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If the fiscal deficit target is met, this will not only help RBI fight inflation, keep the current account deficit under control and raise savings rate, but it will also lead to lower cost of capital in the future. Photo: AFP
If the fiscal deficit target is met, this will not only help RBI fight inflation, keep the current account deficit under control and raise savings rate, but it will also lead to lower cost of capital in the future. Photo: AFP

Budget 2014 | If this is a bitter pill, give us more

Most important thing about the budget was that finance minister Arun Jaitley stuck to the 4.1% fiscal deficit target

The most important thing about the Union budget was that finance minister Arun Jaitley’s stuck to the 4.1% fiscal deficit target for the current fiscal year, as well as the road map announced by his predecessor P. Chidambaram to bring it down to 3% by 2016-17. If the deficit target is met, this will not only help the Reserve Bank of India in its fight against inflation, keep the current account deficit under control and raise the savings rate, but it will also lead to lower cost of capital in the future.

Best of all, the target has been met not by handing out bitter pills, as the Prime Minister had warned, but by giving out sugar-coated ones instead. What is surprising is that he has managed to keep the deficit target unchanged in spite of raising total expenditure by 31,678 crore compared with the interim budget. Out of this amount, 13,621 crore is the increase in capital expenditure. And 5,000 crore goes towards defence expenditure, so the rest will probably be spent on infrastructure, which is excellent.

What about revenue expenditure? That’s up even more compared with the interim budget, at 18,057 crore. Far from reducing subsidies, he has increased them by 4,950 crore, the rise being in fertilizer subsidies.

How has Jaitley managed to fund all this? Note that there’s no change in the GDP (gross domestic product) growth assumption—nominal GDP growth is estimated to be 13.4% over FY14, the forecast made in the interim budget. Well, revenue receipts are up 22,632 crore over the interim budget. Tax receipts, though, are lower than in the interim budget, thanks to the concessions handed out by Jaitley. Non-tax revenues are higher by a huge 31,791 crore. Dividends and profits, for instance, are higher by 13,000 crore. Expect public sector units to pay out hefty dividends this fiscal year. But the bulk of the increase comes from “other non-tax revenue", which is targeted to go up by 18,769 crore. This category covers revenue from various government activities and services, and is expected to go up a huge 24%. The big amount under this head comes from services for spectrum, roads and social services. Does this mean the government will increase user charges?

The rest of the increase is from disinvestment of stakes in government companies, which is budgeted to go up by 6,500 crore to a total of 63,425 crore. Given the appetite in the market, the government should be able to push it through.

Obviously, if the fiscal deficit is lower than last year, the overall impact of the budget is contractionary. Nevertheless, the quality of spending has been improved by increasing capital expenditure. For instance, while total capital expenditure went up by 14.4% in 2013-14, the government has budgeted for a 18.8% rise this year. How much of that actually happens remains to be seen. Revenue expenditure growth is only slightly less than in FY14, which means the cutback in revenue expenditure is probably doable. But the net tax revenue increase, at 16.9% compared with the previous year, is still much higher than the 12.7% rise notched up in FY14. In any case, the finance minister has frankly acknowledged that meeting the deficit target will be a challenge.

The government has, in various ways, tried to increase private participation in the infrastructure sector, while the finance minister has also, within the limited resources available to him, tried to boost growth, particularly in the housing sector, increase foreign direct investment and raise savings.

What are the things he hasn’t done? Nothing much on reforms. All those measures talked about in the Economic Survey remain, as usual, hot air. No subsidy reforms—apart from a statement of intent; nothing on labour laws; nothing on tweaking the land acquisition law; no concrete proposals on restructuring the Food Corporation of India. The fact remains that this budget is at best an incremental one and one concern is that if growth goes up, the structural problems will again result in higher inflation. But then, we live in hope that perhaps the reforms will be done slowly. At present, investors would like to give the government a long rope.

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