Why Union Budget 2013 growth numbers look a bit shaky
The budget will not do much to turn around either savings or investment, but it does balance the priorities fairly
Rating a budget is always an interesting exercise, because any evaluation is based on the presupposed expectations that one had. The attempt here is to take things at face value and see if the budget has addressed the issues appropriately.
First, let us look at the growth assumption in Budget 2013-14. This is critical because last year the FM assumed 7.6 percent growth which did not quite materialize, throwing things out of kilter. This year, based on the fiscal deficit numbers, one can work backwards at what kind of growth we have assumed. The number is 12.9 percent in nominal GDP, which is real GDP plus inflation. Given that the government is talking of inflation remaining low now that it has started coming down, it could be assumed to be 6-6.5 percent, which means real GDP has been taken to be between 6.5-7 percent or 6.7 percent, as per the upper limit specified by the Economic Survey.
The question is whether or not we can achieve this number. It looks difficult, considering that we are talking of 5 percent growth for FY13 and there seems to be nothing significant happening at the ground level. If this assumption goes wrong, then the entire structure will crack. What happens to the fiscal deficit ratio in that case?
The fiscal deficit ratio has been assumed to be 4.8 percent of GDP for FY14. The FM has shown resolution in attaining last year's target. How has he done it considering that there has been slippage in expenditure to a large extent on subsidy and inadequate collections from spectrum sales and disinvestment? He has simply slashed expenditures across the board. Therefore, there is reason for us to believe that in case we run into such slippages, the FM will repeat the action to ensure that the target is maintained. Then what happens to expenditure, which is the third issue of the Budget.
The FM has cut down on project expenditure by as much as 20 percent to control the deficit last year. The same will be replicated here in case of a recurrence. In terms of the other numbers that cannot be compromised it looks unlikely that there could be slippages. We have a diesel policy in place and there is an extra allocation for food subsidy in the light of the likely passage of the food security bill. Therefore, with no expected slippages here (which are the usual suspects), it may be expected that the FM will cut down on project expenditure that will slow down the growth process again.
The fourth issue is whether the fiscal deficit will have an impact on interest rates?The net borrowing programme of the government is higher by around Rs 17,000 cr over last year. Therefore, if the target is maintained, we may not expect liquidity strain to be there even though the gross borrowing programme is as high as Rs 6.3 lakh crore (there are repayments of Rs 1.45 lakh crore this year). One may not expect pressure on liquidity and hence the fear that private sector will be crowed out is not founded. The call on interest rates will be with the RBI which will have its own evaluation.
Fifth, does the Budget stimulate savings? There have been only feeble attempts to take in savings through the Rajiv Gandhi Equity Savings Scheme even though a lot has been spoken about the need to increase financial savings and move households away from gold. We do not see anything on increasing the tax limit for on savings under 80C section and hence the budget has not really addressed this issue - which it could have done if it wanted. Quite clearly, the FM is not in a mood to give much away.
Sixth, will the budget bring in investment? Here the budget has spoken of infrastructure debt funds (IDFs) and a greater role for IIFCL. He has spoken of ways to get in more FII funds. Companies investing in fresh machinery above Rs 100 crore would get a setoff of 15 percent. Will this help? It will definitely help to channel in some investment, but it cannot be significant to turn the growth process around. Growth has to come from elsewhere.
Seventh, is agriculture to get a boost? Yes, there are measures for farmers to get more credit and interest subvention for those who pay on time. Also private banks will be included in this scheme for the first time. There is some talk on setting up more warehouses as also the spread of the Green Revolution. Therefore, there is a positive here for this sector.
Eighth, is the budget populist? It can be interpreted either way depending on how one looks at it. Given the commitment to inclusive growth, spending on NREGA cannot be contested nor can the expense on food subsidy related with the Food Security Bill. These are also necessities since we have at least 325 million poor people. It becomes the prime responsibility of the government to provide support.
Ninth, will inflation come down or increase? The budget is neutral to inflation as it really does nothing to either increase or decrease prices and hence can be taken to be a positive. Revenue is to come from higher growth and not higher tax rates though some products will witness an increase in excise and customs.
Last, is the budget realistic in its assumptions and aspirations? It is a bit bold when it comes to growth assumption, and quite realistic about others. Even the bold assumption may not be a concern for the FM who will be willing to cut expenses again to protect the 4.8 percent number.
A rating of 7 out of 10 would be right for this one.
The author is Chief Economist, CARE Ratings. Views are personal
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