The budget has got something for everyone — for the economist, it has a 4.1 per cent fiscal deficit target; for the common man, there are tax and mortgage breaks; for those who wants to see India build its infrastructure, there are higher outlays and financing made easier; for the foreign investor, there is more FDI in insurance, defence, and funding; and for industry at large, there is execution on investment allowances.
While the initial market reaction has been a little negative, key to note is that the new government has been in power for just six weeks. The budget is just a first step in a five-year run. Moreover, the details appear promising where it ticks many boxes on reviving growth, focusing on infrastructure and increasing savings. It is a steady start, but a long run ahead.
There are multiple challenges — slow growth, high inflation, weak monsoon, elevated geo-political risks and high market expectations. The budget has sought to balance things — it has taken many small steps that seek to address the key challenges, some are more structural in nature, and it does lay out longer-term intent on strong finances and stronger growth. It does, however, avoid biting some bullets without specifics or decisive action on retro tax, subsidies or hard datelines on the Goods and Services Tax.
Looking at the numbers, the budget pegs the fiscal deficit estimate at 4.1 per cent of GDP, based on nominal growth of 13.7 per cent, revenues plus 18.6 per cent and expenditure plus 12.9 per cent. It assumes a 17.7 per cent increase in gross tax collections (corporate 14.6 per cent, income 17.8 per cent, excise 15.4 per cent, Customs 15.2 per cent and services 31 per cent) while the divestment target has been raised to Rs.63,400 crore. As regards expenditure, the budget projects it at 12.9 per cent year-on-year with the Plan and non-Plan expenditure pegged at 20.9 per cent and 8.3 per cent year-on-year. The subsidy bill (2 per cent of GDP) and the MGNREGA outlay remain unchanged. Given the current macro environment, these appear optimistic.
Thus, with a fiscal deficit target of Rs.5.31 lakh crore or 4.1 per cent of GDP and estimated redemptions of Rs.1.39 lakh crore, the budget has pegged the gross market borrowing at Rs.6 lakh crore in 2014-15 against Rs.5.49 lakh crore in 2013-14 and Rs.5.97 lakh crore in the interim budget. A key point to note is that the cash drawdown is budgeted at Rs.17,200 crore. With the government’s opening cash balance at Rs.1.30 lakh crore in 2014-15, this provides a cushion for financing if needed.
Need of the hourThe strength of this budget is that it takes many small but meaningful steps in a broad range of sectors while reiterating commitment to fiscal consolidation (4.1 per cent in 2014-15 to 3 per cent of GDP by 2016-17). Measures include higher outlays and proposed expansion in the infrastructure space across roads, rail, ports, gas pipelines and waterways, with financing made easier through the relaxation of CRR/SLR norms. The budget highlights that the need of the hour is to attract long-term finance for infrastructure projects without putting stress on the domestic banking system. In this regard, the proposed development of the Real Estate Investment Trusts and the Infrastructure Investment Trusts serves an important purpose for investors, who are looking for tax-efficient structures to invest, and for borrowers, who need financing at competitive costs. The proposed bank capitalisation of roughly Rs.2.40 lakh crore over the next four years has been proposed through dilution of the government’s stake to public shareholders. While the government will continue to have majority stake, banks are likely to have greater autonomy. In addition, banks will be allowed to raise funds for lending to the infrastructure sector with regulatory preemptions.
(The author is Chief Economist, Citi India)
