By Nantoo Banerjee
Notwithstanding the Congress party’s election debacle in just-concluded Assembly polls in Uttar Pradesh, Punjab and Goa, the Union Finance Minister, Pranab Mukherjee, must be the most disturbed person at the moment struggling to find right numbers for his 2012-13 budget proposals. The Finance Minister has been proved wrong in most of his 2011-12 fiscal targets based on the prediction of the country’s economic growth rate of nine per cent for the year. Not only that the actual growth rate has fallen short of the target by as much as 25 per cent or even more, but also the government seems to have lost control over its expenditure.
As a result, the current financial year may end up with a record fiscal deficit, anything between 6.8 per cent and 7.5 per cent, compared to the target of 4.6 per cent. This makes the estimation of the 2012-13 budget expenditure a very difficult exercise. The government is so desperate to raise additional resources that within hours of the declaration of the five state election results the Railways indicated the possibility of a hefty 20 per cent freight increase and the public sector oil distribution companies were hinting at petrol price increase up to Rs. 5 per litre.
The size of the 2012-13 budget, which basically means an estimation of the government’s gross expenditure for the year, will be close to Rs. 15 trillion – substantially larger than the original expenditure target for the present fiscal at Rs. 12.58 trillion. The revised expenditure for this fiscal may top the Rs. 13-trillion mark. The continuing high rate of inflation, higher-than-projected subsidies, mid-term spending pressure on the government due to state elections and larger allocation of funds for West Bengal are likely to have caused additional burden on the central exchequer. At the same time, there has been an all-round drop in the government’s revenue collection mainly because of the unexpected economic slowdown.
The widening trade deficit, mid-term fall in the exchange value of Rupee, slow-down in foreign direct investment, rising global petroleum prices, higher NPA fear in the PSU banks and the poor performance of both the primary and secondary markets left the finance minister’s promise of a ‘fiscal consolidation’ unfulfilled. The government also miserably failed in reaching its initial PSU disinvestment target of Rs. 400 billion.
The government’s gross tax receipt for 2011-12 was initially targeted at Rs. 9.32 trillion, including Rs 3.6 trillion as contribution from corporate tax. However, industrial slow-down may have taken a toll on the government’s tax receipts, including corporate tax. The government is most likely to miss the tax-to-GDP ratio target of 11 per cent in 2011-12. Last year, the ratio was 10.4 per cent. The government is most likely to over-shoot its original projection of a lower gross subsidy bill at Rs. 1.44 trillion for the current fiscal. The original estimates put the food subsidy for the year at Rs 606 billion, fertilizer subsidy at Rs. 500 billion and petroleum subsidy at Rs. 236 billion.
Under the circumstances, the government’s gross market borrowing during 2011-12 may have substantially surpassed the original estimate of Rs. 4.17 trillion. Even the net market borrowing target of Rs. 3.43 trillion seems to be an underestimation. A fall in the revenue income did not seem to lead to lower expenditure. The only area, the government may have compressed expenditure is defence. The defence expenditure is likely to fall short of its modest target of Rs.1.63 trillion.
A lower expenditure on defence, which is hardly desirable in the present regional geo-political context, could play a small rescue act to the budget deficit. Of course, there is nothing to be happy about such an act when neighbouring China officially spends over $ 100 billion on defence – almost 300 per cent more than India’s defence spend. The annual share of India’s defence budget in both the GDP and the central government expenditure has of late been declining. In 2011-12, the share of India’s defence budget in GDP was estimated to drop to 1.83 per cent from the previous year’s level of 2.12 per cent.
Pranab Mukherjee, who has spent nearly four decades in the country’s economy management as minister in the union government holding a number of important portfolios including finance under Mrs Indira Gandhi, is an extremely cautious money manager. His wits will be under an acid test this time to lift the economy from the current state of chaos and depression. The biggest challenge before him is to compress the government spending without hurting development and raise both tax and non-tax revenues without hurting business and industry.
The finance minister needs the support of business, stock market, foreign direct investors and, more importantly, of the opposition political parties as well as of his party’s allies in the UPA government in fresh reform initiatives. The last part would be most crucial to his 2012-13 budget proposals. The country will need a lot of investment in new projects and development to clock a rapid economic growth. Projects need to be cleared at faster pace. Mergers and acquisitions must be concluded without unnecessary delays. Projects and M&As worth over Rs 2 trillion are pending government clearance for nearly five years, more for political than administrative reasons. If these projects are allowed to take off in 2012-13, it will make Pranab Mukherjee’s task of generating revenue resources a lot easier. This looks more doubtful after the UP and Punjab state elections.
Unfortunately, there is little the finance minister can do to cut down government subsidies especially in areas such food and fertilizer, which account for nearly Rs. 1.2 trillion. But, he can do away with the rural employment guarantee programme, which is proving to be a huge national waste. The fund for this controversial programme can be better utilized in other more visible rural and urban welfare schemes, including healthcare and social infrastructure. The expenditure side will require an intense scrutiny to prevent wastage and allow only what is a must. The revenue department must be geared to prevent leakage, plug procedural loopholes and check corruption.
The budget formulation for 2012-13 is going to be a real tightrope walk, especially under the latest political scenario. There is hardly much opportunity to needle with indirect and direct taxes. Some minor changes in indirect taxes may help the government to mop up only two to three billions of rupees. A single per cent additional economic growth will generate several times larger indirect tax revenue. As for the direct tax, the corporation tax is unlikely to be disturbed. The compliance of property tax, capital gains tax, value-added tax, etc. is more important than the tax rates. There is a definite case for raising the personal income-tax exemption limit for individual tax payers. Even in this highly middle-class pleasing exercise, Mukherjee may not provide beyond minor benefits to tax payers. The exemption limits may be raised only by 15 to 18 percent in each of the four categories – individual citizens, women, senior citizens and those above 80.
Beyond this, there is little that one can speculate about the coming union budget, which may disappoint those expecting much. Honestly, the finance minister is not in a position to give away or take away much in the process of his budget balancing act. The forthcoming budget session of Parliament is likely to be even more stormy than the last one. It may prove to be an acid test for the government for its very survival. (IPA)
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