Union Budget 2014: Only animal spirits can fix GDP, deficit-tinkering won't

Written by The Financial Express | New Delhi | Updated: Jul 10 2014, 15:45pm hrs
FM Arun JaitleyFinance Minister Arun Jaitley with MoS Nirmala Sitharaman while giving final touches to the Union Budget 2014-15 in New Delhi. (PTI)
If there is a lesson finance minister Arun Jaitley must draw from the lukewarm response to Tuesdays railway budget, it is that investors want a clear-cut message. Apart from the obvious confusion that the budgets numbers presentedthe ministers speech talked of an FY15 surplus of a mere Rs 602 crore while the explanatory memorandum had a figure of Rs 6,063 crorethe first part of the speech signalled fiscal prudence and new ways to attract funds, including FDI; the minister then threw cold water over this by announcing 58 new trains.

It didnt help that, as our lead column today points out, investors are not convinced PPP is going to work without some major overhauling; the Economic Survey appears to concur with the view on the limited capacity of PPP to deliver in its current form.

Given it is the sharp fall in government savings, and private corporate investments, that is at the heart of the current sub-5% growth cycle we are stuck in, it is this that the FM needs to address. As the Survey points out, getting animal spirits back is an important part of the exerciseso, Mr Jaitleys budget has to focus on keeping the Sensex happysince firms increase their investments when their GDP expectations are high; when the markets are high, this increases the gap between market value and replacement cost, to quote from the Survey, which fuels investment.

Also read:Arun Jaitley's Journey

Buoyant markets also help firms raise money and dispose off assets, both critical given India Incs fragile balance sheets. No amount of tinkering with capital expenditure numbersincreasing them by, say, Rs 20,000-30,000 croreis going to give an equal impetus to GDP growth which is also the only way to get the fiscal deficit back on track. Getting the markets to stay at their current levels means the FM needs to have an aggressive timeline for GSTa central GST simply isnt going to cut it. It means, though the government is disinclined towards it for fear of the CAG, the retrospective tax amendment has to go along with the tax demands raised on the basis of itif the law was bad, as everyone recognises, the taxes based on it are also bad and must go.

No one expects a sharp cut in subsidies later today, especially in a drought year, but the government has to be seen to be moving in the right direction. As FE has pointed out often enough, with people consuming less rice and wheat, even if it is better targeted like in Tamil Nadu and Chhattisgarh, there is no case for extending the PDS.

Cash transfers to the poor will cost around Rs 30,000 crore for the same amount of wheat/rice versus Rs 1.2-1.5 lakh crore if this is done through the current PDSno matter how good the PDS system is, it simply cannot compete with cash transfers; just ending FCIs open-ended procurement will save Rs 80,000 crore or more. Moving to Aadhaar will take time, but Jaitley can move markets if, as in the case of diesel, he announces a time-bound set of small cuts in LPG and kerosene subsidies subject to an overall cap. The other option the FM has is to tinker at the margin, cut subsidies a bit, raise capital expenditures a bit. It is a safe strategy, but it only goes downhill.