The budget 2012-13 was prepared against the backdrop of high interest rates, inflation above the comfort zone of policy makers, slowing economy and impending pressure of elections in 2014. Above all, the economy faced a rising fiscal deficit.
I will evaluate the budget on the three parameters. 1) Does it put the fiscal house in order in a credible manner? 2) What does it do to boost the physical and social infrastructure? 3) What are its implications for growth, inflation and interest rates?
Reducing the deficit in 2012-13 and laying out a credible roadmap for a gradual reduction in fiscal deficit over the medium term was the foremost task before the budget. The budget intends to bring down the fiscal deficit to 5.1% of GDP in 2012-13 from 5.9% in the previous year.
I believe that this target is likely to slip, as the underlying growth assumption is optimistic and bold expenditure reforms are lacking.
A similar reduction envisaged last year was not achieved. The fiscal deficit correction relies more on revenue generation than expenditure control. By raising the service tax and expanding its coverage to all but 17 sectors, the finance minister has attempted to perk up revenue collections. But the budget has failed to do enough to control expenditure.
The consumption expenditure-fired high deficit in the last few years has contributed to inflationary pressures. The focus of expenditures on consumption, and not on investments to improve supply, generated inflationary pressures and countered the RBI's steps at inflation control. The budget has not done enough to bring down inflation and sustain it at sub-5% levels.
The budget does attempt to tilt the expenditure balance towards investment: the capital expenditure is budgeted to grow at 30.7% as against 10.6% growth in revenue expenditure. Also, the proposed steps to improve access to funding and tax concessions will boost investments in the infrastructure.
The commitment to cap the subsidies within 2% of GDP is good in intent. The proposal to fully fund the food subsidy but limit the fertiliser and fuel subsidy bill to the fiscal capacity of the government is also rational.
The steps to raise excise duties and service tax will put upward pressure on inflation. So will the upward adjustment of petroleum price if that materialises. We will see some reduction in interest rates as RBI starts cutting rates in 2012-13, but the reduction will be limited by inflation above 5% and the high borrowings needs of the government.
Dharmakirti Joshi, chief economist, CRISIL