Opinion All that remains undone

Given the constraints,and as one had expected,the government chose to reduce the deficit from 5.9 per cent of GDP in FY12 to 5.1 per cent of GDP mostly on higher taxes. The excise and services tax rate was raised from 10 to 12 per cent and the base of the latter was expanded,again as widely expected. Duties on a number of infrastructure-related items were reduced,but increased on other items,including gold and cars. On a projected nominal GDP growth of 13 per cent,tax revenue is estimated to increase 19.5 per cent which does not look unreasonable. On the other hand,the budget expects disinvestment and spectrum sales to yield about 0.7 per cent of GDP,which on the face of it and without details looks a bit on the high side.

As this was the first year of the 12th Five-Year Plan,capital outlay was raised markedly and overall expenditure growth was kept to 13 per cent by underestimating severely,as has been the tradition with India’s budget,subsidy outlays. The finance minister,with great sincerity,underscored in the budget speech the need to rein in subsidies and his plan to limit them to 2 per cent of GDP this year and eventually bring them down to 1.7 per cent of GDP in the next three years. This is clearly commendable and sorely needed. But in the absence of any concrete plans as to how this reduction is to be achieved the subsidy allocation in the FY13 budget remains its Achilles’ heel.

Consider the details of the subsidy allocation. Food subsidy has been raised by a paltry Rs 3,000 crore,when even the most conservative estimate of the additional expenditure arising from the Food Security Bill is Rs 30,000 crore! Last year,the government allocated Rs 24,000 crore for oil subsidy assuming crude oil to average $90/ barrel. Instead,crude prices averaged $115/ barrel and the eventual subsidy bill was Rs 69,000 crore. Unless the government knows something about the geopolitics in the Middle East that the rest of us do not,crude prices have been and will likely to remain significantly higher. And the budget allocated Rs 25,000 crore less! This would suggest that the government plans to raise retail petroleum prices massively in the course of the year. This looks like a tall order.

Separately,as nearly 0.7 per cent of GDP is the estimated asset sales proceeds,the true fiscal consolidation attempted is just 0.1 per cent of GDP. It isn’t clear that this will assure the RBI that the withdrawal of stimulus by the government is adequate for it to make deep cuts in the policy rates. Perhaps a 25 basis point rate cut in April is all that we will get by way of interest rate reduction by the RBI. Moreover,even the 0.7 per cent of GDP from asset sales looks ambitious given that both telecom companies are already highly leveraged and domestic financial markets are pretty tight. Thus,realistically,the deficit outturn may be around 5.5 per cent of GDP for FY13.

Beyond the numbers,the government actually had a bunch of proposals to help ease the cost of funding for infrastructure and other core sectors. Explicitly budgeting for bank recapitalisation (1.5 per cent of GDP),lowering withholding tax on external commercial borrowings (ECBs),allowing airlines,low-cost housing,road sectors to access ECBs even for rupee expenditure,removing sector restrictions for venture capital,doubling the allocation for tax-free infrastructure bonds,and allowing QFIIs into the corporate bond market are important steps to increase the availability of funding and the cost of funds.

However,for several years now,instead of reforming the domestic capital markets such that India’s very large pool of savings is intermediated at a lower cost by reducing irritating barriers that exist in the name of prudential regulations,the government has once again resorted to pushing corporates to seek cheaper foreign funds. While it is not clear how much access Indian corporates have to cheap funds abroad at present,this trend of preferring the private sector to increase its foreign liabilities while keeping the government sector protected (foreigners have access to only $10 billion of government bonds) could end up in tears as it has happened in several Latin American economies and in Korea. Foreign liabilities of India’s corporate sector have been rising rapidly in recent years and while it is yet to reach alarming proportions,India’s rising short-term foreign debt has been one of the reasons why even a modest increase in global risk aversion has had a disproportionately large impact on the exchange rate. Reforming domestic capital markets is a far safer option,something the government and the regulators appear to have forgotten for some time now.

The writer is India Chief Economist,JP Morgan Chase. Views are personal,express@expressindia.com