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Union Budget 2013: Chidambaram to press for austerity measures to cut public spending

Austerity is definitely on finance minister P. Chidambaram's menu as he presents India's 82nd Budget today. He will focus on giving the necessary thrust to gender budgeting, infrastructure and capital markets.

Mail Today Bureau | February 28, 2013 | Updated 09:51 IST

Austerity is definitely on finance minister P. Chidambaram 's menu. Even as he attempts to calibrate spending to kowtow to the diktat of ratings agencies on profligacy, he will focus on giving the necessary thrust to gender budgeting, infrastructure and capital markets (written extensively by Mail Today over the last few days).

Like ace archer Arjun from the mythical Mahabharata, he will have one eye on the big number - fiscal deficit (government's borrowing to fund its expenses) - as he endeavours to rein-in the bloated fiscal deficit number at 4.8 per cent of the GDP for the coming financial year.

So, the game plan will be to cut public spending by as much as 10 per cent over the coming year as the finance minister battles a rapidly decelerating growth rate. B Day will also see the unveiling of the third quarter GDP number which should log in at a paltry 4.8 per cent. With terms being dictated by a sovereign rating downgrade, frugality is the only way forward. On the anvil is also the likelihood of the tax exemption limit at the bottom of the pyramid being hiked from Rs 2 lakh to either Rs 2.5-Rs 3 lakh, a commodities transaction tax, a petro product cess, an income tax surcharge at the higher end of the tax slabs and better sops for investing in equity even as securities transaction tax is reduced.

The Economic Survey presented on Wednesday found indicators that were a cause for worry for the economy - falling savings that have contributed to a gaping current account deficit (CAD), stubborn inflation rates despite monetary efforts, a shortfall in tax revenues, a burgeoning subsidy bill and a disturbing contraction in investment, notwithstanding the country's inexhaustible appetite for gold.

FULL COVERAGE:Union Budget 2013-14

Top finance ministry officials told Mail Today that Chidambaram has been obsessing over the fiscal deficit number. While the natural desire in an election year is to be populist, his mindset is clear as daylight on the subject. No other issue dominates his mind space like the fiscal deficit, even as private investment and consumer demand have turned sluggish. Lower public spending will only accentuate India's growth pangs resulting in a massive slowdown in a various sectors.

However, populism will not be given the go-by completely for there is every likelihood of the roll-out of a food security law which will supply cheap grain to the poor. The grandiose scheme, a pet project of Sonia Gandhi, has been conceived as a flagship programme which will help garner rural votes. Its cost to the exchequer is an astronomical Rs 1,20,000 crore, but its connect with a vast swathe of voters is beyond question.

By signaling to the global investor community that India is fully conversant and compliant with the new fiscal consolidation paradigm, the finance minister reckons it will act as an investment booster, as borrowing costs will fall and capital investment will get a lift. The first stage of this recovery prescription is that growth should be taken back to the 6-6.5 platform.

In a shock and awe moment, India missed its tryst with a fiscal deficit target of 4.6 per cent of the GDP last year as it ballooned to a scary 5.8 per cent, prompting threats of a downgrade from ratings agencies Moody's, Fitch and Standard & Poor's. India has a BBB minus rating with a negative outlook from both S&P and Fitch, the lowest investment grade among the BRIC group of large, emerging economies. A cut would take the country's credit rating to junk status.

Ever since PC replaced Pranab Mukherjee, the government has shown intent by ushering in difficult reforms, including tackling the contentious oil subsidies by taking hard decisions.

All this was dictated by the priority to avoid a ratings downgrade. Ministers and ministries have been unhappy over the spending and budgetary cuts, but it is believed that on the whole, the Congress party and its leadership is on board with his version of the New Deal. What all this does is crimp expansion plans of defence forces, rail lines, highways and even development spending on tribal minorities.

A sense of what is to come on B-Day was unveiled on Tuesday itself with the presentation of an extremely circumspect railway budget which shunned populism. Defence ministry officials are concerned that budget cuts may delay some important arms procurement plans, as well as a $6-billion-project to raise a new battalion on the border with China. The ministry's budget was cut by $1.9 billion in 2012-13.

Chidambaram has promised to achieve a fiscal deficit of 5.3 per cent of the GDP this fiscal year and 4.8 per cent in 2013-14, targets he calls "red lines" that cannot be crossed. Late last year, some economists were predicting that the budget deficit this year could be closer to six per cent.

Courtesy: Mail Today 

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