As expected, the Union Budget for 2010-11 has focused on fiscal consolidation. The finance minister has been able to stick to the 5.5% fiscal deficit target for the year, a target he had set himself in his medium-term fiscal policy statement last year. Interestingly, though, the fiscal deficit target for 2011-12 in the medium-term fiscal statement was 4% last year—this year, he has raised that to 4.8%. That has happened in spite of the economy doing much better at present than at the time of the last budget. Clearly, fiscal consolidation is going to be a slow process.
What is important is whether the deficit reduction is credible. Although the net borrowing requirement has come in as expected, bond yields went up after the Budget. There are several reasons for this. One, the borrowing requirement is large and there is no scope this fiscal year of unwinding securities under the market stabilization scheme (MSS) nor is there any scope to de-sequester or convert MSS bonds into government debt. That means the effective borrowing from the market goes up. Two, a reason for the fiscal deficit coming in at 6.7% of the gross domestic product is because the base year has been changed. As A. Prasanna, senior economist with ICICI Securities Ltd, points out, that would mean the fiscal deficit computed with 2000-01 as the base would be higher and the market is therefore worried that this could mean more borrowings this fiscal year. Third, the bond market expects the government borrowing to be front-loaded, which, after taking the higher redemptions of government bonds this year, works out to around Rs14,000 crore worth of government borrowings every week from 1 April, according to Indranil Pan, chief economist, Kotak Mahindra Bank Ltd. And lastly, with the fuel price hike and the rise in excise duties, the danger of inflation becoming more broad-based has also increased—the markets will now look to the Reserve Bank of India’s credit policy in April and the likelihood of further monetary tightening.
Secured? Revenue expenditure on police services and social services has been curtailed. Gurinder Osan / AP
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So far as the Budget estimates are concerned, revenue expenditure is expected to rise by just 5.8%. At first glance, this looks commendable. A closer look, however, casts some doubt on the numbers. For example, subsidies are lower by Rs14,800 crore compared with the revised estimates for the current fiscal year. It’s difficult to see how this can happen, unless the government is going to free pricing in oil and fertilizers and the finance minister has given no indication of that. Revenue expenditure on police services, social services has been drastically curtailed. Revenue expenditure on defence is budgeted to be lower than the revised estimates for the current year. There’s a big question mark over whether these expenditure cuts will be possible.
On the revenue side, while the estimates for tax receipts are likely to be met given the buoyancy in the economy, the Rs74,571 crore taken as “other non-tax revenue” includes the proceeds from disinvestment of around Rs40,000 crore, higher than anticipated. Whether the government will be able to go in for disinvestment of this amount is debatable.
That said, there are several positives in the Budget. The biggest of them is the huge increase in capital expenditure. Adjusting for defence expenditure, total capital expenditure is up 33.6% compared with the revised estimates for the current year. The reduction in income tax on certain categories is also welcome, but part of that giveaway will be negated by the hike in fuel prices and excise duties.
The stock market’s sceptical view of the Budget and the importance of global factors are amply brought out by the fact that the Sensex gained around the same 1% as the Hang Seng during the day.
Manas Chakravarty is the Consulting Editor, Mint.
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