Jaitley budget going the Chidambaram way
With a tax performance that is even worse than that in FY14, finance minister Arun Jaitley’s FY15 budget looks alarmingly like going the way his predecessor P Chidambaram’s did. While Chidambaram managed to collect 45% of his net tax target by the end of November 2013, Jaitley has managed to collect a lower 42.3%, and with the economy not really picking up, the chances of collections improving is not too high—the duty hikes on petroleum products will only help to neutralise the relative decline in such collections due to the global collapse in prices of petroleum products. Indeed, the mid-year review released some days ago has projected a tax shortfall of over R1 lakh crore due to a combination of economic growth being lower than expected in even nominal terms and due to exceptionally optimistic calculations on revenue buoyancy—as compared to a historical buoyancy of 0.8 in the previous five years, the budget numbers were predicated on a near doubling of this to 1.5. At R1 lakh crore, this means Jaitley’s shortfall in tax collections will be around 40% higher than Chidambaram’s. Of course, Chidambaram also had a R30,000 crore shortfall in disinvestment receipts which, hopefully given the government’s resolve to take on Coal India’s unions—the stake sale of Coal India is expected to fetch R24,000 crore, or 37.8% of the year’s target of R63,425 crore—will not be an issue this year. While there seems to be some doubts over whether the government can sell its residual stake in Hindustan Zinc, Jaitley would do well to not only ensure this happens, but also to divest the government’s shares in L&T and ITC which alone could fetch R47,000 crore. All efforts, as FE has repeatedly pointed out, need to be made to divest 15 million tonnes of FCI’s stocks—this is the minimum that even Jaitley has announced—which could fetch another R22,000 crore.
Unless this is done, like Chidambaram, Jaitley too will end up slashing expenditures—Chidambaram cut capital spending by as much as 17% of the target for the year. Indeed, this is why the highlight of the Jaitley budget was the 13% increase in total expenditure targets and, within this, the 19% for capital expenditure. Indeed, with private sector spending not taking off due to India Inc’s budgets being under strain, the government just has to spend more on areas like public works like roads or irrigation. Goading PSUs to spend more is always an option, but PSUs don’t have that much cash either, more so given the impact of the dramatically lower commodity prices and the extra dividend that Jaitley is almost certainly going to ask for—last year, Chidambaram got R13,000 crore extra by way of dividends from PSUs over that budgeted. For FY16, while the finance ministry has indicated that it plans to stick to a 3% fiscal deficit target, this is probably a bad idea. Increased public spending is the need of the day though, at the same time, there has to be organisational capacity to spend the money—NHAI’s recent performance in this regard is hardly promising. While a 3% deficit will probably cheer bond markets, the consequence of this will be another year of low growth.