Five months after it presented Budget FY15 in Parliament, the Narendra Modi government has admitted the targets it set were indeed challenging and virtually sought a lenient appraisal of this year’s fiscal performance taking into account the “legacy costs”.
In the mid-term economic analysis tabled in Parliament on Friday, the finance ministry, in a seemingly offbeat fashion, advocated a boost to public investment to help crowd in the private investments that could remain constrained for another spell given corporate India’s stressed balance sheets and high debt levels.
In a rare assessment of central bank governors by a serving chief economic advisor (CEA), Arvind Subramanian said the Indian economy “had been drifting without a credible monetary anchor” for six years but, since late 2013, the situation has been “laudably reversed”. Although Subramanian didn’t take any names, it was hard to miss that D Subbarao was at the helm of the Reserve Bank of India (RBI) from September 2009 to September 2013 and incumbent Raghuram Rajan assumed office thereafter.
The review also assumes the RBI would hold on to benchmark lending rates until the last quarter of this fiscal, despite speculations that the government has impressed upon the central bank to ease the monetary stance to spur growth.
The mid-year review detected a huge tax revenue over-estimate of R1.05 lakh crore or 0.84% of the likely FY15 GDP. This, it said, owed mainly to an undue “revenue buoyancy optimism” — FY15 assumed the buoyancy at 1.5 against actual 2008-2014 figure of 0.8. Considerable slippage from nominal GDP expansion projected, due to tepid real growth and “unanticipated” inflation moderation, also kept revenue buoyancy subdued (see chart).
Such a gap is difficult to bridge, even assuming finance minister Arun Jaitley toes the line of his predecessor P Chidambaram and effects drastic expenditure cuts in the final months of the fiscal. The fiscal deficit target of 4.1% of GDP looks un-get-at-able unless revenue possibilities outside those envisaged in the Budget like aggressive sale of the government’s SUUTI shares and offloading of more wheat and rice in the open market are explored.
The scope for compressing expenditure, especially the productive capital spending that is more amenable to Jaitley’s discretion, is also limited.
Especially since Subramanian, in the analysis, advocated a counter-structural — rather than counter-cyclical — fiscal policy, reliant on increased public investment. According to him, given that private investments could continue to be constrained, public investment could crowd them in, complement them.
The revenue over-estimate seen by Subramanian is a whopping 8.8% of the net tax revenue projected in the Budget for FY15. Detailing how the revenue buoyancy assumptions were exaggerated, with the miscalculations graver in the case of indirect taxes, the report said: “In addition, the Budget was strained by a legacy effect, reflecting the excess carry-over of subsidies from the past. This amount is difficult to quantify precisely but could range from 0.3% to as much as 1% of GDP.” The Centre’s receipts from excise, customs and service tax grew by a little more than 5% in the April-September period of the current fiscal against a 20% annual growth target.
Adding to the fiscal woes, disinvestment plans are set to upset the budget maths, as against the targeted mop-up of R64,925 crore this fiscal (including R15,000 crore from sale of the government’s residual stakes in Hindustan Zinc and Balco, and a 5% stake in Axis Bank held through SUUTI), only a 5% stake in SAIL has so far been offloaded, which fetched just over R1,700 crore thanks to a rescue act by LIC. There are uncertainties over the Coal India divestment, from which R22,500 crore is expected to be garnered.
With residual stake sales in HZL and Balco are largely not expected this fiscal, the finance minister has to show some courage to tackle the fiscal challenges. Jaitley would do well to consider offloading ITC and L&T shares held by SUUTI and selling 15 million tonnes of grains from official reserves, as targeted, which could together provide R69,000 crore to the government, apart from some compression in spending.
Capital expenditure for FY15 was budgeted at R2.27 lakh crore, up 21% over the previous year; however, during the first half, it showed a growth of 4.3% over the corresponding year-ago period, to be 44% of the budget estimate, only marginally higher than the five-year moving average of a trifle over 40%. While Chidambaram controlled capital expenditure to be just over four-fifths of the budgeted figure for FY14, Jaitley won’t have much flexibility, given the need to use public investment to boost growth. The fiscal deficit reached around 90% of the full-year target between April and October.
Growth
The review sought to temper expectations about economic growth, stating the GDP is expected to expand 5.5% in the current fiscal, the same as in the first two quarters of FY15 and compared with 4.7% last fiscal. This means despite a favourable base (the economy grew just 4.6% in the second half of FY14), the India growth story is unlikely to rebound meaningfully this fiscal, although it will still be the highest since 2011-12. The economic survey tabled in the House in July had forecast growth in the range of 5.4-5.9% for the current fiscal.
“Although it is still too early to detect signs of robust recovery, emerging trends indicate that the growth deceleration has bottomed out, manifested in the relative improvement in growth in the latest two quarters.”
The CEA said: “Investment is yet to pick up significantly. But on the upside, inflation has come down dramatically, the monsoons failed to extract as much of a toll on growth as expected, and India received a large supply side shock in the form of reduced commodity prices that amounted to about 1.5% of the GDP.” With a slump in commodity prices, especially of oil, the review pegs the current account deficit at around 2% of GDP for FY15, lower than the 2.1% predicted by the economic survey. In the first half, the CAD narrowed to 1.9% of GDP, compared with 3.1% a year earlier, although the deficit widened in the second quarter to 2.1%, against 1.7% in the June quarter, due to a rebound in gold imports.
Inflation
Although retail inflation has dropped to a fresh low of 4.38%, aided by a favourable bases and low commodity prices globally, the possibility an uptick in food inflation persists once the base advantage wears off after December. “Going forward, disinflationary impulses, especially from agriculture, external and domestic, are strong, reflected for example in rapidly declining rural wage growth. The declining trend of inflation is likely to continue, with strong potential to surprise on the upside,” the analysis said.
As far as the growth estimate for FY15 is concerned, the July survey authors were wary. They said FY15 GDP could remain more or less in the lower side of the predicted range of 5.4-5.9% in FY15. As per that survey, “a reversion to a growth rate of 7-8% can occur beyond the ongoing and the next fiscal”, while it also lamented the “resource pre-emption”by the government that constrains external financing for the private sector.
