A backward-looking Interim Budget
The Indian Express
Dr. DK Srivastava
Chief Policy Advisor, EY
Not unexpectedly, the FY15 Interim Budget was backward looking, replete with unjustified comparisons with selected decade old absolute numbers, motherhood statements about ten desirable features of economic policy, and a signing off statement.
The central theme of the Budget was achieving fiscal consolidation. Both the means employed to achieve this and the quality of fiscal consolidation leave crucial question marks. The containment of fiscal deficit relative to GDP at 4.6 per cent in Revised Estimates for FY14 was achieved by a significant cut in the budgeted plan and capital expenditures, rolling over of committed fuel subsidies to the extent of Rs 35,000 crore to the next fiscal year, and by an increase in non-tax revenues.
The first step is unjustifiable in a slowing economy, the second is just a postponement of the true burden, and the third is unsustainable. Relative to the Budget estimates, plan expenditures have fallen by 14 per cent and capital expenditure by about 17 per cent showing the poor quality of adjustment in achieving fiscal consolidation.
The targeted reduction of fiscal deficit from 4.6 per cent to 4.1 per cent in FY15 is also based on doubtful assumptions. The GDP at current market prices assumed in the FY14 Budget was also 13.4 per cent. It turned out to be only 11.9 per cent as per the advanced estimates. This is one of the reasons why the tax revenues have fallen by about by more than 6 percentage points in Revised Estimates FY14 compared to actuals of FY13.
In the FY15 Budget, again an assumption of nominal GDP growth of 13.4 per cent is being made. Given that the real growth rate may not be more than 5.5 per cent and inflation rate is falling, nominal growth may not exceed 11 per cent in FY15. Further, the assumed tax buoyancy is 1.4 in FY15 for Centre’s gross tax revenues against a realised tax buoyancy of 0.99 in FY14. Thus, there is an excessively optimistic assumption both for nominal growth and for tax buoyancy.
The quality of fiscal consolidation requires looking at both fiscal and revenue deficits. The revenue deficit remains high at 3.3 per cent of GDP. About 72.5 per cent of fiscal deficit is budgeted to be on account of revenue deficit in FY15 as compared to the corresponding figure of 71.5 per cent, showing an actual worsening of the quality of fiscal consolidation.
The Interim Budget leaves considerable burden for the next government in terms additional subsidies on account of the Food Security Act and other subsidies that may have been budgeted only partially and over-optimistic assumptions on tax revenue growth. The regular Budget for FY15 will have to start all over again.