Given the size of the Indian economy and the complexity of the administrative set-up, it is generally difficult to engineer dramatic changes in expenditure and in revenues. Nevertheless, the buzzword in the run-up to the Budget was ?fiscal consolidation?. With a slowing economy limiting options to raise revenues, many had expected the government to cut expenditure quite dramatically. Even to non-believers of Keynesian economics, it was obvious that a government spending squeeze would exacerbate economic slowdown. Fiscal consolidation is never a 3-month process: it usually goes through a vicious cycle of slowing growth and multiple expenditure cuts before the economy bottoms out. One year before general elections, this would have been political hara-kiri.
Not surprisingly, the government instead chose to accelerate spending: the FY14 Budget assumes a 16% increase in total expenditure, higher than the growth in FY12 and FY13 of 9% and 10%, respectively. Some of this increase, in our view, is expenditure pushed out from FY13 to manage cashflows, especially in defence, rural development and the finance ministry?s own expenditures. At the same time, on some large heads of expenditure, the numbers appear too conservative. For example, we estimate only R150 billion of the R650 billion estimated for oil subsidy is for FY14, the rest is the carry-over from FY13: the slippage here could be significant. Similarly, despite a substantial overspend on food subsidy in FY13, and continuously rising MSPs, there is a very minor increase in the allocation for food subsidy.
Once you make just these two adjustments, government expenditure could rise by as much as 21% yoy, highest since FY09, right in time for the elections. Whatever the underlying intentions may be, while this doesn?t help the cause of inflation control and reduces the chances of rate cuts, the Budget should support economic growth in the coming year. Incremental spending is likely to be around 1-1.5% of GDP, supporting growth albeit mildly. The increase in taxes for the surprisingly few ultra-rich taxpayers will unlikely cause a consumption slowdown: it will only take away from their savings (only 42,800 people in India have taxable income of R10 million or higher: one need only look at the number of luxury real-estate transactions and high-end cars to understand how understated this figure is!). Similarly, higher duties on imported luxury automobiles are likely to incentivise indigenisation rather than slow down consumption.
Who benefits? The largest quantum of increase after interest payments and defence is for rural development. The slowdown in road-building under the rural roads programme is now behind us, and the finance minister has generously increased the allocation for MGNREGA as well. With state government Budgets also showing preparedness for the upcoming general elections, consumption in that part of the economy is likely to stay supported, if not pick up further. However, this consumption is likely to worsen and not improve the CAD, and further increase India?s dependence on foreign capital flows.