Budget 2013-14: Focus to be on fiscal consolidation

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 Budget 2013-14: Focus to be on fiscal consolidation
It's slightly more than a week before Finance Minister P Chidambaram delivers the last Union Budget under UPA II. Expectations are already running high given the push for reforms the government has initiated since September last year.

The one thing that investors and economists are looking for is a credible fiscal consolidation plan for 2013-2014. Already, it seems that the Finance Minister will keep his word and the fiscal deficit is likely to remain around the promised 5.3 per cent target for 2012-2013.

There are reports that the Finance Minister will target a fiscal deficit target of 4.8 per cent for 2013-2014, largely keeping in mind global rating agencies, which have threatened a rating downgrade if there is no fiscal consolidation.

The problem for the Finance Minister is that given it is is the last Union Budget before elections are held next year, the government has to dole out some populist measures or its chances of coming back to power remain remote, given that the masses are already disillusioned with the present UPA II government. In dishing out populist goodies the government runs the risk of fiscal profligacy.

Under UPA I, the government could offer things like waiver of farm loans, largely because the deficit was under control and India was growing at a scorching pace. The current scenario is rather different as the current account deficit has hit dangerously high levels and the fiscal deficit is already too high. High inflation is only making matters worse.

Under the circumstances projecting a credible fiscal plan is going to be a herculean effort for the Finance Minister. Of course, he can announce a target, but, whether that is a credible target would be the big question.

The one option is to reduce expenditure by reducing the subsidy burden. The government has already initiated that by increasing the prices of diesel in small amounts every month. With state elections around the corner, if the small doses of increase are stopped, it could lead to increased subsidy burden, which could push the fiscal deficit higher. Already there are reports that the food subsidy burden could be high for 2013-2014. With central elections just a year away the government dare not touch the fertilizer and kersoene subsidy, which could spell disaster for its re-election.

It's clearly going to be a tough balancing act for the Finance Minister, when it comes to fiscal consolidation. You have populist budget that is necessary before elections and fiscal consolidation that is imperative. It's a case of being stuck between the devil and the deep blue sea.

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