FM gets 4.6% fiscal deficit despite Rs 1,06,938-cr shortfall on taxes & PSU share sales; excise rates on autos cut a third to revive demand
Despite the backdrop of a Rs 76,965-crore shortfall in tax collections for FY14 and Rs 29,973 crore in disinvestment, finance minister P. Chidambaram managed to better market expectations by restricting the fiscal deficit to 4.6% of GDP (see graphic on how he managed this). The target for FY15 has been kept at 4.1% — expenditure will rise 10.9% versus FY14’s 12.5% — lower than the 4.2% the markets expected. As a result, the year’s borrowings target is Rs 4,57,321 crore versus FY14’s Rs 4,68,902 crore — bond yields fell marginally in response.
Sharp excise duty cuts — from 12% to 8% for small cars, scooters, motorcycles and commercial vehicles — were effected to stimulate demand, and both defence pensioners and students were targeted by specific incentives. In the case of defence pensioners, ‘one rank, one pension’ was formally agreed to, and an interest waiver of Rs 2,600 crore was given for 9 lakh student loans. At the end of trading, the automobile index was up 0.76% and the overall Sensex 0.48%. Chidambaram said the tax cuts could cost around Rs 800 crore in a full month in case this did not result in a sharp pick-up in automobile sales. For mobile phones, the cut in duties was even more dramatic, to 6% with Cenvat credit or 1% without Cenvat credit. Excise duties were cut from 12% to 10% for capital goods as well as consumer non-durables falling under Chapter 84 and 85 of the excise act.
Though an interim budget cannot announce too much by way of new policies, or direct tax changes, Chidambaram pointed out that while loans to minority communities stood at Rs 211,451 crore at the end of December 2013, annual lending had gone up from a mere Rs 4,000 crore a decade ago to Rs 66,500 crore in FY13.
Though the drop in tax collections was along expected lines, what came as a surprise was the complete collapse in disinvestment receipts since most had factored in Rs 17,000-18,000 crore of funds from the sale of the government’s residual stake in Hindustan Zinc and Balco. But, the expenditure secretary said, there was some procedural work that would not get completed in the current fiscal— in which case, this is a bonus for the next government and would help achieve the seemingly excessive Rs 56,925 crore FY15 target.
For some reason, the budget did not reflect the results of the telecom auctions either. Assuming that firms pay just the minimum amount of the amount they bid, the budget should have ended up with around Rs 5,000 crore extra inflows. Possibly when the revised numbers for the deficit come in, they could end up being lower than the 4.6% shown in the revised estimates.
Surprisingly, despite the economy being sluggish, as well as the sharp cuts in excise duties, the budget has targeted a tax growth of 19% in FY15. That a similar growth was targeted for FY14 didn’t dent the taxman’s ambition though, when asked about this at the press conference later, the finance minister said a person’s reach had to be greater than his grasp.
As in FY14, the budget also appears to have under-provided on critical areas of subsidies. Given that Rs 35,000 crore of petroleum subsidies due in FY14 have been rolled over, the budget provision of 63,427 crore in FY15 means just Rs 28,427 crore will be available for subsidies, suggesting the number will be overshot or that much larger subsidy cuts will have to be made over the course of the year. As compared to the CACP estimates of the Food Security Act costing over Rs 2 lakh crore in each of the first three years, the budget provides only Rs 115,000 crore in FY15.
Though the budget didn’t explicitly say so, the Rs 11,200 crore provided for capital infusion in banks is very small compared to the needs of banks – anywhere between $35-80bn over 3 years according to a Credit Suisse estimate – this suggests the government will have to look at lowering its stake in PSU banks sooner rather than later.