Although the Finance Minister did not touch fuel or fertiliser subsidies, it was clear that these may get addressed outside the Budget in the near future, since he made it clear that the Government aims to keep the fiscal deficit at 5.1 per cent for 2012-13.
“I have made a determined attempt to come back to the path of fiscal consolidation in the Budget for 2012-13 by pegging the fiscal deficit at Rs 5,13,590 crore which is 5.1 per cent of GDP,” Mr Pranab Mukherjee said in his budget speech.
That looks optimistic, since the fiscal deficit for 2011-12 soared to 5.9 per cent of GDP, well over a percentage point over the Budget projection of 4.6 per cent of GDP.
That was largely on account of soaring fuel subsidies, where the government's calculations had been knocked awry by surging international crude oil prices. For 2012-13, the Budget has calculated the subsidy outgo on the basis of an average crude price of $115 a barrel, while currently, the average price for the Indian crude basket is hovering around $125. He admitted that the current year was a challenge for fiscal management. Due to slower economic growth, direct tax collection fell short by Rs 32,000 crore while the Government had to forego Rs 49,000 crore on account of duty reduction on petroleum.
Subsidy bill
At the same time, the rising subsidy bill for petroleum and fertiliser forced the Government to borrow more. “While the outgo on account of subsidies increased, I have ensured that the entire amount is given in cash and not as bonds in lieu of subsidies,” the Finance Minister added. This has also impacted the final deficit.
However, the Budget drew a blueprint for the fiscal consolidation. Mr R.S. Gujaral, the Finance Secretary, explained that it involves cutting government expenditure while raising revenue. The spending cuts are largely centred around the subsidy bill.
The Expenditure Secretary, Mr Sumit Bose, said that according to revised estimates for 2011-12, subsidies accounted for 2.4 per cent of GDP, which has come down to 1.9 per cent in 2012-13. This is in line with the Finance Minister's target of capping outgo on subsidies to 2 per cent of GDP. “It would be my endeavour to restrict the expenditure on Central subsidies to under 2 per cent of GDP in 2012-13. Over the next three years, it would be further brought down to 1.75 per cent of GDP,” Mr Mukherjee said in his speech.
The blueprint includes amendment to Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act). Here, expenditure reforms would be important. It has two features, Effective Revenue Deficit — a new measure which subtracts deficit spending to create capital assets from the overall deficit –— and the Medium-term Expenditure Framework Statement. The Government will also merge centrally sponsored schemes.
However, the punch line lies in Mr Bose statement where he said that actions need not to be taken through only Budget but also through administrative mechanism. “It is not going to be business as usual,” he added.