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Interim Budget 2014: Economy headache for next government

Chidambaram projects massive 18% rise in tax revenue, says 2013-14 fiscal deficit contained at 4.6% against a target of 4.8%.

P. Chidambaram, center, shows a briefcase containing interim budget for the fiscal year 2014-15, with state ministers of finance Namo Narain Meena, left, and J.D. Seelam. (PTI photo) P. Chidambaram, center, shows a briefcase containing interim budget for the fiscal year 2014-15, with state ministers of finance Namo Narain Meena, left, and J.D. Seelam. (PTI photo)

In what could be seen as a politically sensitive move, the last budget of the UPA-II government has made it essential for the next government to raise taxes sharply to finance capital expenditure to boost growth.

Presenting the budget in the Lok Sabha Monday, Finance Minister P Chidambaram projected a massive 18 per cent rise in tax revenues for 2014-15, which is far above the projected growth-plus-inflation projections for the economy.

The difference between the two estimates works out to Rs 81,225 crore for the year or about 5 per cent of the estimates for government receipts in FY15.

At the same time, he has kept expenditure projections limited to just 11 per cent by under-providing for subsidies and carrying out a massive re-organisation of investment or plan expenditure, a task which should have been left for after the general elections.

It is this headroom which he has used to claim a reduction in the overhang of the fiscal deficit for FY15.

In the process, Chidambaram has also kept no fiscal room for the 14th Finance Commission award, due in October. He has budgeted for a 4.1 per cent target for fiscal deficit in FY15 despite easing up on fiscal consolidation by giving tax sops to the automobile, mobile handsets and other consumer durables sectors which will run through until June 30. 

Automobile companies including Tata Motors, Maruti Suzuki and the Mahindras, however, took the cue and announced they would cut prices.

Asked later if the sops were aimed to woo voters, Chidambaram said: “My intention was not to please anyone. I wanted to talk to the people directly that we are going through a turbulent phase in the economy.”

The changes carried out by the minister in the plan budget means a number of social sector ministries at the centre including HRD, health and rural development could become marginal as most of their budgets have been transferred to the states.

As part of the reworking of the plan or investment expenditure, the finance minister has cut that spending by Rs 70,000 crore in FY14, which has allowed him to project a rise of 19 per cent in plan spend during FY15. However, if the projection is compared to the sum mentioned in the budget estimates of FY14, the number actually declines by Rs 987 crore.

A HSBC note said the finance minister had made his numbers work by “pushing back expenditures and moving forward tax and dividend collections. It, therefore, implies that the targeted fiscal consolidation will be more difficult to come by next fiscal year”.

Giving more powers to the states could help the UPA government gain support from those which have been asking for more freedom to spend on their pet programmes.

In last year’s budget, Chidambaram had cut back plan expenditure by Rs 80,000 crore. Taking this year’s cuts into account, the UPA-II government has whittled down investment expenditure by close to Rs 1.5 lakh crore in two years.

The lack of fresh investment ideas was slammed by analysts. “There seemed to be a sense of déjà vu in the key tasks stated by the minister in his budget speech. There did not appear to be too much progress on key aspects stated in earlier years such as infrastructure debt funds, regulatory authority for the road sector etc,” said Vishwas Udgirkar, senior director, Deloitte India.

However, to his credit the minister did not splurge on pre-election sops, barring excise set-offs, an increase in agriculture credit target for banks by 14 per cent and putting a moratorium for all interest payments on student loans taken until the end of December 2013.

BJP leader Arun Jaitley was not impressed though. “It’s hardly a budget. It was intended to be a vote-on-account for four months. He started by making a farewell speech, but he ended up making an election speech,” Jaitley said.

For FY14, the minister has achieved a fiscal deficit of 4.6 per cent of GDP by cutting capital expenditure by a massive 17 per cent. This was necessary to counter balance subsidies that have risen by over 11 per cent compared to budget estimates. Here too, the minister has assumed the subsidy bill will not change by even Rs 1,000 crore in the next fiscal despite the National Food Security Act, for which an additional Rs 23,000 crore has been earmarked.

“All this is the result of hard work. I may add, among other mentors, my mother and Harvard taught me the value of hard work,” Chidambaram said.

Other than cutting investments, Chidambaram has made his math work in spite of flat tax receipts through the cushion of non-tax revenues from telecom auctions and short term borrowings which have breached the budget estimate by almost Rs 3,000 crore this fiscal. This will be almost Rs 12,000 crore more in FY15.

But despite these steps, to keep the fiscal deficit in FY15 look plausible, the finance minister will end up borrowing 8 per cent more than the revised estimate for FY 14.

The bond markets were still not impressed that this will be enough and the yields on government paper rose which means they expect the government to borrow even more after the general elections.

Key highlights

CHEAPER
CARS, SUVs, motorbikes, commercial vehicles
TV, fridge, computer, vacuum cleaner, camera
CHARGES for cord blood banks
EXPENSIVE
MOBILE handsets costing less than Rs 2,000

EDUCATION LOANS: Interest component waived on loans taken after April 1, 2009. Cost: Rs 2,600 crore; benefit: to 9 lakh families.
EX-SERVICEMEN: Long-standing demand for ‘one-rank, one-pension’ accepted. Allocated: Rs 500 crore; benefit: 30 lakh retired personnel.

CHIDAMBARAM IN BUDGET SPEECH:
‘My mother and Harvard taught me the value of hard work.’

MODI REPLIED ON TWITTER:

*FM eats up plan exp, rolls over Rs 35,000 cr subsidies to next yr to contain fiscal deficit even as non-plan exp overshoots! Real hard work!
* I welcome the decision on ‘One Rank, One Pension’ for our servicemen. Belated wisdom finally dawns on our ‘hard working’ UPA ministers.
* ‘Hard working’ Finance Minister also joins other illustrious UPA ministers who are seeking refuge in history to judge their ‘performance.’
* It is upto the people to decide whether the Economist PM & FM have been ‘hard working’ or ‘hardly working’ in their tenure.

EARLIER
MODI IN CHENNAI ON FEB 8:
‘Going to Harvard means nothing. What matters is hard work… A man who has just studied in an ordinary school, sold tea and has not even seen the doors of Harvard has shown what it takes to handle economy.’
CHIDAMBARAM TO BBC:
‘What he (Modi) knows about economics can be written on the back of a postage stamp.’

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