A challenging macro-economic situation, brought on both by domestic and global conditions. In this environment, the FM seems to have done a commendable job in sticking to some very public commitments made, in the past few months, regarding the level of the budget deficit.
By GS Sundararajan
Group Director, Shriram Group
The Union Budget 2013-14 was presented in a challenging macro-economic situation, brought on both by domestic and global conditions. In this environment, the FM seems to have done a commendable job in sticking to some very public commitments made, in the past few months, regarding the level of the budget deficit.
The containment of the deficit for FY 2013 at 5.2% (against the projected 5.1%) and the resolve to limit it further to 4.8% for FY 2014 are noteworthy. This can be broadly favorable for both market investor as well as business sentiments, though immediate reactions from the financial markets have been negative.
There has been a significant curtailment of planned expenditures in FY 2013 to attain the projected deficit number of 5.1% - Planned expenditures have been cut by nearly 20% from that budgeted for FY 2013.The axe on planned expenditures is what seems to be giving the broader investor community some jitters - Planned expenditures in India's budget broadly include discretionary expenditures which can increase the productive capacity of the economy - for instance, public infra spending, capital expenditure programs of public sector units such as CIL or even capital expenditures in the agriculture sector such as strengthening irrigation facilities / dry land farming etc.
If expenditure curtailment is to be focused only on planned expenditures, this can have an adverse impact on long-term capital asset creation in the economy. Non-plan expenditure on the other hand has not been reduced at all - In fact, has even increased by 5% on the revenue account and is slated for a further 10% increase in FY 2014.
Non-plan expenditure primarily comprises subsidies - food, fertilizer and petroleum - and other transfer payments, salaries, pensions etc. The 10% increase in non-plan expenditure projected for FY 2014 appears optimistic and quite on the lower side if the track record on this front is any indication. The 3 critical areas of food, fertilizer and petroleum subsidies have not seen any determined attempts at long-term reduction.
One does not know what the final bill on food subsidies will be given the likely introduction of national food security in the coming year - nor on petroleum subsidies despite the recent decisions on incremental increases in diesel prices, curtailment of LPG subsidies and that on petrol.
One has to also note that global commodities prices have not seen any dramatic reductions. The petroleum complex is, in fact, holding quite steady. No cut in non-plan expenditure is what creates the doubt as to whether the Indian government is on a sustainable path to medium-term deficit cutting –Or is the talk on deficit containment just that - talk?
In a weak economy, expenditure curtailment was possibly the only immediate strategy available for meeting the deficit targets .Having taken care of the immediate pressing needs, the FM seems to have had some leeway in projecting his revenue and expenditure estimates for FY 2014.
This has enabled him to project a lower 4.8% deficit number for the coming fiscal . If FY 2013’s experience in severely curbing expenditure to be in line with the budgeted deficit numbers is any indication, the credibility attaching to the 4.8% number for FY 2014 is not small.
Of course, the FM also will obtain quite some help if inflation broadly remains in the 8 to 10% range - this will provide both a larger revenue base for the application of the unchanged tax rates as well as help in keeping the deficit ratios under check .
Indeed, one has to note that despite large deficits in recent years - particularly after FY 2008-09 - India's accumulated deficits (broadly equal to the public debt) have declined as a fraction of the GDP - from 84% in 2003 to only 67% in 2011/12.
The key to that decline in the debt / GDP ratio is the high level of inflation - in working out the deficit / GDP ratio, the high inflation substantially enhances the denominator (the GDP number) with the result that the ratio comes out smaller. One has to also note that with the overall global and domestic economic situation still quite fragile, the FM could not try any far-reaching changes in existing policies relating to taxes and tariffs. Still, the strong desire to mop up some additional revenue is evident in the surcharges being brought in on high-income (more than Rs.1 crore) sections.
On the business investment side, the proposal for a 15% investment allowance on plant & machinery investments above Rs.100 crore over and above the existing depreciation benefits is interesting and really welcome . The FM has also well supported many of the social sector schemes of the government with good outlays.
Overall, a status quo kind of budget under challenging conditions. It is likely that the corporate business sector finds some marginal improvement in the overall operating climate in the months ahead though they will have to remain at heightened levels of preparedness for stiff challenges in both the financial and operating environment.
Financing costs in the economy - for both financial and non-financial businesses - do not seem like they will decline in any noticeable manner, if at all, in the coming fiscal. That inference is quite well supported by the recent decision of a large, private sector bank to access the overseas markets for funding.