Fiscal Discipline The Budget Goal; Reforms To Continue Outside Budget

Dinesh Thakkar
Chairman & Managing Director
Angel Broking

The rational part of our mind was telling us that the FM had little room to do something big bang, but yet, the recent reform momentum and the FM’s own credentials had probably whetted the markets’ appetite for something more. Rationality prevailed, but it does not mean that the budget was a disappointment.

At the outset itself, the FM acknowledged that the current account deficit (almost 5% as per our estimates) was the biggest macro-economic concern, and to fill that gap, he had to everything to keep the dollar tap flowing. So, he could not afford a ratings downgrade and he had to commit very seriously to fiscal consolidation, even at the expense of missing out on some other macro concerns that needed attention like stimulating exports and reviving savings. He has delivered on fiscal discipline, as he did not announce any major populist measure and largely maintained stability in tax policies, save for some tweaking for higher income brackets and corporates. There were some concerns before the budget that there would be a big burden coming from the Food Security bill, but that has also been curtailed to just Rs 10,000 crore.

The FY2013 fiscal deficit target of 5.2% has been largely met by curtailing plan expenditure drastically by almost Rs 1 lakh crore, because the oil subsidies, which were higher by almost Rs 50,000 crore, cramped the spending space. But outside the budget, the government has been swallowing the bitter pill, so to speak, by most importantly increasing diesel prices to create much more space in the FY2014 budget to once again restore plan spending. Also, it has exercised significant restrain by not increasing wheat Minimum Support Prices much inspite of being closer to elections, hence setting the stage for food inflation to come down as well.

Non-plan expenditure increase has been restricted to just about 11%. So, while some of the revenue increases budgeted for FY2014 do look a bit optimistic (for instance 36% increase assumed in service taxes), even if there is some slippage, I think what the FM will do is curtail plan expenditure as they did this year, rather than slip up on the budgeted fiscal deficit. Although he has targeted a significant improvement in the spending mix by looking to increase plan expenditure by 30%, there will be some room to reduce that if the revenue falls short of expectations and yet end up with a better spending mix than in FY2013. Even targets on one-time revenues such as disinvestments of Rs 40,000 crore and spectrum auction revenues of about Rs 20,000 crore do not look unrealistic. Overall, the budget maths is appearing far more credible than last year.

The fiscal discipline will also create more headroom for the RBI to announce further rate cuts and improve the environment for the private sector to step up investments. In this regard, within the budget too, there were a few measures to encourage capex spending (15% accelerated depreciation on large ticket capex) and home purchases (Rs 1 lakh additional deduction on home loans below Rs 25 lakh), though nothing particularly spectacular.

I think that just reflects the fact that a lot of the real reform action is outside the budget. In my view, there were no major positive or negative triggers for the markets. I think what the market will look forward to is the reforms agenda being continued by the government outside the budget, in the coming Parliamentary sessions, for which the momentum still looks very much on track.