The finance minister had the unenviable task of balancing between populism and prudence, and at the same time addressing the different macro risks facing us. He has definitely delivered on his promise of fiscal consolidation, but probably has fallen short of reviving the growth outlook. Except for some tax concessions given to new investments worth more than R100 crore, there is a very little support for the infrastructure sector, reeling under severe stress.
While we were anticipating that the fiscal consolidation will come from expenditure curtailment rather than revenue increase, the Budget seems to have taken the opposite stance. Expenditure growth of 16.4% for FY14 is higher than the last 5 year’s average of 15.1%, and in the process the finance minister has been able to increase the allocation for almost all the ministries substantially. It is noteworthy that the capital expenditure growth has been budgeted at 36.6%, indicating a better composition of fiscal spending. However, a better message could have been sent on fiscal consolidation if expenditure growth was kept under check even in a pre-election year.
Obviously, the FM had to make some heroic assumptions on the revenue side to meet the high expenditure growth. Without investment growth, it will be difficult to meet the direct (18.2%) and indirect tax (20.1%) growth targets for FY14. In fact, with flat industrial growth, budgeting 17% growth in corporate tax collection is optimistic. The additional surcharge on large companies is going to garner some additional revenue, but it is likely to sour the sentiment of the industry.
Also, on the revenue side dependence on a few large one-off items seems worrisome. The finance minister has budgeted R44,000 crore as dividend payment from the RBI, R40,000 crore from telecom spectrum auction and R40,000 crore from divestment. We cannot rule out slippages on these areas.
The bond market reacted negatively to the higher-than-expected gross borrowing target of R6.29 lakh crore, but we think that because the government will end the year with a large cash surplus, there is a scope of drawing down that cash in FY14. To that extent, the borrowing numbers could be adjusted later.