Why you should only expect baby steps in Budget 2012

The best thing Prime Minister Manmohan Singh’s government has going for it ahead of Friday’s Budget unveiling is low expectations.

The ruling party, battered in recent state polls and hamstrung by slowing economic growth and high global oil prices, is in no position to advance bold economic reforms that could unclog flagging growth in Asia’s third-largest economy.

[caption id=“attachment_241824” align=“alignleft” width=“380” caption=“What it can do is bolster tax collections by rolling back what remains of Lehman crisis-era stimulus. PTI”]  [/caption]

What it can do is bolster tax collections by rolling back what remains of Lehman crisis-era stimulus and restoring excise taxes to earlier levels. It can also expand the scope of service tax coverage and keep a lid on populist spending - no small feat for a government whose base tends to be rural and poor.

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Grappling with a yawning fiscal deficit will be crucial to restoring credibility that was stretched in the last budget by unrealistic assumptions.

“Big steps will not be taken, but baby steps will be taken. They will try to show they are trying to do things,” said M. Govinda Rao, a member of the Prime Minister’s Economic Advisory Council.

The Reserve Bank of India (RBI), investors and rating agencies are all clamouring for cuts to a deficit that forces heavy government borrowing, driving up interest costs and deterring investment.

Including shortfalls at the state level, India’s fiscal deficit is around 8 percent of GDP, the highest in emerging Asia.

Economists expect Finance Minister Pranab Mukherjee to target a fiscal deficit of about 4.8 to 5.3% of GDP for the fiscal year that starts next month, higher than last year’s 4.6% target but less than the roughly 6 percent it is actually on track to chalk up.

In last year’s budget, Mukherjee’s projections for growth, asset sales and the deficit proved wildly optimistic.

“I just hope that the finance minister realises that credibility is just as important as representing an aggressive number,” said Abheek Barua, chief economist at HDFC Bank in New Delhi, who said a deficit goal of 5 percent of GDP is feasible.

Reuters