Around this time every year, equity strategists and analysts come out with their industry-specific expectations from the Union Budget. However, such reports read more like prescriptions. As financial year 2011-12 draws to a close, the dominant theme continues to be the steadily deteriorating macro-economic climate. India’s fiscal deficit has been more than six per cent for the last four years, excluding the one-time 3G receipts of the last financial year. Economists believe, domestic issues are holding back the country’s V-shaped recovery.
For starters, they say the mix of growth has been “bad,” as the government has stoked consumption to push growth even as private investment ratio to GDP has declined. No surprise then that inflation has soared higher than the central bank’s comfort level. Chetan Ahya of Morgan Stanley in a note says, “A further boost to domestic consumption through monetary and fiscal easing in the face of capacity constraints and already high inflation would only intensify the inflation problem.”
So, what are market experts prescribing to the finance minister? First, the investment cycle has to be revived, but this may be easier said than done. Second, fiscal consolidation is imperative if the economy has to grow at a stable rate. In order to attain this, the government has no choice but to curb expenditure. Ahya expects the government to make an announcement on the medium-term plan to reduce non-merit subsidy spending and leakage in welfare scheme spending as enrolling of unique identification numbers is scaled up by the Unique Identification Authority of India (UIDAI).
| TWEAK LEVERS TO CUT FISCAL DEFICT | |
| Key levers | Sensitivity |
| Excise Duty | A 5% increase in growth reduces fiscal deficit to GDP by 50 bps |
| Customs Duty | A 5% increase in growth reduces fiscal deficit to GDP by 50 bps |
| Service Tax | A 5% increase in growth reduces fiscal deficit to GDP by 30 bps |
| Divestments | Every Rs 5,000 crore of additional divestment reduces fiscal deficit to GDP by 5 bps |
| Expenditure | A 2% increase in growth increases fiscal deficit to GDP by 25 bps |
| Oil Subsidy | Every 10% increase in price of oil price, increases oil subsidy burden by $6.5 billion or 0.3% of GDP |
| Source: Morgan Stanley Research | |
Economists hope this year the Centre will be more realistic about its fiscal-deficit target, thereby giving the central bank enough room to take the required monetary policy actions. This year is not the best to increase receipts through increase in taxes, given the already fragile state of the economy. So, curbing expenditure is not really an option for the government.
Samiran Chakraborty of Standard Chartered Bank says the government urgently needs to reduce unproductive expenditure on subsidies to demonstrate its commitment to fiscal consolidation. Monetary policy can only be eased substantially in FY13 if the Budget outlines a credible fiscal-consolidation plan. Despite the urgent call to cut expenditure, most experts believe deregulating administered prices of fuel and fertiliser may not happen overnight. However, judicious price increases would go a long way in reducing the subsidy burden. Clearly, it may not be easy for the government to curb expenditure given the next fiscal may see higher allocations for food subsidies, recapitalisation of banks and potential restructuring of state electricity boards. But, even if it increases the share of expenditure on infrastructure projects, it will help revive the investment cycle.