot of interest and this year’s edition will be especially important. Budget 2013 is not just significant because it’s the last to be tabled before parliamentary elections due next year but also in light of economic headwinds.

Areas that require immediate attention include the need to invigorate investment, pacify rating agencies, lower subsidies, address structural bottlenecks and jump-start domestic growth. This will require the administration to make tough choices. A turnaround in investment, in particular, is unlikely in the short term.

The budget should be dual-focused, with an eye on short- and long-term objectives. No one expects a rapid turnaround but the country’s biggest malaise — inaction — must be addressed and could form the crux of the fiscal statement come end-February.

Signs of sustained reforms and improvement in governance would buoy market sentiments, improve investor perception and percolate through the real economy.

Meanwhile, a positive budget would retain foreign investor inflows and help bridge the current account deficit. This is key as the recent imposition of taxes on gold imports has had little impact in dampening demand, while exports are unlikely to recover in the absence of stronger growth in the EU and the United States.

In the short term, with little room to limit expenditure (in particular food and fertiliser subsidies), the government is likely to look at new revenue-generating measures.

Excise tax increases, rationalisation of tax incentives, ground work for a unified goods and services tax (GST) among others are possible steps. A clearly defined timeline on GST implementation will also be a plus, along with gradual reduction of union excise duties or services taxes (to bring them in line with proposed GST rates).

Progress on the disinvestment front should also lead to higher non-tax revenues. To this end, after a lacklustre first half of FY2012/13, the government has raised close to 70 percent of the budgeted 300 billion rupees so far. Indications are that the disinvestment collections target might be maintained at between 300 billion rupees to 400 billion rupees for FY2013/14.

The likelihood of aggressive cuts in spending in specific ministries in the final quarter of the fiscal year and the recent decision to partially deregulate diesel prices have raised the possibility of a smaller deviation from the official 5.3 percent of GDP fiscal deficit target.

In the absence of cuts in non-plan expenditure, however, it will be difficult to meet next year’s deficit target of 4.8 percent of GDP (and 3.0 percent in subsequent years). Nonetheless, narrowing the overshoot is commendable.

In the longer term, the budget should focus on a fiscal consolidation roadmap. While this could be undone by the ‘next’ administration come May 2014, goalposts will help keep fiscal laxity in check. Other areas that could also receive attention include infrastructure, financial inclusion and facilitating the development of the corporate bond market.

A key area of concern has been the fall in investment spending, which, in our view, cannot be fixed by this Budget alone. Instead, steps to facilitate a quick resolution of industrial disputes, clarity in land acquisition laws, reduction in funding costs and improvement in corporate governance would help raise domestic and foreign funds alike. Last but not least, realistic estimates of GDP growth and other budgetary assumptions would also bolster policymakers’ credibility.

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