Published Editorial

Budget FY15: Small Reformist Steps, Large Shadow of the Interim Budget

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Chief Policy Advisor, EY

The new government presented the full year FY 2015 budget taking small steps towards its economic vision but leaving most of the budget under the shadow of the previous government’s interim budget. It maintains the same fiscal deficit target of 4.1% of GDP and improves only marginally the revenue deficit target to 2.9%. These are unrealistic targets and the FM is not bold enough to acknowledge this. In the first two months of the financial year, 45% of the full year fiscal deficit target and 53% of the revenue deficit target have already been crossed.  The budget increases nominally the central government capital expenditure from FY14RE at 1.68 to 1.76% of GDP. With revenue expenditure slightly pruned, the total expenditure of FY14 RE has remained almost unchanged at 14% of GDP. That implies a complete absence of fiscal stimulus to growth making even the nominal growth assumption of 13.4% unrealistic. With WPI inflation coming down to less than 6% and even charitably assuming 5.5% as real growth, we may not be able to get a nominal growth of more than 12%.

The assumed tax buoyancy for overall tax revenues is 1.32 against a realized tax buoyancy of less than 1 in FY2014 is again overly optimistic and as unrealistic as the FY15 interim budget. The only additional inflow of resources is through disinvestment that has been increased from Rs.25841 crore FY14 RE to 63425 crore. This is certainly doable although never achieved in the past. The additional resource would just about set off the shortfall in tax revenues given the unrealistic tax buoyancies.

The small step forward out of the shadow of the interim budget does show a glimpse of the new government’s intent. The important initiatives that will directly support growth are the following: stimulus to household consumption through increase in income tax exemption limit, steps to push the household financial saving rate through Kisan Vikas Patras and increase in the 80 C limit, initiatives for REITs and for infrastructure investment, and uplifting FDI limits on defence equipment and insurance. The growth effect of these initiatives will, however, be only marginal in the remaining part of the year. The country will have to wait till February next for a fuller basket of policy initiatives to boost growth and emerge out of the shadows of the past economic policies.

(Views expressed are personal)