The Union Budget of 2012-13 will be conducted at a time when the economy is in the midst of an economic downturn and upside risks of further contagion from the slowdown in the developed economies remain high. This time around expectations from the government to dole out ambitious or big-budget announcements are few as Government finances remain crippled with the target for fiscal deficit for FY12 expected to be breached by over a percentage point.
Lower revenue generation during FY12 owing to the slowdown in the growth momentum and inflated subsidy bill would continue to pose challenges for the government for the ensuing year as well. The government in this budget is thus expected to focus strongly on fiscal consolidation. Moreover, expectations for a reform-oriented budget from the government to help the economy to gather momentum are very high.
Widening of the tax base, extension of service tax to more services currently not taxed and setting out clear guidelines for disinvestment process for revenue mobilisation is expected to be considered by the government during this budget. During FY12, the government was able to divest its stake in PSUs only to the extent of Rs 11.44 billion (as on 31-Dec-11) against the target of Rs 400 billion due to adverse capital market conditions.
Clearly this year too, garnering of revenues through disinvestment would depend on how the economic conditions turn out during the year. Moreover, some provisions of the Direct Taxes Code could be implemented during this year which would help to widen the tax base and raise revenues. While implementation of the Goods and Services Tax (GST) by this year could have helped in garnering revenues for the government, it is unfortunate that the government is again set to miss its deadline by another year.
However, rationalisation of expenditure this year would remain critical as it would be difficult for the government to raise excise duties and service taxes given the deterioration in the investment activity and the dismal performance in the industrial sector. While it is expected that the government would consider bringing down subsidies (by removal of subsidy in diesel) it remains uncertain as the subsidy on the petrol is still not fully de-regulated.
The prospect of the Indian economy to emerge out of the current phase of slowdown in growth largely depends on the investment activity especially, in the infrastructure arena and timely execution of projects. Although, substantial allocation has been made during the previous budgets on the infrastructure sector, timely and effective utilization of these funds have always remained an area of concern. Moreover, obstructions in the form of delays in approval and decision making had stalled many new projects.
Therefore, measures such as incentives for investments in sectors such as fertilisers and agricultural supply chains, rationalisation of Dividend Distribution Tax to make investment in infrastructure sector more attractive, concrete steps towards creation of a deep and robust debt capital market to make long term debt instruments available for infrastructure and granting infrastructure status to healthcare and education sector are some of the steps that could provide a boost to infrastructure.
Stimulating the confidence level among the business community and creating suitable avenues for boosting the investment and consumption demand would be the most crucial aspects of the budget this year. Besides initiation of reforms and measures’ such as further liberalisation of FDI in some sectors, mining sector reforms and easing of procedurals conducive to investment, undertaking steps to ensure speedy implementation of the key policies already announced would aid in reassuring that the Government remains committed in uplifting the pace of growth of the economy.