Fiscal arithmetic & consolidation

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Pinaki Chakraborty: Mar 19 2012, 02:44 IST

The Budget 2012-13 has been presented in an uncertain global economic environment and declining Indian economic growth. Multiple challenges that had to be factored in while formulating the Budget proposals were global economic uncertainty, eroding investors confidence in India and economic growth and above all the issue of access of government provided services to the poor and deserving particularly the subsidies.

The Budget seems to have followed fiscal expansion both on the direct tax side and on plan expenditure. The direct tax proposal, as estimated, would result in a revenue loss of more than R4,000 crore. But in case of indirect taxes, particularly, in case of excise duty and service tax there has been a general increase in the rate.

Also, a welcome move is the introduction of negative list for service taxation. If implemented effectively, it can really broaden the base of service tax and improve revenues. Some of these tax measures seem to be the key to hold on to the fiscal deficit number at 5.1% of GDP, which is way above the FRBM target of 3%. The real question is whether this fiscal deficit number of 2012-13 is credible. Probably not.

Marginal decline in fiscal deficit as evidenced from 5.9 to 5.1% of GDP between 2011-12 (RE) and 2012-13 (BE) is not only ambitious but also relies on heavy compression of non-plan expenditure. It appears that the arithmetic has been worked out on a difficult to comply assumption, ie compression of non-plan expenditure.

If we look at the aggregate expenditure, the

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