Mr Chidambaram’s ways are predictable by now. His smiles conceal a tough-minded approach to inconvenient issues like ‘who cares if the people have to bear more burdens” or whether growth is creating productive jobs or not or reducing inequality. But he takes care to see that whatever he wants done, in fiscal correctness, is disarmingly packaged. The forthcoming Budget will testify to this.

UPA Government swears by “inclusive development”, which would require “sustained growth” over years to create fiscal space for investments without which there would be neither development nor inclusiveness, as he said recently. Therefore, the Finance Minister is rightly seized of a fiscal road map and making it feasible with sizable expenditure cuts along with a calibrated reduction in subsidies, a process set in motion with rise in petroleum product prices.

All the reforms including FDI in multi-brand retail, aviation etc and other policy measures on which the Finance Minister has worked over the last five months, are yet to evoke a recognisable response from investors, domestic or foreign, even if FIIs, with plenty of global liquidity, have kept up an impressive flow of portfolio investments. But there is big disconnect between equity markets and the real economy.

We need more direct investments, and the Finance Minister himself went round abroad to talk to investors on reforms and Government’s strong commitment to fiscal consolidation. The forthcoming budget should, therefore, become a critical turning point for the economy to emerge out of the worst downturn in a decade. The budget would be “responsible”, he had said implying perhaps it would not be overly-populist.

For Mr Chidambaram, fiscal math being the first priority, he has done everything to make sure of redeeming his commitment to contain fiscal deficit at 5.3 per cent of GDP in current year. From slashing allocated expenditures across the board including defence, juxtaposing them for revenue loss from low growth, to lowering subsidy with fuel price increases set in motion, he has covered his tracks. Tax officials were goaded to mop up what they could, all in a “just and fair manner”, adopting “non-adversorial approaches”. What is more, FM has raised over two-thirds of the disinvestment target of Rs. 30,000 crore, with another six weeks left for further fund-raising.

Indian corporates have praised all his moves and now await the Budget hoping the Finance Minister would rise to their expectations on stimulating investments by clearing hurdles as much as providing a host of fresh incentives. So what Mr Chidambaram would do for his second priority of restoring growth momentum is keenly watched not only in India but also by the international investor community.

So far, he has kept assuring everyone of providing stability and clarity in tax laws after last year’s GAAR and retrospective effect proposals had caused a scare among foreign investors. He would also lay down the path for the Goods and Services Act which would get implemented possibly in fiscal 2014-15. With pending legislative business (land, insurance, pensions, GST etc) there does not seem any early breakthrough for the economy to grow out of the shadows.

The real test for the budget would be whether it would bring about a turnaround for investment which would have to be largely private, domestic and foreign, after the steady decline in investment-GDP ratio from the pre-crisis peak of 38 per cent (2008-09) to 30 per cent in 2011-12. What fiscal crops and more than that, credible non-fiscal measures he would hold up in a budget of promise, is what the markets and investors are waiting for.

The Finance Minister will certainly seek to mobilise additional resources by widening the tax base, and also effect some rate changes for which he will draw from a ready menu of options. It would all be linked with the GDP growth target for 2013-14 when the fiscal deficit target is to be pegged at 4.8 per cent of GDP under the new fiscal road map to bring it down 3 per cent of GDP by 2016-17

Now the Finance Ministry is upset with CSO’s advance estimate of 5 per cent growth in 2012-13.It is pointed out that CSO has extrapolated trends in the first half of the year and would revise growth to a more respectable 5.5 per cent. More than quibbling over a few decimal points, substantial measures need to be taken in the areas of structural rigidities and supply constraints for growth to take firm hold for the medium term.

The Finance Minister, so upbeat, would like the country to believe that the slowdown has bottomed out and inflation is on a declining course, no matter CPI is stuck around double-digit while risks of increase in headline inflation can hardly be ruled out with global oil prices gyrating. It is, therefore, likely that he would budget for a 6 to 6.5 per cent growth which, given the reality of inflation, would turn into 14 per cent at current prices as basis of budget revenue and expenditure projections.

Given the need for revenues, even with enforced reduction in budget support for the plan and non-plan expenditure (like defence and subsidies) in the coming year, the budget would not have many giveaways. These could come later in the year if political circumstances so warrant. Meanwhile, the FM, while widening the base, could lift the exemption limit to at least Rs. two lakh and make marginal adjustments in income slabs. A surcharge on the richer classes is considered an imperative.

The budget proposals on providing clarity in the tax laws would be of interest to foreign firms and investors. Besides extending tax exemption for software companies, he may allow 25 per cent accelerated depreciation for investment in plant and machinery and a few other incentives for retail investors, the corporate sector as well as for investments in infrastructure bonds.

The major thrust for additional revenue is likely to be, as in the past, on indirect taxes with a possible two per cent hike in the Union excise levy, taking it to the pre-crisis level of 14 per cent. The Finance Minister is also expected to make tariff adjustments for non-essential and luxury items of import selectively. Discouraging gold imports is a continuing concern and becomes relevant in containing the current account deficits, another major risk for inflation and macroeconomic management. Exports also need focus in the budget.

Domestically, how much the budget helps to promote savings, which have sharply declined, also remains to be seen. Consumption, the growth-contributor, has been on a decelerating pace because of high inflation and reduced disposable incomes with the middle class. The cascading effect of sectoral price increases has already turned the country a high-cost economy, in goods, services or assets.

Whatever the new incentives for investment revival, growth would still depend on how speedily the structural impediments and supply side bottlenecks are sorted out and inflation remains low. The economy has been performing far below its potential of 8 per cent growth, the target set for the 12th plan. Two years of growth lows and infrastructural and project take-off challenges to overcome, India may have to settle for a new normal of around 7 per cent growth on average over the twelfth plan period (2012-17). (IPA Service)