Budget 2013: Five big challenges for P Chidambaram

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Finance Minister P Chidambaram faces a daunting task as he prepares to deliver his seventh Union Budget. Given that this is the last full Budget before the General Election (due in May 2014), there will always be that temptation to loosen the purse strings. Not that difficult a task but for the looming threat of a potential downgrade to India's sovereign rating to junk status. His onerous agenda - please the voters, put the government finances in order, and get the Indian economy back on track.

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1. Goodies for the electorate: Increased spending on social welfare schemes, like the Food Security Bill that will raise India's food subsidy bill to 1 per cent of GDP, may be announced. Speedy implementation of direct cash transfer scheme aimed to plug the subsidy leakage may also be announced. A hike in the exemption limit on income tax to keep the middle class happy is also likely. The challenge for Mr Chidambaram will be to be steer clear of populist measures and slash public spending to meet the fiscal deficit target of 4.8 per cent of GDP in 2013-14.
   

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Spurring economic growth: India's gross domestic product (GDP) is estimated to grow an annual 5 per cent in 2012-13 - the slowest in a decade. Lacklustre growth has hurt the rupee, which has lost 18 per cent against the dollar since the start of 2011. The FM has slashed public expenditure in the current fiscal year to bring down slippages and analysts anticipate further fiscal tightening in 2013-14 to meet the fiscal deficit target. The challenge before Mr Chidambaram will be to boost growth, amid spending cuts, to win middle class, aspirational voters and also placate ratings agencies.

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Convincing the Reserve Bank: In its third quarter review of Monetary Policy, the RBI commented that "...a sustained commitment to fiscal consolidation is needed to generate monetary space". Clearly, the central bank is unlikely to play ball with Mr Chidambaram if he does not deliver on the fiscal side. Since Mr Chidambaram cannot increase taxes ahead of elections, he will have to resort to aggressive fiscal tightening. The challenge for Mr Chidambaram will be to see that Budget does not add to inflationary pressures so that the central bank cuts rates to boost growth.

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Commitment to reforms: Lack of reforms over the last few years have meant that foreign capital has dried up, widening India's current account deficit to record levels. To woo foreign investors back to India, Mr Chidambaram will have to deliver strong economic growth without adding to fiscal slippages. Mr Chidambaram will also have to spell a clear timeline for implementing tax reforms such as Goods and Services Tax and Direct Tax Code. This will not only spur economic growth, but would also attract more foreign investment.

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Convincing ratings agencies: Two of the three big ratings agencies - S&P and Fitch - have India on negative watch for a downgrade to junk. A downgrade ahead of the elections would be disastrous for the government. Mr Chidambaram would have to adhere to his stated task of fiscal consolidation and bring down fiscal deficit to 4.8 per cent of GDP in 2013-14.

[Ankhi_sena_mun]