Budget: Close to reality, but no game-changer

I had limited expectations from the Budget, which helped avoid any major disappointment. From a macro perspective, the biggest challenge for the government had been to strike a balance between fiscal consolidation and revitalising growth by improving the current sluggish investment sentiment. This was particularly difficult, given the government's poor fiscal health. These conflicting objectives did not leave much room for any major change in the tax structure in either direction.

Targets credible

Against this backdrop, the government's move to raise excise and service tax rates indicates prioritising fiscal consolidation to an extent. The strategy to emphasise more on the areas of indirect taxes will likely be more revenue-efficient for the government as these taxes are relatively more difficult to evade. In the case of direct taxes, on the other hand, with the more taxpayer-friendly income tax slabs, the government would hope for better compliance.

Overall, revenue collection targets for 2012-13 look broadly credible. I find the government's 2012-13 growth assumption of 7.6 per cent to be somewhat more optimistic than our expectation of around 7 per cent. But a slippage of 50-60 basis points in GDP growth will not hurt the revenue collections drastically.

In fact, overall fiscal projections seem credible, especially when compared with last year's experience. It is true that subsidies projections, fuel subsidy, in particular, involve major under-estimation. But, most of the other estimates appear largely realistic.

The Budget was void of any overdose of populism. Allocations to social sector schemes, such as the NREGA, have been broadly modest. Given the government's sticky expenditure patterns, some slippage in the fiscal projections cannot be ruled out. I don't expect fiscal deficit to exceed 5.4-5.5 per cent of GDP in 2012-13 under normal circumstances.

Nevertheless, the Centre projects a gross market borrowing of Rs 5,70,000 crore in 2012-13 (assuming fiscal deficit of 5.1 per cent of GDP). Such a large borrowing would continue to put considerable pressure on bond yields — we expect the 10-year benchmark government bond yields to gradually head towards 8.70 per cent in the next three-four months, with significant risks of further upside.

Petro-price hike

The Budget proposals, however, would lead to more cost pressures for manufacturers through higher excise and service tax burdens. Also, to contain petroleum subsidies at even close to the projected Rs 44,000 crore, the Government will have to increase fuel prices substantially. The oil marketing companies are currently incurring under-recoveries of nearly Rs 500 crore a day.

The first petro-price hike, thus, can be just days away (possibly immediately after getting the budget passed in the parliament). This would have adverse implication for both inflation and growth in coming months.

The equity market didn't get much cheer from the Budget (despite the rationalisation of the STT, tax benefits for first-time equity investor) as there was nothing much on offer to revive the investment and growth sentiment in the near-term. However, given the realities of the ongoing coalition politics, no major reforms, such as the opening up of investments to foreign investors or concrete implementation plans of tax reforms such as DTC or GST, were really expected in the Budget. And there was no pleasant surprise on these counts.

The fiscal arithmetic, thus, comes distinctly closer to reality this time, but the Budget is no game-changer for the near-term muddling through of the economy.

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