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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