We need realistic fiscal arithmetic

I maintain relatively muted expectations from the coming Union Budget. No quick turnaround in the fiscal health is realistic to expect. The gross fiscal deficit (GFD) in 2011-12 is finally set to hover around 5.5 per cent of GDP — way above the government’s unrealistic initial target of 4.6 per cent. The backdrop of weak economic growth and the typical pro-cyclicality of tax revenue collection would continue to dampen the government’s receipts even in 2012-13, while large sticky expenditure heads would mean no notable reduction in fiscal deficit.

Irrespective of the degree of optimism the government opts for in its fiscal projections, realistically, the Centre’s GFD will hover in the range of 5.0-5.5 per cent in the coming financial year and gross market borrowing will be around Rs 5.5 lakh crore. Borrowing overhang of that order remains an obstacle for any meaningful improvement in the liquidity, interest rates and investment scenario in 2012. Windfall gains — for example, the possible 2G or 4G telecom licence auctions — cannot be ruled out and can potentially help the fisc to an extent. However, prudent accounting principles do not suggest aggressive assumptions under these heads at this stage.

Any major overhaul of the tax structure — either direct or indirect — is unlikely, especially if the government plans to implement the new Direct Taxes Code (DTC) and the Goods and Service Tax (GST) in 2013-14. Changes in the tax structure will broadly be towards a greater convergence with DTC and GST. For example, tinkering in the excise tax rates on a selective basis or in personal income tax slabs and further broadening the service tax net are possibilities.

The major challenge for this year’s Budget is to strike a balance, whatever possible, between fiscal consolidation and revival of growth by revitalising the investment climate. That is a mammoth task. One should not blame policymakers if they do not score a perfect ten in this act during the year.

Nevertheless, the government definitely owes us a relatively realistic and credible set of fiscal arithmetic and projections to start the year with.

Siddhartha Sanyal Chief India Economist, Barclays Capital