The Budget 2012 comes in the midst of significant deterioration in the Government's finances, that have been driven to high deficits as much by increased expenditure as by shrinking revenues. 

The current fiscal year is likely to see the Centre's deficit at close to 6 per cent of GDP from a budgeted target of 4.6 per cent.

Of this increment in the fiscal deficit, over the budgeted figures, increased expenditure contributes 60 per cent, while the rest comes from the drop in revenues.

With growth already seen easing, expenditure reduction cannot be the preferred method of consolidation, as it would impact growth.

The Budget must therefore see a combination of expenditure reduction, especially of the wasteful kind, and increase in the revenue-generating capacity of the economy, with emphasis on the latter.

Also on the cards is a rollback of the fiscal concessions granted in the Budget 2009. The Finance Minister is likely to be targeting a fiscal deficit close to 5 per cent of GDP.

The Budget is thus expected to touch upon three key areas: deficit reduction, kindling growth through an investment boost and clearing policy clutter by charting the course for reforms. It is likely to be a mixed bag as there is a need to balance the difficult fiscal situation and the compulsion to improve the investment climate.

While the fiscal deficit may peak in the current fiscal, it is not likely to come down significantly in the next one, as the economy is still recovering.

Given the tight fiscal situation, tax increases are inevitable, along with some rollback of fiscal benefits provided earlier. 

Higher taxes

Broadly, the Government is expected to hike Excise and service tax rates by 2 per cent each and increase the latter tax net by having a smaller list of services that do not attract tax. 

Duty on non-commercial diesel cars may be increased, in an attempt to curb diesel consumption that in turn feeds into the Government's subsidy.

Import duty on thermal coal may be reduced to nil from 5 per cent now and an import duty may be imposed on power-generating equipment.  In an attempt to boost investments, we could see an increase in tax exemptions for infrastructure bonds.

The exemption limits for personal income tax may increase, which could marginally push up disposable income, feeding into the consumption equation.

Small and medium enterprises have been acting in a counter-cyclical way, cushioning the impact of a decline in industry growth. The Government should therefore be looking to boost growth of these enterprises.

SKILL DEVELOPMENT

With access to higher education not crossing 3.5 per cent of the population and with the 12{+t}{+h} Five-Year Plan focusing on education and skill development, the Budget is likely to emphasise skill development, as it directly impacts productivity in the larger economy.

 The Budget for 2012-13 would be a good opportunity to make amends for the Government's fiscal excesses, given that the next one will be filled with populist measures, with an eye on the 2014 general elections.

The Reserve Bank of India had to make the tough choice between inflation-targeting and growth stimuli, and hopefully, inflation will abate to sub-7-per-cent levels.

Liquidity-enhancing measures in the form of cuts in cash reserve ratio will hopefully lead to the much-awaited policy-rate reversals in the coming fiscal, which in turn could boost the much-needed private investment into the economy. 

Fiscal consolidation and clear policy initiatives at this stage would go a long way in reviving sentiment, as well as send out a clear signal that the Government means business.

(The author is Managing Director, Sundaram Finance

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