The new central government will have very little time to come up with the full-year budget for FY15. Its options to put together a growth-stimulating fiscal strategy will be severely constrained by the fiscal imbalances that it will inherit.
The interim budget had overstated tax revenues and nominal GDP growth, understated expenditures in order to ostensibly reach a fiscal deficit target in the revised estimates for FY14, and set out a tougher target for FY15. The actual tax revenues are turning out to be lower because neither the growth nor the tax buoyancy assumptions are likely to be met. The new government will inherit considerable postponed expenditures as also new expenditure commitments that have not been provided for. Subsidies postponed to FY15 from the previous, committed expenditure on account of DA hike for central government employees and committed but unpaid compensation for CST to the state governments will constitute an immediate expenditure headache for the new government.
Furthermore, both direct and indirect tax collections are likely to be below the revised estimates of the 2013-14 interim budget. Real growth could turn out to be just about 4.6% which, combined with an inflation rate of about 6% as measured through the implicit price deflator, may give at best a nominal growth of 11%, rather than what was assumed in the interim for FY15 at 13.4%. The tax buoyancy assumed for FY15 was 1.4. It is turning out to be less than 1.
The growth prospects for FY15 may be further beset by poorer agricultural growth with forecasts of an impending EL Nino. Neither industry nor services are showing any signs of revival. WPI and CPI inflation have shown signs of increasing again in March 2014, stalling any comfort from the monetary side.
From its FY08 peak, the savings rate had fallen nearly 7 percentage points by FY13. This trend has continued in FY14. All three sectors—household, private corporate, and public sector—are responsible for some of the fall in their saving rates, but the biggest fall, amounting to nearly 4 percentage points, comes from the public sector. This is directly linked to the tardy progress in reducing central government revenue deficit, which was a little less than 4% in FY13. It is estimated to be 3.3% in the interim budget RE for FY14 but would turn out to be more when the relevant actuals become available. This was the result of a conscious policy of excessively