Budget 2015 based on 2 risky assumptions; if they fail Jaitley may struggle to meet targets

Finance minister Arun Jaitley has, in his first full-year Budget, done reasonably good work, given the resource constraints he faces and multiple demands from various quarters he was hard-pressed to meet. It would be difficult to envisage what more could the finance minister have done, to say the least. At the end of the day, he has the unenviable task of balancing the budget so as not to disturb the hawks tracking fiscal deficit and also those demanding sops. Considerable amount of printing ink has been already utilised explaining how he managed to propose a Rs 70,000 crore increase in infrastructure investment and earmark Rs 79,500 crore for rural development. So, this article is not a set of advice to that poor soul. I intent to focus on some key implicit assumptions in the budget estimates and the risk to those. Will crude remain below $60? [caption id=“attachment_2132471” align=“alignleft” width=“380”]  If crude rises above $65 per barrel, Jaitley may have to forego some of the planned investments. Reuters[/caption] Several experts have estimated that the fuel subsidy bill will be lower by Rs 50,000 crore in 2015-16 and likewise the government can earn anywhere between Rs 60,000 crore and Rs 70,000 crore on account of higher excise duty on petroleum products for the full year. This bounty is based on an assumption of crude oil remaining below $60-65 per barrel and dollar-rupee at 63 or thereabouts. Coincidentally, the quantity of this bounty arising out of lower crude price and a stable rupee compares well with the incremental spending towards infrastructure and rural development. So, if the crude rises to levels above $65 per barrel, the finance minister may have to forego some of these investments in order to maintain the fiscal deficit target. Such a spending cut will definitely impact the economy. Global liquidity to continue? The divestment target for FY16 is a bold Rs 69,000 crore, which is higher than the 2014-15 target of Rs 63,000 crore, approximately half of which has been actually achieved till date. Last 12 months have been a great period for the Indian markets and still the divestment target was not met. We are de facto assuming another great year for the market so that the divestment target can be fully met. May be a somewhat optimistic assumption even by bull-market standards! Downside risks If any of the above assumptions get violated, we may end up with much lower government spending or a higher-than-budgeted fiscal deficit. More importantly, such a scenario can even cause slippage of economic recovery and weaken the currency. A sensitisation on this is required because there is an emerging notion that India can remain a beacon of high growth all by itself when majority of the countries are struggling. Will rate cuts help? The assumption that India is somehow de-coupled from the rest of the world was in fashion in 2009-10 and 2010-11 when, thanks to huge government spending and low interest rate, India delivered 8 percent-plus GDP growth. Of course, 2010-11 to 2013-14 were painful reminders to how faulty the assumption was. The current state of relative stability of Indian economy owes a lot to global factors which can change any time in next 12 months and sadly these are not under anyone’s control. What, however, can be done is to continue with a reasonably high real interest rate cushion so that despite any global financial turmoil or any adverse development on India’s fiscal deficit, global investors continue to find India attractive. The dependence on monetary policy to propel growth may require a rethinking. India need not play for the broke by staking both fiscal stability and monetary elbow room at one go. India has taken, and for very good reason, a bet on the fiscal side by delaying fiscal consolidation. The risk may need to be balanced by not reducing the interest rate in next three to six months. The author is senior director - corporate ratings, India Ratings & Research. Views are personal