Budget 2012-13: fiscal test is awaiting the government

Budget for 2012-13 is scheduled to be presented in the Parliament on 16th of March. This year’s budget is  going to be a critical one for the government as well as for the economy in many respects. Firstly, the national and global environment is difficult and this situation may put pressure on revenue front. Similarly, on the expenditure front, the government should carryout expenditure compression measures, given the possibility of tax revenue under-realization.

            An interesting pre-budget development is the CSO’s downward revision of GDP growth target to 6.9% for the current year. This rate is the lowest for the last three years and is near to the lowest rate of the global financial crisis rate of 6.7% for the year 2008-09. This low rate indeed may produce low tax revenue for the government pushing fiscal deficit from the estimated 4.9% for the current year. Low economic growth precedes low tax buoyancy and will result in revenue decline and high fiscal deficit. Hence, on the revenue front, the government is not sitting on the same level of comfort it expected a year before.

            The picture is worse on the expenditure front. Data on government borrowing indicate that the government has utilized 85% of its target borrowing within the first eight months of 2011-12 itself. Hence, chance is that government’s borrowing may overshoot at least by 20-25% for the year. In the absence of unexpected revenue gains, this additional borrowing may raise fiscal deficit to 5.5 to 6% range, well above the estimated 4.9%.

            In conclusion, solid expenditure compression measures and revenue mobilization attempts may be adopted in the budget. 

Year

GDP Growth (%)

Fiscal Deficit (% of GDP)

2008-09

6.7

6.7

2009-10

7.4

6.4

2010-11

8.2

5.1

2011-12

8.2

4.6