India : Can budget 2014 be a game changer?

The former Finance Minister had stretched revenues and expenditure to its limits to attain his target of fiscal deficit. He has left no breathing space for his successor. Credit has to be given to him for fulfilling his target and thus keeping intact the reputation of the country before foreign investors in the matter of fiscal consolidation. Building upon this is not going to be easy for the new Finance Minister.

The interim budget has set a target of 4.1 per cent of GDP for the fiscal deficit during the current year. While remaining within this target is going to be difficult, it should be the endeavor of the new government to remain as close to this target as possible.

Expectations from the new FM are very high. There is demand for increasing infrastructure spending and there are also expectations about tax concessions. The FM would like to increase the exemption limit for income tax and also the limits under 80C. But both of these will prove to be expensive and he cannot extend benefits beyond a point. It would be desirable to extend tax benefits for pension schemes. For instance an FM with lot of cash surplus could extend the exempt-exempt-exempt (EEE) system to pension products. But the present FM does not enjoy such luxury.

On the expenditure side there is a demand for more funds for road projects. There is a proposal for creating new IITs, IIMs and AIIMS in every state of the country. There is a proposal for creating 100 new cities. The dream extends to running bullet trains connecting metro cities. But where is the money for all this? The newly created IITs and IIMs are themselves starved of funds and their needs have to be attended to first before creating more of them. All the major urban centers in the country are found wanting in basic infrastructure facilities. How can we think of creating 100 new cities before the crying needs of existing towns and cities are attended to.
The present government is committed to increasing defense expenditure. It would like to provide facilities in rural areas matching those in urban areas. There is demand to spend more on housing and public health. But every bit of increase in government expenditure will increase the fiscal deficit by the same extent.

The FM would have liked to take steps to reduce subsidies. But the experience of the government with regard to railway fare increase and the subsequent roll back indicate that Jaitley cannot be too adventurous in the matter of curtailing subsidies. Decontrol of pricing of diesel and increasing the price of cooking gas and kerosene are part of possible measures the government can take in reducing subsidies. But will the Finance Minister actually be able to bite the bullet?

Does the purse of the Finance Minister allow him to provide concessions to industry to promote industrial revival? The FM is all set to do a tight rope walking. Inspite of all the constraints facing him if Arun Jaitley is able to act in a generous way it is going to be a miracle. His space for sanctioning additional funds to critical projects as well as room for extending fresh tax concessions are both limited. If he disregards the call for fiscal prudence and chooses to go for an increase in the fiscal deficit it will not be welcome news to the foreign investors and the stock markets.

In matters that are strictly within the purview of the budget and the Finance Minister there isn’t much room for manoeuver to Mr Jaitley. What he can still do is to make a large number of policy pronouncements concerning various departments of the government in his budget speech. That can make the Union Budget 2014 look like a major game changer. But in matters strictly falling under the jurisdiction of the Finance Minister there appears to be very little of substance which can be expected from the budget. We should be prepared on July 10th for something which cannot be called a dream budget or a game changer. It would be a big challenge to Jaitley to prove this wrong.