Union Budget 2013 - 14: Adherence to fiscal consolidation, says ICICI Economist

By Shilpa Kumar
Senior General Manager
ICICI Bank

The Finance Minister has broadly delivered on his commitment of a budget that adheres to a path of fiscal consolidation while simultaneously attempting to support medium term growth pillars as were emphasised in the Economic Survey, with focus on agriculture, social development, infrastructure and investments.

To begin with, the budget has bettered the fiscal deficit target for FY2013 to 5.2% of GDP while delivering a target of 4.8% fiscal deficit for FY2014. Gross borrowings for the next fiscal are estimated at INR 6.29 tn, with net borrowings of INR 4.84 tn.

Fiscal consolidation has been achieved both through rationalisation of expenditure and increased tax revenue. On the expenditure front, the Government has contained the subsidy bill at 2.0% of GDP for FY2014, which has been reduced to INR 2.3 tn in FY2014 from INR 2.6 tn previously on the back of lower petroleum subsidy. Tax revenue is expected to rise by 19.1% YoY aided by wider ambit of services tax, higher excise and customs duty for select sectors and higher surcharge on individuals and corporates above a threshold.

Acknowledging the constrained economic space, the Budget has identified investment as the key towards restarting the growth engine. Cabinet Committee on Investment is expected to play an important role in this regard. Further, the Budget has announced an investment allowance of 15% to attract high value investments.

Equal if not more focus has been given to the problem of widening CAD. While a few corrective steps were announced, the Finance Minister has said that the Foreign Trade Policy due next month will contain more measures towards boosting exports of goods and services.

The critical aspect of this budget will be the ability of the Government to stay within the expenditure target and achieve the projected revenues, specifically given the possible introduction of the Food Security Bill (FSB) that would impact the subsidy calculation and in turn the fiscal balance.

The Food Ministry has pegged the quantum on account of FSB at INR 1.2 tn, some of which will get added on to this year's Budget following Parliamentary approval. The fertilizer and fuel subsidy at INR 660 bn and INR 650 bn respectively look more credible given the partial deregulation of diesel prices and proposed changes in urea pricing policy.

Meanwhile, the dependence on non-tax receipts is still rather high as is evidenced from the continued reliance on avenues such as disinvestments and spectrum proceeds that have been budgeted at INR 540 bn (for total stake sales including in non-Government entities) and INR 408 bn respectively. 

All of these will be closely watched by the markets given the past slippages on subsidy, spectrum and disinvestment targets. The real success of this policy document would be in meeting the rather onerous task of balancing the socio-economic priorities in the face of a sharp growth slowdown, yet striving to stay on the path of fiscal consolidation.