Revenue optimism implies forced austerity again: Nomura

The government presented the interim budget (or Vote on Account today). A Vote on Account is a special constitutional provision by which the government gets parliament to vote to secure funds for essential expenditure for part of the next financial year. The final budget will be presented sometime in June/July when the next government is in place (post elections).  Key takeaways:

Fiscal consolidation and market borrowing:

The government set the revised estimate for FY14 (year ending March 2014) fiscal deficit at 4.6% of GDP, better than the budget estimate of 4.8%. Despite substantial slippage on the revenue front, the government cut its spending by INR750bn (relative to the budget target) in order to lower the fiscal deficit. In FY15, the government has set a fiscal deficit target of 4.1% of GDP, marginally better than expected (4.2%). Net market borrowing at INR4.57 trn is expected to finance 87% of the fiscal deficit, while gross market borrowings are likely at INR5.97trn in FY15, better than market expectations (INR6.1-6.4trn).

Growth expected to rebound

The government expects nominal GDP growth to grow 13.4% y-o-y in FY15 versus 11.9% in FY14.

Related stories

Sonal Varma

MD & Chief India Economist|Nomura Financial Advisory & Securities (India)

• 
  Cyclical recovery underway; see FY19 GDP between 7.2-7.3%: Nomura
• 
  Do not expect any rate hike in 2018 by RBI: Nomura
• 
  Expect March inflation around 4.5%; bond yields at 6.75-6.8% by Jan: Nomura

Indirect tax cut on select sectors: Excise duty was cut from 12% to 10% on capital goods and consumer durables sectors in order to revive demand. For auto sectors, the lower duty will be applicable only till June 2014, which may prepone demand. Also, select services were exempted from services tax.

Optimistic on revenues: The government expects gross tax revenues to rise 19.4% y-o-y in FY15 versus a fairly subdued 11.8% in FY14.  Tax buoyancy is expected to rise led by higher growth in services and income taxes. Asset sales will continue to partly fund the deficit and INR569bn has been budgeted from asset sales versus INR258bn in FY14.

Expenditure growth contained: After sharply squeezing spending in FY14, expenditure is projected to rise 10.9% y-o-y in FY15 versus 12.8% in FY14, below nominal GDP growth and also lower than the average of 12.3% y-o-y in the last five years. Most of this moderation is expected on account of a slower pickup in non-planned expenditure. Subsidies are projected at 2.0% of GDP in FY15 versus 2.3% in FY14.

The government has managed to better the stated fiscal consolidation target in FY14 partly by pruning expenditure and partly by postponing payments. Looking ahead, optimistic projections on revenue are the key to continued consolidation in FY15. The question is whether the 4.1% fiscal deficit number is credible. We believe that the government’s revenue projections – both on asset sales and on tax revenues – are very optimistic. We expect GDP growth at 5% y-o-y in FY15 due to the ongoing fiscal and monetary policy tightening. In the last decade, India’s tax buoyancy has stood at 1.1, suggesting that the assumed tax buoyancy(of 1.4) is optimistic. Additionally, subsidies worth 1% of GDP will get rolled over from FY14 into FY15, suggesting that the budgeted subsidy amount will be insufficient to meet the entire demand. Hence, the government will need to continue to prune its spending in the next one year as well, if it has to meet the budgeted fiscal deficit target. Therefore, the trend of forced fiscal austerity will continue next year as well. The true and final picture on the fiscal front will be known only in July post elections.