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Budget 2012: Fiscal deficit at slightly below 5%, economy awaits discipline

Rajiv Bhuva     February 27, 2012
{mosimage}The Union Budget 2012-13 is expected to target a fiscal deficit ratio of slightly below 5 per cent of the gross domestic product (GDP) from a likely 5.25 per cent in 2011-12.

The slippage - on account of falling revenue collection and a higher subsidy burden - is considerable compared to last year's Budget estimate of 4.6 per cent of GDP.

While listing the Indian economy's pain points, a Deutsche Bank macro research note - previewing the Indian Budget - expects Finance Minister Pranab Mukherjee to factor in disinvestment proceeds ranging between Rs 25,000 to Rs 30,000 crore, in order to bring down the ballooning fiscal deficit.

Last year's disinvestment target was pegged at Rs 40,000 crore whereas the government mobilised a paltry sum of Rs 1,144.55 crore through divestment in Power Finance Corporation in May 2011.

"Discipline brings the house in order," is a universal truth, and for an emerging economy like India it is not only undeniable but also the need of the hour.

A fixed income research note, released on Saturday by Deutsche Bank, points out that the Budget comes at a time when economic growth has slowed and inflation, while declining, is facing headwind from a renewed rise in global commodity prices.

"Additionally, with the Fiscal 2011-12 out-turn likely to exceed the budgeted target by close to 1 per cent of GDP, there is considerable pressure to get back on the path of fiscal consolidation," says Taimur Baig, Deutsche Bank's chief economist based in Hong Kong.

Unfortunately, building on the slippages of financial year 2011-12, it is difficult to see much scope for substantial fiscal consolidation in 2012-13.

"The expenditure side of the Budget will likely remain sticky owing to welfare programs such as NREGA and a rising subsidy bill on account of food, fertilizer and oil," the note adds. "The revenue side of the Budget is likely to be weak despite the slated implementation of the Direct Taxes Code, given likely persistence of weak growth in the next few quarters."

As has happened in the past, the likelihood of fiscal deficit's primary financing through sizable market borrowings would continue to weigh on bond market sentiments.

But fiscal consolidation is critical to prevent crowding out of private investment at the current juncture, as well as for reducing the current account deficit. Running high twin deficits - fiscal and current account - not only exposes the economy to macro imbalances but also makes it vulnerable to external shocks. The depreciation of the rupee during November-December last year is a case in point.

"Fiscal consolidation is an imperative to achieve a stable non-inflationary rate of growth in the coming years," adds Baig.

Even the Reserve Bank of India, or RBI, has again and again underscored the importance of fiscal consolidation in making monetary policy transmission more effective. A Budget that brings back fiscal discipline would give the central bank some flexibility in manoeuvering its monetary policy actions.

The finance minister now has a tightrope walk lined up for him. For, this time round, even when substantial pull back is required, a mild dose of consolidation of the fiscal mess is a must.

So the bottom-line? Fiscal discipline, Mr. Finance Minister!

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