The Finance Minister is scheduled to present the Budget on March 16. With fiscal slippage expected to be about 1.2 per cent of GDP (fiscal deficit at 5.8 per cent as against budgeted estimate of 4.6 per cent in FY12) and GDP growth expected to be below 7 per cent in FY12, the Finance Minister has to do a balancing act between fiscal consolidation and reviving economic growth. Our sense is that the Finance Minister has very little room for an expansionary budget and that the focus would clearly be on measures to reduce non-Plan expenditure (read, subsidies).

Further, with the RBI clearly signalling the need for concrete steps towards fiscal consolidation before embarking on the path of monetary easing, plausible measures from the central government in this regard would be keenly watched out for.

Moderate non-Plan spend

While the Finance Minister has various weapons in his arsenal to achieve the desired end, measures taken to kick-start private investment growth and moderate non-Plan expenditure would be critical in our view.

Given the current state of affairs, we highlight some of the options available to Mr Pranab Mukherjee to rein in fiscal deficit without any material impact on economic growth.

The Finance Minister could revive tax collections by increasing union excise duties and service tax rates to pre-crisis levels. Further, introduction of a ‘negative list' of services instead of the currently followed ‘ positive list' would bring more services under the service tax net, thereby boosting service tax collections.

Concrete measures to reduce fuel and fertiliser subsidy burden in FY13, we believe, would be the main focus area in this year's Budget. While a full-fledged deregulation of tariffs could be still a while away, the Finance Minister could hike retail prices of fuel and fertilisers to reduce the under-recovery burden. Also, steps towards focused distribution of subsidies through direct cash transfers using the UID system would be a positive.

Faster clearance of projects

A clear thrust on reviving private investment spends with measures towards faster clearance of projects and resolving issues pertaining to fuel availability would be critical. Further, measures could be taken to improve availability of long-term financing to infrastructure sector through focus on programmes such as Infra Debt Fund, IIFCL's Credit Enhancement Scheme and takeout financing.

While non-tax revenue was muted in FY12 due to absence of any one-off income, the government could re-auction the spectrum obtained from cancellation of 2G licences to mop-up around Rs 230 billion in FY13.

Also, while a weak capital market impacted disinvestment mop-up in FY12 (approximately Rs 100 billion as against budgeted estimate of Rs 400 billion!), improving equity market sentiment and utilisation of the auction route for disinvestment could prop up revenues in FY13.

(Extracts from a report by IDFC Securities Research.)

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