Interim Budget: Another fiscal deficit surprise from FM

Finance Minister Chidambaram today presented India's interim budget for 2014/15, amidst what can only be termed a cacophony of noise in the Lower House of Parliament.  With the general election having to be held before the end of May this calendar year, this was not a 'normal' budget, including changes to direct taxes and/or grand policy announcements, but largely a chance to tell listening voters what the government had achieved during its near 10 years in office.  There were, however, several points of interest:

4.6 percent of GDP fiscal deficit in 2013/14: 

This is below the government's original forecast of 4.8 percent of GDP as Chidambaram again confounded those who expected the deficit to overshoot his "red line", while pleasing the rating agencies.  As in 2012/13, when the deficit was 4.9 percent of GDP, tight control of public spending is key as revenues are set to undershoot official projections again.  This is turn will keep a lid on GDP growth which is, nevertheless, still expected to average 4.9 percent in 2013/14.  As per the January edition of "Focus Asia" we forecast 5.0 percent GDP growth in the current fiscal year and a 4.8 percent of GDP budget shortfall.

Current account deficit at USD 45 billion:

This is a little higher than our own USD 40 billion (2.2 percent of GDP) projection, the risks to which are for an even smaller shortfall given the on-going restrictions on gold imports.  The finance minister made no reference to these restrictions being lifted or duties cut in his budget speech as some had anticipated. 

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Robert Prior-Wandesforde

Director- Asian economics|Credit Suisse

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RBI mustn't just focus on inflation: 

In a clear swipe at Governor Rajan's obvious desire for the central bank to move to an explicit inflation targeting regime, the finance minister argued "the RBI must strike a balance between growth and inflation when formulating monetary policy".  Rajan will of course counter with the argument that low inflation is a necessary condition for stronger growth and we expect him to continue with the new monetary policy regime.  

Excise duty reductions: 

As had been widely speculated, Chidambaram announced excise duty cuts on some capital goods and non-durable items (specifically those for export purposes) from 12 percent to 10 percent.  There were also reductions for motor vehicles.  All duty cuts will last until the end of June 2014, by which time a full-budget from the new government should have been delivered. 

GST and direct tax code: 

The finance minister expressed his regret that neither measure had yet passed into law, blaming the opposition for the delay.  Chidambaram did nothing more than to say he "hoped" they will be delivered in 2014/15, but clearly this is far from certain.