Budget 2012: Key things to watch

Just a few hours left before Finance Minister Pranab Mukherjee presents his Union Budget proposals for the new financial year starting 1 April.

The FM will be presenting the Budget against a backdrop of slowing economic growth and a soaring fiscal deficit (the gap between government revenues and expenditure). GDP Growth for the quarter ended December came in at 6.1 percent, the slowest pace in more than two years.

Will the government announce any significant reform measures to kick-start the economy? And how will it tackle the fiscal deficit?

Here’s a quick run-down of what you need to watch:

What is the plan to cut the fiscal deficit?

A ballooning fiscal deficit has become the biggest headache for the government. In the current financial year ending March, the deficit is expected to hit 5.6 percent of GDP, up a full percentage point from the estimated 4.6 percent.

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Everyone will be watching to see what the estimate for the new financial year will be. Chances are, the FM will announce a figure that might be 50 to 80 basis points lower than the figure for the current year (100 basis points = 1 percentage point). More importantly, it will be interesting to see what the government plans to do to reduce the fiscal deficit. That will be known from its estimated expenditure and revenue-raising plans.

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Will FM cut subsidies?

Subsidies account for the lion’s share of the government’s expenditure. If the government is really serious about cutting expenditure, cutting subsidies is the way to go.

Three subsidies - food, fertiliser and fuel - account for over Rs 3,25,000 crore of the government’s annual expenditures - and more than two-thirds of the fiscal deficit. There are hopes the FM might cut fuel subsidies to some extent. Diesel, kerosene and LPG (cooking gas) prices might be raised, although it’s possible the hikes might not be steep given that subsidies are a political minefield.

Will FM raise taxes?

Most experts believe Mukherjee will announce a hike in excise duty, which will affect businesses. Most experts believe the duty will be raised by 200 basis points to 12 percent. Assuming that companies are able to pass on higher costs to consumers, the prices of several goods could be hiked modestly.

In addition, a negative list might be introduced for services. The list will contain only those services that will not be taxed; every other service will be subject to tax. This will also raise the prices of services across the board.Services account for about 60 percent of the economy, but only 5 percent of overall (centre plus states) government revenues currently, according to Moody’s.

After the Vodafone tax case, it’s possible that some changes in foreign company-related transactions might also be introduced.

Will there be extra social spending?

Allocations to the highly controversial Food Security Bill are likely - at a time when the government is struggling for revenues. Most experts expect a hike in food subsidies overall.

The general expectation is that given the Congress’ poor performance in the UP elections, the government couldfast-forward spending on social-welfare schemes to win some popularity votes, although how it funds that extra spending remains to be seen. Indeed, there is even some buzz of a farm loan waiver to boost consumption.

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Will there be measures to boost business?

There are several pending reform measures waiting to be undertaken.Several sectors from power and coal to aviation and electricity are wheezing under the impact of flawed policies that badly need fixing.

Industry body CII wants the government to fast track at least 100 big manufacturing and infrastructure projects like the Delhi-Mumbai industrial corridor to remove bottlenecks in industrial growth.

Manufacturing and service exporting companies expect marketing incentives and policy support in the budget to grow amid fading global growth prospects.The government may also provide more funds for exporters’ bodies to explore new markets in Africa, Latin America, and transport subsidy, according to this Reuters report.

Will there be changes in income-tax slabs?

There’s growing buzz that there will be changes in income tax levels. Currently, those earning salaries above Rs 1,80,000 per annum have to pay tax. The income-tax exemption limit might be raised to Rs 3 lakh, according to this story.

Tax slabs could also be aligned with Direct Tax Code (DTC) proposals. The deduction on savings could also be raised to Rs 2.5 lakh.