Budget 2013 preview: Will prudence triumph over populism?

We expect finance minister Chidambaram’s 28 February budget to err on the side of prudence, incorporating a modest tightening of the underlying fiscal stance after a bigger squeeze in 2012-13. This should help pacify the rating agencies as well as the RBI, leaving us more confident of our continuing bullish view of the bond market. The larger than previously expected fiscal tightening has, however, led us to further reduce our GDP growth forecasts for the current fiscal year and next.

What are the main measures likely to be announced? On the assumption that the FM will indeed deliver a net fiscal tightening in the order of ¼ - ½% of GDP in the budget, we have summarised what we believe are the most likely expenditure and revenue measures. Based on his past budgets (he has been finance minister on two previous occasions) and other statements, we expect Chidambaram’s approach to be governed by an ideological preference for spending constraint over direct tax rises. We should probably also think of him more as a technocrat than a “conventional” politician, although clearly he won’t and can’t ignore the political angle altogether, not least because this will be the last full budget before the general elections. It looks very much as though the Food Security Bill, the financing of which Chidambaram is likely to provide for in the budget, will be the government’s flagship “welfare” programme as it attempts to

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