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We expect FY12 fiscal slippages to breach the 1% of GDP mark. Indeed, elevated fiscal deficit over the past couple of years has partly contributed to high inflation and sluggish investments. Therefore, fiscal consolidation is likely to be Union Budget 2012-13’s central theme. FY13 provides a good window of opportunity to take some tough decisions as state elections are behind us and general elections are not due until 2014, although below par performance of Congress in state elections implies that UPA will be on the defensive.
In our view, the Finance Minister (FM) is likely to roll back tax sops on the excise front fully, expand services tax base etc., to boost revenue. However, expenditure control while politically difficult will also be crucial—reining in subsidies, controlling social sector spending and going slow on implementation of food security act. These measures could trim deficit to ~5.2% of GDP, a mild consolidation over 5.7-5.8% in FY12 (E).
Fiscal slippages could cross 1% of GDP in FY12
The government’s performance on the fiscal front has been below par in FY12. Against the budgeted ~4.6%, we expect the actual fiscal deficit to be around 5.7-5.8% of GDP, a staggering ~1% slippage. Barring 2009-10, this has been the highest slip in recent years. Slower-than-expected growth, unfavourable market conditions and elevated energy and other commodity prices contributed to such large slippages.
FY13 Budget: Consolidation to take centre stage
Going into FY13, the situation is no less challenging. We believe the FM will be focused on two key themes in the forthcoming Budget—initiate the fiscal consolidation process (without much tinkering of tax rates) and boost declining investments through policy actions. For fiscal tightening, the FM is likely to rely on both revenue enhancement and expenditure cuts.
On the revenue front, the government is expected to roll back excise rates to pre-crisis levels and introduce negative list in services which will improve the service tax buoyancy. Moreover, sizeable telecom auction revenues and aggressive disinvestment target are likely to boost non-tax revenues. In terms of expenditure cuts, the thrust is likely to be subsidy rationalisation, and controlling growth in social sector spending.
Infra, power sector likely to get a boost
The budget is likely to be supportive of infra sector. To allay the funding concerns in the infra space the government may most likely increase tax exemption limit under Section 80 CCF while allowing for banks to raise funds through tax free bonds. Further, the SEBs are dealing with a multitude of issues and any roadmap to address them will be keenly awaited.
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