Eye On Election - Budget 2013

Finance minister P Chidambaram has a challenge to meet aspirations. These include those of the budget and those of the politics of the budget.

Here are important things to note ahead of the most important event in India's economy:

Also read: Union Budget

Growth Needs A Push

From a high of 8.5%, India's economic growth is likely to settle at 5% for 2012-13, according to Central Statistical Organisation. Finance minister P Chidambaram has his eye on this number. He would like to see growth showing an upward trajectory through 2013-14 ahead of the elections. This is because a high growth rate would help create more employment for people. However, getting to a higher growth rate entails spending significantly on investments. This may be a tough task in view of the overall budget constraints. A lower fiscal deficit leaves more money in the system for private sector. However, reducing deficit means cutting subsidies or higher prices for essential commodities for people. These decisions may be difficult to take, from a political perspective.

Also read: Highlights of Union Budget

Political Demands

Members of the ruling Congress Party asked for tax incentives for farmers and the middle class. Chidambaram highlighted financial constraints before the government even as demands were made for a people-oriented budget, according to a report in the Economic Times. Typically, the last budget before an election sees an increase in spending to please voters. The situation is different this time. The state of government finances offers limited scope to give away freebies.

Can Tax Revenue Be Raised?

Since it is an election year, the government may not change tax rates for individuals. However, there is speculation that the government could bring in a commodities transaction tax or CTT on the lines of securities transaction tax. "If CTT is levied, it will be negative for commodities market," Kotak Securities said in a pre-budget note. A single nation-wide goods and services tax and direct tax code are said to be revenue enhancement measures, according to experts. However, these are likely to be implemented in 2014-2015, according to Kotak Securities.

Can Expenditure Be Curtailed?

A key to stimulate growth would be cut expenditure and reduce the fiscal deficit. To cut the fiscal deficit, the government needs to raise prices of fuels like kerosene, LPG and diesel and bring them closer to market rates. The Government has already permitted a gradual increase in diesel prices. Ahead of elections, it is unlikely prices of the remaining fuels would be raised dramatically. "The subsidy target could be exceeded by about Rs 40,000 crore for the fiscal to Rs 2,30,000crore," according to Kotak Securities analysis. Overall, the government is likely to cut spending. "We expect plan expenditure in FY13to be lower by about 14% against budgeted levels. The targeted reduction in spending in fourth quarter 2012-13 may lead to under - utilisation of budgets for FY13, helping the deficit numbers," Kotak Securities added.

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