Budget 2014 won't be a crowd pleaser: 4 things to expect from Modi sarkar

The most awaited event of the newly elected Narendra Modi government is here. Expectations are running high as promises made by the BJP during the elections have appealed to both the business community and the common man alike. While industry captains are expecting a break from the troubles they have been through for the past few years, the woman on the street wants steps that will improve her quality of life. Catering to the aspirations of both is a tough balancing act for the government. Given the deep troubles of the economy a please-all budget is out of bounds for finance minister Arun Jaitley. At best what he can do is kick off some of the reforms that would be beneficial in the long term. All the positives that have been driving the economy of late have been washed out because of the deficient rains, which will have an all-pervasive impact. The government’s economic survey that was released yesterday indicated as much. As Firstpost editor R Jagannathan noted in his analysis of the survey yesterday, “The good news is that this year (2014-15) will see the economy lift itself out of the sub-5 percent trap that UPA-2 had dragged it into, but the survey’s invisible writers suggest that GDP growth might only hit the lower band of the 5.4-5.9 percent range that has been projected, thanks to the possibility of a weak monsoons year.” [caption id=“attachment_1611905” align=“alignleft” width=“380”] Reuters[/caption] Here are four things that can be expected from Modi’s government’s first union budget: Realistic fiscal deficit: It is one key figure from the budget that economists and markets watch out for. Fiscal deficit is when the government’s expenditure exceeds its revenue. This has been the case over the last few years, when the UPA, embroiled one scam or another, indulged in populism and wasteful spending. The situation was aggravated after the government’s tax revenue declined massively due to the slowdown induced by a now infamous “policy paralysis”. However, the surprise was that Jaitley’s predecessor P Chidambaram managed to contain the fiscal deficit for 2013-14 at 4.5 percent of GDP. He also set a deficit target of 4.1 percent for the current financial year. Experts say that the these figures have been arrived at by rolling over subsidies. They want the government to restate the fiscal deficit target for the current financial year to at least 4.5 percent, which has been termed a credible figure. The government in its Economic Survey released yesterday said that a new Fiscal Responsibility and Budget Management (FRBM) Act, aimed at keeping a check on the expenditure of the government and thereby the fiscal deficit, is the most required. The expectation is that the government will take steps to make its spending sensible and meaningful. What this also means is that we will have to bear a little more pain. Expenditure reform: The populism of the Congress-led UPA government’s economic policies largely meant more subsidies. As Firstpost editor R Jagannathan noted, the UPA failed to cut fuel, food and fertiliser subsidies, with only diesel being dealt with at the end of its second term. Ill-targeted fuel subsidies over the last 10 years mean Rs 8,00,000 crore went down the drain. More dangerous is the Food Security Act, which will subsidise rice, wheat and coarse grains for two-thirds of the population. “While the fuel subsidies can be – and are being - fixed, the food and fertiliser subsidies will be tough to handle even for a Modi sarkar in the short-run,” he says. But since the Economic Survey has made all the right noises, the government is likely to fix its expenditure by bringing in reforms on this front. Key to this could be the roll-out of direct benefit transfer across the country, which could be effective in plugging the losses that happen during the transmission and distribution of the subsidies. Care Ratings in a report has said the survey has signalled “prioritization of expenditure reforms involving three elements: shifting subsidy programmes away from price distortions to income support, a change in the focus of government spending towards provision of public goods, and a systems of accountability through a focus on outcomes”. Targeting inflation: Price rise is the most important factor that is putting a drag on all fronts of the economy. It has impacted consumption and demand, and corporates and the common man have been hit. Interest rates in the economy, which have remained at the elevated levels for a few months, can be brought down only if inflation is controlled. This has also been central to the Congress’s defeat at the hustings and is going to be a key focus area of the budget. The government has already taken some steps towards, but they have been for the short term. According to Care Ratings, the economic survey indicated the government will “work towards a low and stable inflation rate through fiscal consolidation, by establishing a monetary policy framework and by creating a conducive environment for a competitive national market for food”. Though all of this may not be possible in the first budget, it will definitely kick off the process. Taxes: Taxes have remained in the news during and after the elections. So some steps can be expected on this front.  The budget is expected to have some sops for the salaried class like increasing the exemption limit. This is important from the corporate point of view as well as higher disposable income with the salaried class would mean higher consumption. Tax reforms may have to wait a little longer, but once the government is expected to give a roadmap for the roll out of the much delayed Goods Services Tax, which is aimed at overhauling and streamlining the ages old and cumbersome taxation. The Economic Survey has said that as a first step towards introducing GST, the government proposes to implement a Central GST, which will combine excise duty and service tax. “Replacing all existing indirect taxes by the GST will create a national market, eliminate cascading taxes, and align taxation of imports and exports correctly. This will improve the competitiveness of production and export from India. The implementation of a Central GST (CenGST) could be the first step towards the GST. Once the CenGST is implemented, and the information technology system for CenGST has worked, estimation risk will be lower and it will be easier for the centre and states to move to the GST,” the survey said.