Aggressive budgeting to the fore once again
Given the continuing growth slowdown, finance minister P Chidambaram has done well to try and stimulate consumption by fairly sharp cuts in excise duties in sectors like automobiles where, in the case of small cars, scooters, motorcycles and commercial vehicles, the cuts are as high as a third—while the nominal value of the cuts can be as much Rs 800 crore a month, if sales pick up, this will be made up. Chidambaram would probably have liked to drop last year’s surcharge on income taxes to stimulate consumption but given this in an interim budget, direct taxes cannot be touched. The interim nature of the budget also meant the finance minister could make no major announcements in terms of new policies, reducing the budget exercise to largely an accounting one—one of the reasons why markets look forward to budgets is the sense they give of the direction of policy reform. Markets have cheered the duty cuts—automobile stocks (BSE Auto index) rose 0.76% and the overall Sensex 0.48%—as well as the fact that FY15’s fiscal deficit has been kept at 4.1% of GDP, lower than the 4.2% target in last year’s medium-term fiscal deficit roadmap. Despite the dramatic Rs 76,965 crore shortfall in tax collections—Rs 48,052 crore in net terms—and R29,973 crore in disinvestment receipts, the finance minister managed to shave off Rs 17,960 crore from the FY14 fiscal deficit target. He did this through a Rs 74,863 crore cut in expenditure as well as by leaning on PSUs to give him higher interest/dividends of Rs 17,575 crore over the budget target.
The problem with the budget numbers, however, is that they are increasingly becoming less realistic, though the finance minister made light of this argument by saying a man’s reach must always be more than his grasp. At the time when the economy was struggling in February 2013, finance ministry mandarins thought nothing of projecting a 19% hike in gross tax collections. And though the rupee looked fragile and there was little to suggest oil subsidies would be cut, a R30,000 crore cut was projected in the subsidy numbers for FY14. Not surprisingly, the revised numbers for the year are very different. There is a R77,000 crore shortfall in tax collections, and petroleum subsidies were R20,480 crore more than budgeted. Despite this, however, FY15 assumes a 19% hike in taxes once again, which means the finance minister is looking at a sharp revival in growth, though there is little to suggest that is on the cards. And once you take into account the R35,000 crore of the petroleum subsidy that the finance minister says has been rolled over to FY15, this leaves just R28,427 crore for the year’s subsidies—though the rupee is stable now, as are oil prices, the fact is that LPG subsidy reforms have been nearly fully rolled back, and on diesel, big users like state road transport organisations have managed to successfully evade January 2013’s decision to make them pay market prices. The R1.15 lakh crore provided for food subsidies, similarly, looks like a huge underestimate since the Food Security Act (FSA) needs to be fully rolled out in FY15—to put the number in context, Commission for Agricultural Costs and Prices chairman Ashok Gulati has put the cost of the FSA at R2 lakh crore per annum for the first three years.
In other words, when a full budget is presented in June, the finance minister will have to take a hard look at the numbers again to avoid getting tripped up with revenues falling short and expenditures rising above estimates dramatically. Though finance minister Chidambaram was right in emphasising the great job the government has done in terms of getting the economy back on track in the last 18-20 months, particularly the pragmatism—RBI decision to defray the costs of currency hedging—displayed in controlling the current account deficit, it is a pity the government has all but given up on the Aadhaar-based direct cash transfers. Based on the numbers given in the budget, under Rs 4,000 crore has been transferred using this method against the Rs 2.56 lakh crore of expenditure on just subsidies. Bringing Aadhaar back on track has to be number one priority for the next finance minister, along with of course, getting both GST and DTC through Parliament. Only when these two critical legislation are passed can India hope to get a 3-4 percentage point hike in the tax-to-GDP ratios. The larger point is the economy continues to be fragile, and this is what the full FY15 budget needs to address.