Risk factors in Budget 2013

March 4, 2013

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

Finance Minister P. Chidambaram has apparently done the impossible. He has brought down the fiscal deficit in the current year from the budgeted 5.3 percent to 5.2 percent in spite of the fall in revenues. What’s more, the deficit was further slashed to 4.8 percent in the 2013/14 budget. Is that realistic?

Look at the expenditure. In the current year, subsidies on food, petroleum products and fertilizer were up by 676 billion rupees or 36 percent. These are precisely the expenditures the minister had to curtail, though he did make an effort to do that too late in the day. With the jump in non-Plan expenditure, the fiscal deficit could be brought down only by cutting Plan expenditure.

Budget 2013 is designed to rev up economic growth by correcting expenditure imbalance. Chidambaram has proudly declared that Plan expenditure will be up next year by 29 percent from the revised estimate. Non-Plan expenditure also increases, though at a lower rate of 10 percent.

Subsidies have also been targeted in the budget. Total subsidies will be down by 266 billion rupees or 10 percent. The sharpest subsidy cut (319 billion rupees) will be on petroleum products. The finance minister has also provided an additional subsidy of 100 billion rupees on food but may have to shell out much more if the Food Security Bill is passed in the budget session.

To cover the additional expenditure, Chidambaram has gone in for a surcharge on personal incomes in excess of 10 million rupees and on companies with profits more than 100 million rupees. These will yield additional revenues of 180 billion rupees.

The exchequer would also gain from growth in GDP. Gains in gross tax revenues are projected at 17.4 percent with GDP presumably increasing in 2013/14 at 13.4 percent. That assumes a multiple of 1.3.

The budget arithmetic is thus based on two critical parameters. First, that subsidies on petroleum products will be drastically cut though past experience does not support that assumption. A substantial increase in diesel prices may not be possible in an election year. Also, the government is bound to be more generous in respect of food subsidies if the Food Security Bill is passed. The budget is very much exposed to this political risk.

Second, even if the economy grows at 13.4 percent in 2013/14 as assumed, gross tax revenues may not increase at a multiple of 1.3. Last year, the GDP increased 13.3 percent but tax revenues, excluding additional taxation, increased 12.1 percent. Projected tax revenues may not be realized as in the current year. That is the economic risk implicit in the budget.

On the face of it, the budget looks quite elegant. But it is subject to implicit political and economic risks, which may make it difficult to bring the fiscal deficit down to 4.8 percent.


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