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Budget – 2013-14: Focus on Fiscal Consolidation

, March 12, 2013, 0 Comments

It was one of the most awaited budgets in recent times, expectations  were on both extremes  – that the Finance Minister will present a typical pre-election year populist budget while another set of people expected a realistic and fiscal discipline oriented annual financial statement. Thankfully, the announcements made in the Union Budget 2013-14 build on the various positive measures taken by the government since September last year. India does not have any room for profligacy at a time when growth is at its decade low, fiscal deficit is high and external account is in deep stress amidst a high level of wholesale and retail price inflation.

Moreover, the sovereign rating stands a one-in-three chance of downgrade to junk status. This budget has diminished the downgrade risk a bit by projecting a near-realistic estimate of fiscal deficit at 4.8 percent of gross domestic product (GDP) for FY14 while the current year’s deficit at 5.2 percent, a tad below the earlier estimate. In September, 2012, Government accepted the main recommendations of the Kelkar Committee on revised fiscal consolidation and it has indeed been trading on this path, though with significant expenditure compression in plan budget. Given India’s current macroeconomic backdrop, Union Budget 2013-14 has many positive measures in small doses which appear realistic to pursue.

Reviving Investment Demand

The slowdown in the capex cycle since the second quarter of 2010-11 has been very destabilizing for the economy. As a consequence, GDP growth during recent quarters remained below the trend. The cabinet committee on infrastructure (CCI) constituted under the chairmanship of the Prime Minister is expected to facilitate faster clearances for projects which have inter-ministerial issues like pending environmental and land approvals. In two meetings so far, CCI has taken decisions in respect of a number of gas, power and coal projects.

While providing for additional funding required for Delhi-Mumbai Industrial Corridor (DMIC), the Union Budget has also announced development of Chennai-Bengaluru & Benguluru-Mumbai industrial corridors. In the medium term, these projects have the potential to create economic gains for many cities. Infrastructure tax-free bonds worth Rs.500 billion will be issued by specifying institutions during 2013-14, providing a fillip to this sector. If the intent of the budget proposals is translated into action, the target of 3000 kilometers of roads in the first six months is an achievable target. That will give an impetus for road construction activity in the country. Proposal for setting up a regulator for road sector should be made a reality sooner.

Whither CAD?

India faces acute current account deficit (CAD) and the financing of it may be difficult if there is a fresh bout of risk-off in global markets. Country’s foreign exchange reserves are barely adequate to meet seven months of imports. The budget has not provided any answer to this issue except through curtailing fiscal deficit. The proposed inflation-indexed savings instruments may reduce a bit the import of gold. It is now for the upcoming Foreign Trade Policy to initiate policy measures to rev-up the exports and diversify it in terms of baskets and destinations. An uncontrolled CAD will also reduce the already limited room available to the Reserve Bank of India for monetary easing during the current calendar year.

Beyond the Budget

The Finance Minister rightly mentioned towards the conclusion of his speech that the Budget is another day in the life of a nation. There is an immediate need to revive the decision-making process at all levels. Resource availability and interest rate are not as big deterrent to growth revival as is the difficulty of doing business in India. The corporate today are searching for better prospects of investing out of India than risking their valuable capital to inordinate delays and even sudden reversal in decisions taken earlier.

The return of a certain degree of confidence was made possible by non-budgetary actions initiated by the government, particularly partial deregulation of diesel prices, rise in railway fares and freight charges, deferment of GAAR and important legislative developments including foreign direct investment in aviation, multi-brand retail, insurance and provident funds. There is further need for improving processes and reducing delays. The most important push for the growth would be critical decisions that the CCI may take in sectors like coal, power, roads and construction, telecom etc. All these sectors have important backward and forward linkages and, therefore, may prop-up consumption and investment demand if specific issues are adequately addressed.

About author
Nitesh Ranjan is chief economist of Union Bank of India. A post-graduate in economics & with diploma in treasury, investment & risk management, he has over twelve years of work experience across government sector and banking ......more. ...more