Union Budget 2012 is on the anvil. And as witnessed in the past, the most challenging aspect for government in the budget agenda would be to plan its finances in a proper way. If you recall last time around government came out with a very optimistic fiscal target. In fact, despite a huge outlay of plan expenditures the fiscal gap was pegged at 4.6% of GDP. But now after the end of the year it is clearly evident that the target is at a significant risk of being missed. And remember this is even after a huge windfall gain that accrued to the government from the auction of 3G licences last year.
However, with disinvestments taking a backseat amidst poor market conditions and non-tax/tax revenue not showing any signs of improvement, 2012 could be even more challenging. Further, rising expenditure and interest cost on government debt is making the matters even worse. Subsidies on food, fertilizer and fuel are another set of headache for the government. Further, depreciating rupee means that the fuel subsidy burden will increase since India imports majority of its crude requirement.
However, apart from this financial situation of three state governments namely Punjab, Kerala and Bengal happens to be the biggest worry. The farm economy in Punjab has peaked out and the fiscal deficit is expected to worsen. The fiscal position of Kerala and Bengal is not encouraging either. This means that the Centre will have to dole out more funds to bail them out by extending grants. This may further strain the government finances.
There are clear pressures visible on the revenue side as well. Higher interest rate environment is hurting corporate capex and thus the revenue visibility (corporate tax receipts) of the government. Even the reforms are progressing at snail pace suggesting that the capex boom may take a while to emerge.
Thus, overall it appears that considering the slowdown in the economy and rising expenditure managing the finances will be a big challenge for the government in 2012.