Budget 2012-13: Fiscal consolidation achievable, or not?

The Union Budget for 2012-13 presented today underlined the government’s current position – stuck between a rock and a hard place. This has resulted in limited forward moves in creating fiscal consolidation, which was a significant expectation from the penultimate budget before the next general elections. With economic growth already showing signs of slowing down, measures to improve the fiscal deficit run the risk of derailing it further.

Nevertheless, there is some progress in moves towards fiscal consolidation going forward. The fiscal deficit to gross domestic product (GDP) ratio has been projected at 5.1 per cent. This is a number higher than projected in the previous budget, but still significantly below the 5.9 per cent now anticipated for 2011-12. A 0.8 percentage points decline in fiscal deficit to GDP ratio is indeed a positive, given that it actually materialises. The actual for 2011-12 have been far higher than what were projected, which was a significantly way of the mark estimate on hindsight.

Signs are hopeful, however, that the centre’s projections this time around are more credible than during the previous year. This budget marks the return to the Fiscal Responsibility and Budget Management (FRBM) Act which chalks out a path to lower deficit over the coming years. The projections for the next years put the deficit to GDP ratio at 4.5 per cent for 2013-14, and a still lower figure of 3.9 per cent for 2014-15. We have observed in the past that the government has largely adhered to the framework laid down as per the FRBM, even though this path of consolidation was deviated from in the crisis years.

The government has chalked out a few policies that could help in containing the deficit in 2012-13 in comparison with 2011-12. These are essentially measures to increase tax revenues through an increase in indirect taxes. Service tax rates and excise tax rates have been hiked to 12 per cent from 10 per cent earlier. On the other hand, income tax slabs have been relaxed slightly in order to provide some relief to the individual tax payer, probably as a measure to partially counter the impact of sustained high inflation. However, on a net level, the increase in revenue from higher indirect tax rates is estimated to be much higher than the loss on account of a change in income tax slabs, making it a gain for the exchequer.

On expenditure, however, the overall situation does not look as contained as would have been expected. Total expenditure in 2012-13 is expected to rise by 13 per cent from the revised estimates of 2011-12. This is a sharper increase in the actual expenditure during 2011-12 of 10 per cent (even though it has overshot the expected growth by a whole 5 percentage points). This means that there is very little scope available for the government to now increase expenditures if the need arises, if it is serious about meeting its deficit targets. 

This scope is further curtailed by the projections for the GDP at 7.6 per cent for 2012-13, which are seen as potentially unachievable by a number of experts on the subject. This means, that even if the government is able to keep its actual fiscal deficit at the projected figure of Rs. 5,13,590 crore, a slower GDP growth will still result in an overshooting of the deficit to GDP target.

It is possible that the government rolls back subsidies, even though that was expected during the budget. This could curtail the expenditure, the deficit and hence the deficit-to-GDP ratio, but it remains to be seen. On an overall basis, however, it looks like the government’s fiscal challenges are far from over, and a few tough spots might need to be overcome despite all its good intentions.

The article appeared in Business Bhaskar, the financial daily in Hindi

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