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Finance minister Arun Jaitley's maiden Budget is marked by some ambitious steps to achieve a strict adherence to fiscal prudence despite a higher capital spending and large income tax breaks. While the fiscal deficit has been budgeted at 4.1% of GDP for 2014-15, same as his predecessor P Chidambaram's projection in the interim budget, and lower than 4.5% recorded in 2013-14.
Jaitley aims to bring down the deficit further to 3.6% next fiscal and 3% in 2016-17 to achieve the FRBM goal in three years, which though looks an uphill task given the state of the economy, could still be attained with GST roll out.
With fiscal discipline, it is not surprising that the net borrowing of the government will increase only slightly to R4.61 lakh crore during 2014-15 from R4.54 lakh crore last year even though gross borrowing will hit all time high of R6 lakh crore due to higher redemptions of bonds of R1.39 lakh crore that matures this fiscal. However, when compared to GDP, the gross borrowing will still be lower at 4.7% this year compared to almost 5% last year. A heavy borrowing not just creates a problem for RBI in liquidity management but also crowds out the private sector. Keeping borrowing within a range is crucial for reviving private investment this year especially since the GDP growth has been tottering at less than 5% in the past two years.
Not to forget the burgeoning interest burden of the government that will climb up by 12.4% to R4.27 lakh crore in 2014-15 due to the ever-increasing borrowing. The interest burden is a drag on the government balance sheet as it accounts for 23.8% of total expenditure as compared to just less than a fifth even three years ago. As a percentage of GDP, interest payment will increase to 3.3% this fiscal from 3% in 2010-11. While RBI's tight monetary policy resulting in a high interest rate regime is to be blamed for the rise in interest payments in recent years, the government on its part cannot shrug off the responsibility of adhering to strict fiscal prudence to improve debt management and hence lower its interest outgo in the coming years.
Jaitley assumed the nominal GDP growth at market prices of 13.4% for 2014-15 (same as in the interim budget), which he hopes would allow gross tax revenue of R13.65 lakh crore during 2014-15, up 17.7% from the previous year. This of course is a tall order. The higher tax growth is assumed despite the big tax breaks on personal income taxes — the direct tax proposals will result in net revenue loss of R22,200 crore to be partially compensated by R7,525 crore net gain from the indirect tax proposals.
Among the taxes, service has been driving growth in the economy but its share in the exchequer is still low. Service tax collection is budgeted at R2.16 lakh crore for 2014-15, which is 30% higher than the revised estimate of last year, but it is just 16% of the overall tax receipts whereas the sector contributes close to 60% to the national GDP. Also, the assumption that corporate tax will grow by about 15% is a bit unrealistic given that two years of economic slowdown has roiled corporate balance sheets and many are jostling with high debt.
On top of this, the government also hopes to mop up R63,425 crore through disinvestment in PSUs such as ONGC and Coal India, which will be 145% of R25,841 crore mopped up last year.
However, the total expenditure as percentage of GDP will shrink slightly to 13.9% this fiscal compared with 14% last year. Much of the expenditure growth will be driven by growth-boosting capital spending budgeted at R2.27 lakh crore (1.8% of GDP) for 2014-15, which will be 18.8% higher than R1.9 lakh crore (1.7% of GDP) last fiscal.
The optimism on the restraining spending also comes from a leash on subsidies — the total subsidy bill is budgeted to rise to R2.6 lakh crore or 2% of GDP compared to R2.56 lakh crore (2.25% of GDP) last year. This is being possible as petroleum subsidy is projected to shrink to R63,427 crore this fiscal from R85,480 crore last year as diesel prices are being gradually raised to bring them closer to market rates. Food subsidy is likely to rise significantly to R1.15 lakh crore as Food Security Act has to be implemented while fertiliser subsidies are to rise slightly to R72,970 crore this year compared with R67,971 last year.