Budget seen reformist despite poll setback
The ruling Bharatiya Janata Party is expected to press ahead with economic reforms in the Union Budget on Thursday despite suffering a setback in key state polls last weekend.
But Finance Minister Yashwant Sinha faces widespread scepticism about whether he can deliver on his pledges after last year's Budget failed to produce either the higher economic growth or Budget deficit cuts it promised.
Sinha is expected to stick to that same orthodox mix this year, curbing the deficit, promising economic liberalisation and paving the way for lower interest rates to boost growth.
That formula failed last year as the government got bogged down by a series of political and financial scandals which left it little time to convert promises into action.
"The Finance Minister has a narrow path to tread this Budget," said Manishi Raychaudhuri, Mumbai-based associate director at UBS Warburg.
"On the one hand he has to boost demand but there is very little he can do on the excise duty front or by way of foregoing tax revenues, his hands are tied," he said.
RATES SEEN CUT
This year, Sinha is expected to announce more privatisations, reduce interest rates on state-run small savings schemes, bring more services under the tax net and tackle the government's rising subsidy bill.
Privatisation is expected to get a boost after the government unexpectedly sold stakes earlier this month in two key state-run firms and announced more sales. After raising just over Rs 2 billion till then, February's sales brought the government more than Rs 28 billion.
Interest rates on schemes such as the public provident fund, which offer a tax-free interest rate of 9.5 per cent are also expected to be lowered or converted into a rate linked to a floating benchmark. Alternately, the government could do away or reduce the tax exemptions, analysts say.
Sinha is also expected to extend the tax net to the services sector which, although accounting for around half of GDP, is largely untaxed.
Some analysts expect him to start a move towards dismantling the complex subsidy structure, which is estimated to eat up as much as 12 per cent of the government's total revenue receipts this year.
If implemented, these measures should help him greatly in bringing the stubbornly high fiscal deficit under control.
Despite a decade of reforms, the central government's fiscal deficit has remained around five per cent of GDP and is expected to be 5.1 per cent for the year ending March. That number will almost double if the fiscal deficits of state governments are also included.
In the last year's Budget, Sindha targeted a fiscal deficit of 4.7 per cent of GDP.
Further, the fiscal deficit is expected to come under additional pressure with the freeing of administered oil prices in April.
Bringing the deficit under control is key to improving India's rating from its current junk bond status and attract badly needed foreign investments to the capital-scarce country.
An annual report on the economy released by the government on Tuesday, said the fiscal deficit was the single most intractable problem dogging the economy and was choking growth.
GDP growth slumped to a decade-low four percent in 2000-01 (April-March) from 6.1 per cent a year earlier. The economy is expected to expand by 5.4 per cent this financial year, a downward revision from initial estimates of 6.5 per cent.
While still a healthy clip in a global slowdown, the forecast growth is not enough to seriously reduce poverty levels in the world's second-most populous nation.
In his favour, Sinha can point to a stable external sector, with foreign exchange reserves at record highs above $50 billion. Inflation, a sensitive issue in a country where most people earn less than a dollar a day, has also fallen sharply.
Thursday's Budget will be Sinha's fifth in a row, a feat matched by only two other finance ministers in the past three decades.
Reuters
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