Union Budget 2012-13: ‘Fiscal consolidation = Subdued growth ?’

India Infoline News Service | Mumbai |

The government has its work cut out… manage coalition while trying to reform and meet fiscal target without hampering growth. Based on our internal workings, 5.5% fiscal deficit is more realistic

Expectations were really never high from the budget after the recent electoral drubbing. The need of the hour was a clear roadmap for fiscal consolidation by cutting expenditure and subsidies. Instead, a slew of allocations were made to several schemes in an attempt to be populist.

Bold reforms like action on the FDI or GST front were ruled out given the political compulsions, however, the budget platform could have well been used to send out a strong signal by addressing critical issues like land acquisition and the mining bill. While the FM did cover areas like infrastructure and agriculture, a detailed plan seems missing.

The big move that took many by surprise was the two percentage point hike in both, excise duty and service tax rates. Widening of the service tax net was on the cards with a select negative list, but raising rates when GDP growth has fallen from 9% to 6.9% could prove to be costly. Almost all companies will fully pass on these hikes to customers, leading to inflationary pressures. This could result in RBI holding rates longer, especially in a high oil price environment.

Widening of personal income tax slabs, which puts Rs2,000 extra in the hands of persons falling in the lowest tax slab of 10% and Rs22,000 for the 20% bracket, is a positive move.

The equity market will take heart from the reduction in STT rates by 20% on delivery trades and introduction of the Rajiv Gandhi scheme for allowing income tax deduction of 50% to new retail investors (up to Rs50,000) who fall under income below Rs1mn. Qualified foreign investors are also allowed to access the bond market. These measures will go a long way in deepening these markets in the long run.

An arithmetic check on the budget numbers reveals that the government has been far more realistic in its assumptions of tax revenue for FY13, unlike FY12. Taxes on personal income, service tax and excise duty look achievable. Corporate taxes and customs duty numbers appear somewhat overstated. Overall, the government risks missing the estimated revenue growth by 2-3 percentage points.

The bigger worry however, is on the non-tax revenue and subsidy front. Unrealistic assumptions of income and understated subsidies were the reasons for the high spill-over of the fiscal deficit by 130 basis points over the budget estimates in FY12. The same could repeat in FY13 on at least one of the two fronts.

The disinvestment target of Rs300bn hinges on the fate of the equity market, which is not in the best of health. A substantial portion of the non-tax revenue (Rs580bn) is budgeted to come in from communication revenues, the regular run rate for which is Rs160bn yearly. Meeting the non-tax revenue target heavily depends on sale of spectrum.

Coming to subsidies, there is a clear case of understating of the expense as was the case last year. The budget projects a 12.2% fall in total subsidy in FY13 as against the rise of 24.7% in FY12. This looks highly improbable when one considers petroleum subsidy has been projected to drop by 36.4% in a scenario of rising crude oil prices. Fertiliser subsidy is also estimated to drop by 9.3%.

The budget has projected fiscal deficit at 5.1% for FY13, which looks like a best case scenario to us. The Finance Minister will need the perfect execution (and some luck too) to meet this figure. Based on our internal workings, 5.4-5.5% looks more realistic. The government has its work cut out – manage coalition while trying to reform and meet fiscal target without hampering growth.

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