March 14, 2012 / 12:05 PM / in 6 years

Will Budget 2012 be reform centric or populist?

The current status of the Indian economy indicates a need for hard stance on reforms. The ballooning fiscal deficit is putting pressure on the subsidy bill. The PM’s Economic advisory council’s report has suggested an increase in indirect taxes and keeping petroleum prices be out of the subsidy list as a measure to consolidate the fiscal deficit. Disinvestment program may also speedup in coming financial year, and the platform for such a program may be announced in this budget.

A view of the Indian parliament building is seen in New Delhi December 1, 2010. REUTERS/B Mathur/Files

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The finance minister is likely to increase the excise duty and service tax to 12 percent from the current 10 percent level. Since international crude prices are high, the government may not increase import duty on crude oil. But taxes on cigarettes might be increased.

(For full coverage of the Budget, click here)

There’s talk of the government announcing an increase in the tax exemption limit under Section 80C from 1 lakh rupees to 1.5 lakh rupees. Pranab Mukherjee is likely to include banks fixed deposit under Section 80C with some lock-in restrictions.

With ADHAR UID system in place, India is expected to announce measures to cut various subsidy programs to stop leakages in subsidy and offer direct cash subsidy to the individual.

The budget should give special attention to legislations on mining and land acquisition. Watch out for the allocation to the defence sector, considering China recently announced a significant increase in its defence expenditure.

Pranab Mukherjee will have to decide whether to pass on the increasing cost of oil prices to consumers directly or to continue with the subsidy policy. Mukherjee will have to find ways to reduce the fiscal deficit and improve health of the equity market. In all likelihood, the budget is expected to avoid controversial issues that can threaten the government’s stability. The budget is likely to be populist in nature but the government might announce measures to contain the deficit.

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