In putting together Budget 2013-14, Finance Minister P Chidambaram seems to have gone through a laundry list of different challenges facing the economy and done a little to address each. The drop in the financial savings rate, for instance, has been addressed through an increase in the eligible income limit for the Rajiv Gandhi Equity Savings Scheme. An investment allowance of 15 per cent for new investment projects has been proposed to spur investments and growth. A temporary surcharge on the “super-rich” has been geared to lend revenue and fiscal targets a degree of credibility.
This effort to fit everything somewhat scrappily into an omnibus policy document has resulted in the lack of a cohesive grand plan to put the economy and public finances back on track. Individual measures seem timid and inadequate in relation to the enormity of the problems they are designed to address.
Besides, there are clear dampeners for investor sentiment, such as the new surcharge on the “super-rich” and the imposition of a commodity transaction tax. So, for those who expected Mr Chidambaram to produce the clichéd “game-changer”, the Budget is likely to have been disappointing, to say the least.
That said, economic recovery is not contingent on fiscal measures alone. The strategy of fiscal consolidation that underpins this Budget could ease inflationary pressures and give the Reserve Bank of India elbow room to ease monetary policy.
It would also mean a moderation in the government’s draft on the bond market. (The government’s net borrowing is pegged at Rs 4.84 lakh crore in 2013-14, just marginally higher than the Rs 4.67 lakh crore that it borrowed in 2012-13.) Both these could bring the cost of borrowing down and help consumption and investment. A lower fiscal deficit will also translate into a lower current account gap and reduce the threat of a rating downgrade. This will help improve the operating environment for Indian companies with a more stable exchange rate and lower external borrowing costs.
This is all in theory; it could happen in reality if the finance minister manages to stick to the targets set for this year. Thus, an important gauge of the success of the Budget would be the credibility of the fiscal consolidation plan. Mr Chidamabaram deserves kudos for bringing the deficit down to 5.2 per cent of gross domestic product (GDP) for this fiscal year when most analysts claimed that it would be well-nigh impossible to get it below 5.8 per cent. The question is, how credible is the deficit target of 4.8 per cent for the next fiscal year?
The first critical risk comes from the Budget’s growth forecasts. The nominal GDP growth forecast is 13.4 per cent, roughly translating into a real growth forecast of 6.4 per cent. Given that growth in the current year is likely to be in the ballpark of five per cent, this certainly seems aggressive.
If growth were to falter, there could be a substantial shortfall in revenues - as was the case this year, when tax collections fell short by Rs 29,000 crore (Rs 290 billion). (The Budget also assumes an improvement in the tax-to-GDP ratio from 10.3 per cent to 10.9 per cent through better collection efficiency and compliance. This, however, might not be entirely unrealistic.)
There could also be legitimate questions on whether the assumptions for capital receipts and non-tax revenues are a little overstretched. The disinvestment target for 2013-14 is Rs 56,000 crore (Rs 560 billion), more than twice the amount raised in the current fiscal year, Rs 24,000 crore (Rs 240 billion).
In the absence of a significant recovery in corporate earnings next year, equity markets might not be in a position to absorb this massive supply of paper, especially if the flow of liquidity from the West dissipates. Non-tax revenues (the smorgasbord of items such as interest recoveries, dividends from public sector undertakings, spectrum sales) are assumed to grow by a whopping 33 per cent, and there could again be some gap between the budgeted amounts and the actuals.
There are a couple of risks on the expenditure side too. Subsidies are estimated at Rs 2.2 lakh crore, or 1.9 per cent of GDP for 2013-14 (including Rs 90,000 crore (Rs 900 billion) for food subsidies). The fertiliser subsidy target of Rs 65,000 crore (Rs 650 billion) seems inadequate, given that large arrears are carried forward from the current year. Ditto for oil subsidies. The finance minister has committed to providing more money to the food security programme if required, and political compulsions towards the end of the year might just force him to do so.
The apparently large increase in Plan expenditure (30 per cent) reflects the fact that Plan spending in 2013-14 was slashed and provided a low base. The actual increase over last year’s budgeted amount is a tiny six per cent. Thus, an increase in allocations towards Plan schemes is likely over the year and could add to the expenditure burden. The bottom line is that a fiscal deficit of 4.8 per cent of GDP is not the easiest of targets to achieve.
Is the Budget a complete botch-up then? It is not difficult to find reasons to be critical. Financial investors have expressed their disappointment in no uncertain terms. One thing going for the finance minister is that he has fallen back on the basics of good housekeeping and taken the business of reducing the gap between expenses and income seriously. This is not trivial. Budgetary “consolidation” was imperative, given the various macroeconomic imbalances that a runaway deficit fostered. Thus, it would be unfair to write the Budget off. In the short term, there could be some slippage from targets; but if we get the direction of the fiscal trajectory right, it could set the base for a sustained long-term recovery.<hr>
Abheek Barua is Chief Economist, HDFC Bank