Next year likely to see 6.5% growth

The Union Budget for 2013-14 announced by the finance minister can be ascribed as being balanced, refraining from any big-bang announcements and instead opting for multiple pragmatic initiatives with a focus on socio-economic development and resuscitating growth, thereby ensuring fiscal prudence. Despite the challenging macroeconomic backdrop, the FM succeeded in consolidating the fiscal position in 2012-13 by announcing a lower fiscal deficit target of 5.2% of GDP, and has signalled further improvement to 4.8% of GDP in 2013-14.

The expected fiscal consolidation in 2013-14 is characterised by expenditure switching policies along with an increase in the tax-to-gross domestic product ratio.

On the expenditure side, subsidy expenditure has been compressed by 60 basis points to 2% of GDP in 2013-14. The recent reform measures on administered fuel over the last five months have helped the government to budget lower yet credible subsidy expenditure.

On the revenue front, the FM has refrained from making any major changes in tax rates, while providing some relief and savings incentives to the lower-income category. The government expects tax-to-GDP ratio to improve by 50 bps to 10.9% in 2013-14. I believe the expected pick-up in economic growth to be around 6.5% next year which along with the widening of the tax net will help in achieving higher aggregate tax revenue growth.

In my opinion, the expected increase in government?s capital spending will promote ?crowding in? of private investments. In fact, the last time capital spending rose by a similar amount (39% in 2010-11), the overall investment ratio in the economy jumped by 70 bps to 37% of GDP, and overall the GDP growth rose by 70 bps to 9.3%.

The Budget retained its focus on MSMEs and the agriculture sector to set the pace for sustenance of growth. Given the sheer importance of the two sectors in the economy, the unwavering focus on the sectors is a major positive. Most importantly, the government has allowed MSME units to continue to enjoy benefits or preferences for three years even after they grow out of the category. In addition, to provide greater credit to MSMEs, the Budget doubled the refinancing capability of SIDBI to R10,000 crore and provided R500 crore to set up a credit guarantee fund. On the agriculture front, the Budget announced a R1,000-crore allocation to a new Green Revolution in eastern India and a R500-crore allocation for crop diversification in order to support a persistent rise in agricultural output. These, coupled with a focus on improving healthcare and skills development, would create the necessary employment across the country.

The relaxation in limit for Rajiv Gandhi Equity Savings Scheme by R2 lakh will attract more retail investors to the capital markets while the additional interest deduction of R1 lakh for home loans up to R25 lakh will not only promote home ownership but also have a strong positive multiplier impact on the economy through inter-industry multiplier linkages.

More importantly, the future introduction of inflation-indexed bonds is a practical solution for protecting the interest of savers from the impact of high inflation. This has the potential to become a viable alternative to physical savings, which has often played the role of a hedge against inflation in India.

The Budget has pragmatically addressed the concerns on the current mild growth, lacklustre investor climate and unsustainable current account deficit within the ambit of credible fiscal consolidation. More importantly, it has managed to lay the framework for both DTC and GST.

I believe this will provide the beginning of a virtuous cycle for the Indian economy for a target gross domestic product growth of 6.5% in 2013-2014.