Slowing economy, missing revenue targets, dangerously high borrowing and the developing fiscal cliff are some of the macroeconomic and environmental factors of the upcoming budget.

The finance minister will be doing the tough job of compressing expenditure needs in a downsized revenue basket. So far, the government’s revenues especially direct taxes are showing a clear trend of big shortfall caused by slowing GDP growth. Of course, this year’s (2013-14) budget is going to be one of the toughest budgets in the last twenty years.

Anticipating a record shortfall in tax collection, the revenue department was searching every nuke and corner to secure every naya paisa from taxes during the last few months. It is estimated that the tax revenue shortfall along with missed disinvestment target may increase the fiscal deficit near to 5.5% mark for the current year.

The leading feature of India government’s financial health is that a vibrant direct tax growth (corporate and personal income taxes) emerged as the main source of revenue since 2007. Direct tax revenue depends upon the growth of the economy. Slow down of the economy produces a multiple reduction in targeted direct taxes for the government. To compensate the shortfall in direct tax revenues, there are no ad-hoc revenue sources like spectrum auction this year.

On the expenditure front, this year gives some extra commitment from the finance ministry. First factor is that this is the last opportunity for the UPA to launch popular measures like food security targeting the coming election. Secondly, the government has to seriously launch schemes and programmes for the twelfth five year plan. Similarly, major expenditure compression measures on the subsidy side including diesel price and direct cash transfer are in their infancy stage.

The net effect of the above trends gives us a clear indication that the coming budget will be an austerity budget focusing on expenditure compression measures. Many of the popular measures in the traditional format may not be there or may exist in a namesake manner.

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