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First step to mend a fractured economy
With neither time nor tide (read fiscal space) by his side, Arun Jaitley may not have had any fireworks for those who expected one in the Union Budget 2014. Still, his budget speech laid down a vision of returning to the growth path of the pre-2008, pre-downturn years.

Budget 2014 laid down policies and reforms, which, being high on details, ticks many boxes on fiscal consolidation, tackling inflation and reviving growth.


An ambitious fiscal target

In what was acknowledged as a ‘daunting task’ by the Finance Minister, the Budget chose to retain the previous government’s fiscal deficit target of 4.1 per cent for FY-15. The targets for FY-16 and FY-17 were indicated at 3.6 per cent and 3 per cent respectively, thus lending itself to an ambitious fiscal consolidation plan.

The target, especially for FY-15, is widely seen as being loaded with optimism for a few reasons: one, gross tax revenue (the biggest contributor to the exchequer) as a percentage of GDP fell steeply post FY-08 and until FY-10 and thereafter has mostly remained stagnant.  Even if FY-15 sees a marginal economic recovery and improved business sentiment, a 20 per cent Y-o-Y growth assumed in tax revenue appears a tad unrealistic, unless the economy gets as lucky as the stock markets! Besides, some tax tweaking has meant marginal loss to the government’s tax revenue.


Ambitious target for disinvestment

On the brighter side though, yet another ambitious target – disinvestment of Rs 58,425 crore from PSU stake sale and from residual stake sale in erstwhile government companies - may not be too difficult to achieve. That’s especially if it is done in the early part of the financial year by capitalising on the current stock market buoyancy.

While disinvestment may be a one-off measure to help the fiscal position, quicker implementation of GST, though, may be necessary if the government has to achieve its medium-term target. There appears no time line currently on implementation of a nation-wide GST.

On the expenditure side, although the budget does not provide any concrete measures for expenditure control, the quality of spending has clearly got a growth focus. After almost two years of a severe squeeze on plan expenditure, FY-15 will see a 21 per cent increase in the budgeted plan expenditure with thrust on rural and urban infrastructure spending.

It is noteworthy that spending on rural development, which was growing at 20 per cent compounded annually between FY-08 to FY-12 fell by 2 per cent annually in the subsequent two years. The current plan budget will hopefully reverse this. Similarly, capital expenditure is set to grow at 18.8 per cent compared with single-digit average growth witnessed in the last 3 years. Capex by public sector companies are expected to show the way for private sector to follow suit.

A disappointment on the expenditure front would be the subsidy. While subsidy on food and fertilizer have broadly remained the same, fuel subsidy has a lower projection. The rationalisation here may be carried outside the budget but then there appears to be no road map for overall subsidy rationalisation.


Tackling inflation

With the consumer price inflation choosing not to come down from its lofty perch and the RBI blaming ‘structural issues’ for continuing high food inflation, the Union Budget may have taken some right first steps to  address this through focussed measures in the agriculture space.

Allocation of about Rs 5000 crore for construction of warehouses, godowns and cold storages can be expected to tackle the issue of storing agricultural produce with reduced wastage. The budget has also hinted at restructuring Food Corporation of India, with the aim of reducing transportation and distribution losses. Allocation towards ‘soil health card’, mobile soil testing and also setting up of a price stabilisation fund are all aimed at improving productivity in the medium to long term.

Interestingly, the budget has chosen to retain allocation under the MGNREGA, a scheme which was expected to be sidelined. The Budget intends to ensure that the rural spend is done on more productive creation of assets in the agricultural space. This spending, if done with the right intent, could spur agricultural growth.

Other efforts such as continuation of the 7 per cent interest subvention scheme besides an additional subvention of 3 per cent for prompt paying farmers effectively reduces borrowing costs of farmers who do not default. This is a more productive incentive than the farm loan waiver schemes.

In all this, execution remains the key to alleviate the supply-side bottlenecks. For, it is not as if the previous budgets have not tried to plan for all of the above. Just that the failure in implementation, time and again, has led to raging inflation in the past couple of years. Besides, weak monsoon can play spoilsport for agricultural growth, which has been pegged at a respectable 4 per cent.

In the short term though, measures outside of Budget, such as getting states to set up farmers’ markets, release of foodgrains and raise minimum export prices on commodities such as onion may help contain inflation to some extent.

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