Issues to Watch In the Budget

As the day of presenting the Budget for the year 2012-13 is getting near Factbuzz brings out some of the areas which needs to be watched out for. This post brings out you what are the crucial aspects ? ? Keep reading to know and understand, what they meant and why are they important ?

1.  Fiscal Deficit

Fiscal Deficit is the difference between all expenditure and receipts including non tax ones (like disinvestment). This is bridged by market borrowings. So a higher deficit would push private borrowings away from the market and keep interest rates high. It has gone out of hand, the UPA government is mostly meeting it through market borrowings. In July 2009 the UPA-II government had declared it would pare its fiscal deficit to 3% of GDP by March 2012. It was pegged at 6.4% in 2009-10. However, Economists say the Fiscal deficit will rise by at least 1% point over the budgeted 4.6% in the current Fiscal which is equivalent to Rs 90,000 crore. A key challenge here is to do the needful to reduce the Fiscal Deficit.

2.  Revenue Deficit

It shows the Government’s current expenditure not covered by its tax collections. Current expenditure does not include interest payments on debt and capital spending. Ideally, this number should be zero or negative because revenue deficit means borrowing to meet today’s needs. It has soared nearly 6-fold in the last 4 years and is set to cross Rs 3,50,000 crore this Fiscal. As per the Fiscal Responsibility and Budget management Act, the centre had to eliminate the revenue deficit by March 2010. That plan has gone haywire first because of the fiscal stimulus in 2008-09, and then due to farmer loan write-offs, social spending and subsidies. With additional social spending planned and indecision on fuel and fertilizer subsidies, how is it going to be reduced ? ? ? is the million dollar question

3. Market Borrowings

This gives how much the government is borrowing from the public indirectly. It’s indirect as scheduled commercial banks have to hold 24% of their deposits in government securities. It is important because In India, only the public is the net saver. Both the Government and Corporate Sector rely on public saving, which averages 22% of GDP. But Indians tend to park half their savings in physical assets like gold. Thus savings amounting to 11% are available to government and the corporate sector. The problem comes when Government is borrowing excessively, it crowds out the corporates which then have less money to invest and create assets and jobs.

4. Implied GDP growth rate

This is the rate at which the economy is projected to grow and the expected rate of inflation. In Last Budget, the government assumed a nominal growth rate of 14% for 2011-12, as the economy showed resilience in the aftermath of the 2008 crisis. With the assumption that inflation would be tamed at 5%, the real GDP growth was pegged at 9%. In a recent document the Central bank of India says that the finance ministry expects real GDP growth rate to slow down to 7.25-7.75% in the current fiscal.

5. Social Sector Spending

This refers to the amount spent by the government on social schemes. There are some arguments against governments spending more in this sector saying that govt is throwing good money after bad. There are 13 flagship schemes in this. In 8 years UPA government’s spending on these schemes increased by 4.6 times. In 2011-12 it is projected to account for 18% of the total spending. A committee has been formed to suggest ways to reduce the number of schemes.

6. Capital Expenditure (CAP-EX)

This is the amount government spends to create assets. Assets refer to the properties that yield benefits for not just 1 year but for many years. This is one parameter to measure the quality of Fiscal Deficit by using the ratio of Cap-Ex to Fiscal deficit. The current ratio is 40% i.e 40 paise of every 1 rupee earned/borrowed today is spent towards cresting asset. The challenge here is How can we increase Financial Spending ?

7.Tax Arrears

This is the amount of tax payments pending, along with those under dispute. It helps as an indicator to know how efficient tax authorities are in collection of taxes and disposing appeals. Why to reduce Tax arrears? Because reducing them helps to cut the fiscal deficit. In 2009-10, according to CAG report Income Tax arrears accounted for 54% of the direct tax collection.

8.Revenues Foregone

This represents the notional amount of revenues given up by government because of Fiscal sops. This is the area that government looks if it wants to raise the Taxes. The amount of revenue foregone was around 72% of the direct taxes collection which amounts to Rs 5,11,630 Crores. The government intends to phase out several exemptions like the area based exemption made in specific areas for excise duty relief. In order to bridge the fiscal deficit, it has to minimize the number of exemptions to increase tax revenues.

9. Resources given to State and Local Bodies

The amount of funds transferred to states.  The 13^th financial commission has recommended the states share to be fixed at 32% of the sharable central taxes. The important aspect here is the amount transferred to create assets. This number grew only by 25% in the last 3 years to Rs 1,06,026 crore pointing to more money being spent on non-plan expenditure.

10. Tax Collections

The amount that government collects from taxes. In the previous budget the government predicted a much lower growth rate in excise and customs duties. This implies that the Government expected growth in manufacturing to slow. But for the services sector, the target for growth in tax collection was kept at previous year levels.

image credit : toonpool

Let us know if we missed out something that should be in the list… Feel free to share your opinion

Posted in: budget, Budget 2012-13 Check list, Budget Goals, CAPEX, capital expenditute, Finance, Fiscal deficit, issues to watch in budget, market borrowings, revenue deficit, Revenues foregone, Tax arrears