- Union Budget FY14 will need to juxtapose imperatives of Fiscal sustainability (India's credit rating concerns), stimulate growth and cater to populism ahead of an election year
- Achievement of FY13 FD/GDP target of 5.3 percent based on quick fixes, viz. leveraging PSU balance sheets, curtailment in capital spending & plan spending and likely postponement of subsidy payment
- Target of 4.8 percent FY/GDP in FY14 against the backdrop of slower tax revenue growth will require higher dependence on non-tax revenue and non-debt capital receipts. Expected 14 percent tax revenue growth target will also require increase in tax rates. We expect budget to target expenditure growth at 10 percent
- Sharp curtailment in revenue spending growth to 6-7 percentYoY necessary for achieving 3 percent FD/GDP by FY16. Trend revenue spend growth of 13 percent could result in unbounded fiscal deficit
Lenient fiscal expansion and rising subsidy burden, resulting in adverse growth inflation dynamics and an unfavorable revenue-expenditure mix necessitate fiscal prudence. Fiscal consolidation becomes a quintessential to create space for monetary policy easing, tame inflation, reduce the crowding out effect of higher government spending and lessen external sector vulnerabilities. Finance Minister envisages a medium term target of 3 percent by FY16 from 5.3 percent in FY13.
FY13 GoI's accounts till Dec FY13 reflect constraints and quick fixes: FY13 highlights the compromise on quality plan and capital spending to compensate for lower revenue receipts and higher than budgeted subsidy bill. Likewise probable postponement of subsidy payment to the next fiscal serves as a quick fix to achieve the desired fiscal deficit target.
Union Budget FY14 will likely be conservative: Amidst the imperatives of reigning in fiscal imbalances and political expediency ahead of the 2014 election, Budget FY14 will lean towards aiming FD at 4.8 percent of GDP. This target would hinge upon, lower subsidy allocations with curtailment in overall expenditure and measures to boost revenue (predominantly non-tax).
Market movement based on cyclical economic growth: Historical data provide little evidence of directional impact of Union Budget on markets. Market returns around the budget announcement are strongly aligned to expectations on economic cycle. Unlike the tax sops driven 1997 "Dream Budget" or the hyper expansionary 2009 budget, there is little change of dramatic upsurge against an austerity budget this time around.
Structural analysis-Fiscal consolidation needs halving of revenue spending growth: Decline in tax elasticity indicates larger fiscal structural constraints that would continue in FY14. Lower tax elasticity would necessitate scaling down of revenue spending growth to 6-7 percent for several years for fiscal consolidation targets to be met, in our view. At 13 percent growth ("business as usual" scenario) there is strong probability of fiscal deficit/GDP becoming unbounded; rising to 6 percent by FY16.
The tight walk between economics and politics: Union Budget FY14 would test Government's predicament to ensure a) concurrence of Fiscal sustainability (& address rating downgrade concerns), b) resuscitate economic growth and c) the requisite expenditure space ahead of an Election year. Thus, a cap on the fiscal deficit would mandate sharp curtailment in expenditure and measures to boost receipts. On the contrary, slower than expected economic growth, demands investment impetus via greater capital spending. To top it all, the political agenda would claim higher spending ahead of the 2014 elections. While garnering tax receipts could remain a challenge (as seen in FY13), allocation of expenditure to accomplish the contradicting objectives would be interesting.
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