Budget 2013-14: Things economists will watch for in Chidambaram's speech

Welcome to Indianomics on CNBC-TV18. The countdown to Budget Day has begun and in this week's episode, we offer you a layman's guide to the Budget and what you should watch out for to judge what the Budget has in store for you and the economy.

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Sonal Varma, India economist, Nomura will play teacher and take us through the Budget and point out what to watch out for. Joining her is Taimur Baig, economist, Deutsche Bank who will offer comments and perspectives on expectations from this year's Budget. Below is an edited transcript of the show on CNBC-TV18 Q: What is the most important estimate to watch out for in the Budget? Varma: The most important estimate obviously is the fiscal deficit estimate that the government projects. That is the number that economists will look at. Q: The fiscal deficit estimate was projected at 5.1 percent for the current year. What are you going with for the current year? Do you think the 5.3-percent is a giveaway as already announced by the finance minister? Varma: The projection of 5.3 percent is what we think the FY13 revised estimates are going to be. What will be the most interesting bit is the FY14 projection for Budget deficit this year. Q: Where do you expect the Budget deficit to be? Varma: We expect it to be 4.6 percent of GDP, but in October when the Kelkar Committee had come out with its recommendations, the finance minister had indicated that the government would probably target 4.8 percent of GDP. If they target something less than 4.8 percent, which is what we expect, then that will actually be a positive surprise. Q: There are various kinds of deficit estimates that keep cropping up in a Budget such as primary deficit. What is the difference between fiscal and primary deficit? Varma: Fiscal deficit is purely the gap between government’s revenues and expenditure. Primary deficit is essentially fiscal deficit less interest payments- the interest that is paid on past debt. So, primary deficit looks at the current fiscal position of the government. excluding the past burden of interest payments. Q: Primary deficit is 1.9 percent of the GDP. What is the GDP? What is the government’s estimate? Varma: Somewhere in the footnotes, the government will mention its assumption of GDP growth. Our expectation is that the government would assume it around 6.5 percent for real GDP growth and around 6-6.5 percent for inflation. So I think the broad assumption on nominal GDP growth therefore should be around 12-12.5 percent. Q: Any other big estimate that we need to watch out for- the government’s borrowing perhaps or deficit? Varma: The estimate of government’s borrowing is important for the market. Essentially, the market will be looking at the government’s gross borrowing and the net borrowing data. The government recently cancelled a Rs 12,000-crore auction and therefore its net borrowing last year was about Rs 4,70,000 crore and gross borrowing was about Rs 5,60,000 crore. So the question is at what level would borrowings be relative to last year’s figure. Q: What will be the first assumption of the Budget? Would it be on how much the government is spending on subsidies it? Varma: This is a projection. Whether the government shows 4.6 or 4.8 percent, this is based on assumptions that government makes. The second part to try to analyse if these assumptions are credible and there are various parameters to look at. The key parameter therefore would be the underlying assumption on subsidies. Q: The fertiliser subsidy was put at nearly Rs 61,000 crore. Do you expect that will be overshot and how much do you expect in the coming year? Varma: The fertiliser subsidy limit will definitely be overshot. I think fiscal 2013 will end up with around Rs 70,000-75,000 crore of total fertilizer subsidy. For FY14, I think the underlying assumption from the government is that it will budget only about Rs 50,000 crore as subsidy which is lesser than last year. Q: So that might be something that will be a negative for the government, because the government could overshoot that limit especially if the rupee depreciated? Varma: It also means that there is an underlying assumption perhaps that the government plans to hike urea prices during the course of the year. Q: Let us come to the more important part, the food subsidy. I think the food subsidy bill was placed at Rs 75,000 crore in the current year. What do you think will be the next year’s deficit because of the food security bill? Varma: That is right. In first phase of the food security bill, which is going to start from next year, there will another Rs 20,000-25,000 crore of additional burden. Estimates on food subsidy burden for next year therefore could be Rs 90,000 - Rs 110,000 crore. Food is going to be the biggest portion of the subsidy burden in FY14. Q: On fuel subsidy, the government gives away close to Rs 43,000 crore with about Rs 1.5 lakh crore as under-recovery on fuel. Though a part of it, around Rs 50,000 crore will be borne by the companies, but what will this Rs 43000-crore subsidy be ultimately? Varma: Well, for FY13 the subsidy will definitely be double that number. However, in India the Budget is on a cash accounting basis. Therefore if there is a deferment of payment that does not get reflected in this year’s Budget, and I think something similar is going to happen in FY13 where part of the payment for FY13 under recoveries will actually get pushed out to next year.
So this Rs 43-46000 crore that the government has budgeted on oil will probably be closer to Rs 75,000-80,000 crore for this year. Next year depending on how much oil companies are able to pass on the diesel price hike and so many assumptions on oil, currency, etc will finally determine where oil subsidy will finally end up next year.
_PAGEBREAK_ Q: The next assumption of the Budget is divestment. Do you expect it get better next year? Varma: The divestment figure for FY13 was about Rs 30, 000 crore. With fiscal consolidation being the need of the hour, government is using the route of selling assets to achieve its objective. Our expectation is that in the Budget the government will show about Rs 40,000 crore as the disinvestment target for FY14. Q: The government made a lot of money on spectrum sales. So I think that will be one of the assumptions.  The figure of Rs 52,000 crore relating to spectrum sales will seem confusing because you have to deduct around Rs 14-15000 crore which is the usual revenue that the government makes on revenue-sharing by the telecom companies. The balance for the current year is Rs 40,000 crore. Will they assume more next year? Varma: As compared to FY13 I think the assumption should not be higher because in FY13 the assumption was Rs 40,000 crore and the government has hardly done anything on that account. So our expectation is that the government will be a bit more conservative and we expect about Rs 20,000 crore to be budgeted under the telecom spectrum receipts. Q: We have looked at all the big expenses and the small revenue items. The big revenue item will really be tax. Do you expect government to meet its gross tax revenues of Rs 10.7 lakh crore in the current year? Varma: No. I think, given the economic slowdown, the slippage on tax revenue is going to be about Rs 40,000 crore which is why it is important to look at the assumption that the government makes on revenues. Q: So what will approximately be your assumption of an increase in FY14? Would it be 10 -15 percent? Varma: I think the government is going to assume certain buoyancy over-and-above depending on what the nominal growth assumption is. So, if the nominal GDP growth assumption is around 12-12.5 percent, then I would reckon that the tax revenue growth that the government will assume, will be around 13-14 percent. Q: What are your fiscal deficit and GDP assumptions? Sonal Varma was just telling us that she is expecting it to be 4.6 percent, but what are your assumptions on fiscal deficit, GDP and tax revenues? Baig: On the fiscal deficit side, as you correctly pointed out earlier, the consensus is at 4.8-4.9 percent of GDP which translates, in our estimation from a net borrowing point of view, something in the range of Rs 5,10,000 crore  which is not in great variance from the Rs 6,00, 000 gross borrowing that the authorities have alluded to, a couple of days ago.
Though that is unconfirmed, that's what the street is talking about. So once you take redemptions out of the equation, you end up with the Rs 5,10,000 crore  estimate. In terms of normal GDP growth rate, we expect about 6-6.5 percent real and about 6-6.5 percent inflation. That gives you a normal GDP growth rate of 12-12.5 percent. Q: Sonal, you have assumed that the fiscal deficit is going to be fairly tight at 4.6 percent. Subsidies, with food security and the monthly price-hike of 45 paise in diesel resulting in a hike of Rs 2.50 or Rs 3 annually, will not see a great reduction. Do you think the axe will fall on plan expenditure and if that happens, don’t you think that will be counterproductive and impact growth in FY14? Varma: I think growth will suffer in FY14. It will be very difficult for the government to cut non-plan expenditure which is about 70 percent of overall expenditure and typically consists of things like subsidies, salaries and interest payments. If one has to cut down deficit, the axe would have to be wielded on items like defence and plan expenditure.
The fiscal multiplier in India, based on some studies, is about 0.5 which means that if the government cuts down its spending by Rs 100, growth will fall by Rs 55. Q: Do you expect the axe to fall on plan expenditure and therefore cause a fall in growth? Baig: In Europe, for example, significant fiscal contraction has had a major negative multiplier impact on the overall dynamic for GDP. So this raises concerns regarding the authorities’ aggressive cut on plan spending.
My view is that the overall envelope has gotten so much bigger in recent years, as you remember both in 2011-2012 and 2012 -2013, there were very ambitious increases projected into the Budget. The fact that we are starting with the lower base does not necessarily mean that it is going to be negative for growth.
I think what matters is the quality of the spending. If the government can get the Delhi-Mumbai corridor going and a lot of plan spending associated with that, it could be a much bigger positive multiplier than the overall normal spending estimates would suggest. Q: What will make you give a eight or a nine out of ten to the finance minister? Baig: I am pretty sure that it will be a well-presented Budget. The finance minister is seen as a veteran at presenting budgets. I am sure he understands the importance of this particular Budget and the high expectation surrounding that. My understanding is that in his roadshows in the last couple of weeks around the world, he has done nothing but raised further expectations of a good quality Budget.
On the revenue side, we would like to see some tangible goals towards improving revenue administration in terms of tightening up base broadening measures as well as some sort of roadmap towards the implementation of Goods and Services Tax. On the non tax revenue side, one would like to see some realistic, but ambitious target as far as disinvestment is concerned.
On the expenditure side, the big issue is the persistence and sustainability of the fuel subsidy regime and to what extent that has been curtailed under the new formula of raising diesel prices on a gradual basis and having full cost recovery on petroleum.
Beyond that the composition and the quality of finance spending, to what extent the government holds other components of discretionary expenditure - all of that is important. So all in all, it will be the details not necessarily just the top-line number of below 5 percent of GDP deficit, but how one gets there and some sort of a medium-term roadmap- the goal for the next year and the year after that.
I think that's what would be expected and given credit for as far as the Budget is concerned. Varma: Credible estimates, credible assumptions. If the government is projecting lower subsidies, then a clear roadmap on how fertiliser prices and non-diesel petroleum prices will be hiked over the course of year. The more the fiscal consolidation is supported by revenue and ancillary measures, the more credible it will be.