A commendable consolidation plan

The Narendra Modi government’s maiden budget has struck the right chord with all key stakeholders. Budget 2014-15 is marked by a perfect balance between the need to persist on the path of fiscal consolidation, curb supply-side inflationary pressures, revive economic growth, facilitate a business-friendly environment, while being cognisant of ‘real’ fiscal constraints.

In addition, the most telling exposition has been the laying of the economic and policy vision of the new government, which judiciously straddles the inter-temporal timeline for implementation.

This is a masterstroke, as it anchors short-medium- long term expectations, while providing the Finance Minister with sufficient time and flexibility to announce and undertake policy decisions outside the budget.

The Budget has retained the fiscal deficit target for 2014-15 at 4.1 per cent of gross domestic product (GDP), against 4.5 per cent in 2013-14.

This emphatically signals that the new government is determined to take up the challenge of fiscal consolidation and back it up with quality adjustment.

Over the past two years, while the headline fiscal deficit corrected from 5.7 per cent to 4.5 per cent of GDP, the same was accomplished on the back of severe cut in the budgeted plan expenditure (averaging at ₹1,198 billion, or 1.1 per cent of GDP) even as non-plan expenditure overshot (averaging at ₹136 billion, or 0.1 per cent of GDP) from their respective budgeted targets.

For 2014-15, while overall expenditure is budgeted to increase by 14.8 per cent, the same is buttressed by an increase in the productive capital expenditure from 1.7 per cent of GDP in FY14 to 1.8 per cent of GDP.

This will serve a two-fold purpose. The direct impact will increase government investment towards 8.3 per cent of GDP from 8.1 per cent of GDP in FY13.

More importantly, it will catalyse ‘animal spirits’ by creating space for corporate investment through the process of ‘crowding-in’.

The redistribution of expenditure will enhance the quality of fiscal adjustment, which also finds support from efficient management of subsidies and plan expenditure.

The Budget has lowered the subsidy disbursal target to 2.0 per cent of GDP from 2.3 per cent in FY14. This is expected to be backed by the ongoing fiscal pass-through of administered fuel prices, effective targeting through Direct Benefits Transfer Scheme, and a better alignment of urea, electricity and natural gas prices.

On the plan expenditure front, the Budget has made further progress towards consolidation by reducing the number of centrally-sponsored schemes from 126 in FY14 to 66.

This will encourage better monitoring and efficient utilisation of funds. In addition, entitlement-based existing welfare programmes have been redesigned to direct spending towards creation of capital assets.

This is expected to enhance the overall productivity levels in the economy.

Such prudent expenditure management will be superior to the one attained by bridling plan expenditure with the single-minded objective of meeting the deficit target.

It will have a salutary impact on the growth-inflation balance, providing room for monetary manoeuvrability to the Reserve Bank of India.

Reflective of the weak economic situation, the Government has reduced the tax revenue target by nearly ₹15,000 crore.

With pruning of tax revenue targets, the heavy lifting is being done by other sources of revenue such as dividends and divestment. Greater reliance on dividends will help in channelising cash surplus of PSUs towards capital expenditure.

In addition, with the BSE PSU Index up by 40 per cent in 2014 so far, the time is ripe for moving ahead on strategic divestment. As such, dividends and divestment are expected to contribute 1.2 per cent of GDP in FY15, up from 1.0 per cent in FY14.

The Finance Minister is hopeful of resolving the conflict on Goods and Services Tax (GST) with States and pave way for its implementation as soon as possible.

This will enable the country to migrate towards a robust, effective, efficient and competitive tax structure.

The Centre has already begun synergising the consultative process with various State governments with the objective of implementing the DTC (Direct Tax Code)/GST framework from 2015-16 onwards.

This will be the singular move, which will have a transformational impact on manufacturing and export oriented industries.

Over a period of time, this is expected to create nearly 4-5 million jobs and enhance the country’s potential GDP growth by 1.5-2.0 per cent.

While this Budget has provided reprieve for consumption in the form of tax support for housing and additional relaxation in income tax slabs for salaried personnel, the thrust is unambiguously on using quality fiscal consolidation to move towards a healthy and sustainable growth-inflation balance.

In addition, with ironing out concerns over retrospective tax amendments, investor confidence and ‘ease of doing business’ is now likely to improve significantly.

These are the sine qua nons for maximising governance.

The writer is the president of Assocham and managing director and CEO of Yes Bank