The best thing Prime Minister Manmohan Singh’s government has going for it ahead of Friday’s federal budget unveiling is low expectations.
The ruling party, battered in recent state polls and hamstrung by slowing economic growth and high global oil prices, is in no position to advance bold economic reforms that could unclog flagging growth in Asia’s third-largest economy.
What it can do is bolster tax collections by rolling back what remains of Lehman crisis-era stimulus and restoring excise taxes to earlier levels. It can also expand the scope of service tax coverage and keep a lid on populist spending, no small feat for a government whose base tends to be rural and poor.
Grappling with a yawning fiscal deficit will be crucial to restoring credibility that was stretched in the last budget by unrealistic assumptions.
“Big steps will not be taken, but baby steps will be taken. They will try to show they are trying to do things,” M. Govinda Rao, a member of the Prime Minister’s Economic Advisory Council, told Reuters.
The central bank, investors and rating agencies are all clamouring for cuts to a deficit that forces heavy government borrowing, driving up interest costs and deterring investment. Including shortfalls at the state level, fiscal deficit is around 8 percent of GDP, the highest in emerging Asia.
Economists expect Finance Minister Pranab Mukherjee to target a fiscal deficit at the federal level of about 4.8 to 5.3 percent of GDP for the fiscal year that starts next month, higher than last year’s 4.6 percent target but less than the roughly 6 percent it is actually on track to chalk up.
In last year’s budget, Mukherjee’s projections for growth, asset sales and the deficit proved wildly optimistic. “I just hope that the finance minister realises that credibility is just as important as representing an aggressive number,” said Abheek Barua, chief economist at HDFC Bank in New Delhi, who said a deficit goal of 5 percent of GDP is feasible.
SUBSIDY RESTRAINT
The biggest budget challenge for the Congress government, however, will be taming its populist urge to spend, especially on subsidies for fuel and other essentials that, once adopted, are hard to cut without being punished at the polls.
The government’s subsidy bill is expected to top $50 billion this year, exceeding the budget’s initial estimates by more than $20 billion. Oil subsidies alone overshot by three-fold and there is little relief in sight, with Brent crude trading above $125 a barrel after rising nearly 10 percent this fiscal year, while a weakening rupee amplified the costs.
The government bit the bullet in 2010 and freed up petrol prices but continues to subsidise diesel and cooking fuels and has raised the price of diesel only in grudging increments.