As the economy looks for a boost in investments and growth from the government through decisive policy announcements, Budget 2012 should focus on striking a balance between fiscal consolidation and public spending while maintaining sustainable inclusive growth, said Care Ratings in a report. It added that the government’s key focus should be on centralised sponsored schemes to faciliate growth in rural areas.

Fiscal Consolidation

India’s fiscal deficit has already reached 92.3 percent of the targeted budget in the first nine months of the current financial year ending March 2012 due to higher spending on oil subsidies and social spending programmes. “As of December 2011, the amount of fiscal deficit reached Rs.3,81,012 crore, an increase of 122 percent from the same period last year,” the Care report noted.

On Wednesday, the Prime Minister’s Economic Advisory Council Chairman, C Rangarajan, said in order to reduce the government’s fiscal deficit, revenues need to increase by about Rs 35,000 crore. That, he said, was possibly by increasing excise and service tax rates to pre-crisis levels and pursuing a disinvestment programme in the new financial year. On the expenditure side, subsidies had to be contained, Rangarajan added.

The PMEAC report suggested an increase in indirect tax rates and decontrol of urea and fuel prices among others to improve government finances.

Taxes

But clearly, fiscal consolidation cannot be achieved in one single year; it needs to happen over time and in a phased manner. The finance ministry is likely to increase revenue collections by increasing excise and service taxes to 12 percent from the current 10 percent. Other sources of tax collection include increasing taxes on cigarettes and increasing the import duty on crude oil.

Investors

As far as investors are concerned, Deduction under section 80C may be revised to Rs 1,50,000 from the existing limit of Rs.1,00,000. There could also be some concessions given to interest on bank deposits to encourage savings.

The finance ministry is also considering allowing individual foreign investors to directly buy corporate bonds issued by Indian companies. Currently, foreign individuals are allowed to invest in Indian corporate bonds only as a sub-account of a foreign institutional investor. Direct investment will not only make the process simpler, but also less expensive.

Real estate

For residential housing, the scope of the 1 percent subsidy announced last year should be widened and the price band of the subsidy extended to benefit home buyers, especially from lower-income groups, said the Care report.

The Confederation of Real Estate Developers Association of India has also stressed the importance of devising new schemes like a tax holiday to generate stock under the affordable housing category.

Growth

Based on government projections, industrial sector growth is expected to be subdued this year, with manufacturing output growing at 3.9 percent against 7.6 percent in the previous financial year, while construction is expected to increase by 4.8 percent from 8 percent. However, the services sector is expected to grow by a robust 9 percent in the year ending March 2012.

Clearly, the government needs to focus on nurturing the growth momentum in the forthcoming Budget. The growth target for the next financial year is likely to to be around 7.5 percent, while inflation could hover at 6-6.5 percent, the ratings agency said. The figures imply a nominal GDP growth of 13.5-14 percent for the year ending March 2013, lower than that the current year’s figure of 16.1 percent, it added.

Source: Firstpost, India,  dated 23/02/2012