To the extent finance minister Arun Jaitley’s maiden budget got a good response, it had to do with the big increases in Plan expenditure, slated to rise over a fifth after an 14.4% compression in FY14 in relation to what was budgeted. Between rural roads and NHAI, the roads sector was to get R52,189 crore, or double what it got in FY14; MSMEs were to get a R10,000 crore fund to catalyse their growth … None of this, it is now clear, have any hope of getting off the ground. As compared to the planned 21% hike in Plan expenditure—18.8% in the case of capital expenditure—there was a contraction of 0.4% in Plan expenditure in April-October 2014. With the April-October fiscal deficit already reaching 90% of the budget target, some harsher cuts lie ahead; indeed, had it not been for the luck with global oil prices, Jaitley’s budget would have been in shreds several months ago.
One of the first things Jaitley needs to do is to get the chief economic advisor to relook the tax model the ministry uses. In FY14, despite the jugglery in booking some taxes in advance and delaying tax refunds, gross taxes were nearly R80,000 crore below the budget estimate. In FY15, the numbers could also be in that ballpark, perhaps a bit lower if the taxman manages to reach part of the target of reducing the number of pending tax disputes by around 60%—the big transfer pricing cases like Vodafone and Shell, the taxman has to keep in mind, are not going to materialise given the Bombay High Court judgments. How did the taxman project a 17.7% hike in tax collections when nominal GDP was projected to rise just 13.4% in the year? Hardly surprising then, that direct taxes grew just 5.5% in April-October versus the 15.8% estimated in the Budget, and indirect taxes just 5.9% versus the budget’s 20.3%.
Despite this being obvious on even the day the Budget was presented, if FE was optimistic that fiscal targets could be achieved, it was
because of the under-budgeting in revenues. While the finance minister, we said, needed to be aggressive in getting 3G spectrum freed up—this is almost a done deal—the big cushion was in the SUUTI shares the government has. While the Budget is looking at sales of just R6,500 crore from the sale of SUUTI’s Axis Bank shares, there is no reason why the ITC and L&T shares worth R48,970 crore held by SUUTI should not be sold—if the fear is BAT will get control of ITC, this can happen even today if BAT chooses to mop up shares in the market. The other thing Jaitley or his boss need to do is sit down with the agriculture ministry and aggressively sell the extra foodstocks FCI has—just selling the 15 million tonne target fixed some months ago will fetch Jaitley another R22,000-23,000 crore. For FY16, in order to be credible, Jaitley and Modi will have to assume much more realistic tax growth and, more important, they will have to ensure direct benefits transfers are in place and the restructuring of FCI—including ending open-ended procurement—is complete. In July, investors were willing to give the duo the benefit of doubt as there wasn’t enough time for the government to get all its ducks in a row.