The absence of major expenditure announcements in the Interim Budget was in line with expectations. However, the reduction in the allocation for recapitalisation of public sector banks at this juncture is a negative in light of prevailing asset quality trends and the capital requirements for meeting Basel-III norms.

Curtailing the fiscal deficit to 4.1 per cent of GDP for 2014-15 also seems challenging, given the optimistic assumptions for nominal GDP growth (13.4 per cent), tax revenue growth (19 per cent) and disinvestment receipts (₹370 billion). That said, on the revenue side, the targeted reduction in excise rates till end-June 2014 to support the manufacturing sector is welcome.

Subsidy allocation

Assuming total oil under-recoveries to be around ₹1 trillion in 2014-15, the subsidy provision of ₹284 billion (net of carried forward amount ₹350 billion) seems largely adequate, if the monthly diesel price hike continues as planned and the absolute contribution of the upstream companies does not decrease.

The budgeted subsidy for phosphorus and potassium nutrients for 2014-15 is likely to be reduced in light of the recent fall in global prices. Nevertheless, the budgeted fertiliser subsidy for 2014-15 of ₹670 billion is likely to prove inadequate, given the likely escalation in subsidy requirement for domestic urea manufacturing if the proposed gas price revision is implemented from April 1.

Capital assets

The revised estimates for financial year 2013-14 indicate a substantial cut in revenue grants for the creation of capital assets. The quality of fiscal adjustment in 2013-14 is somewhat sub-optimal. Weak manufacturing activity contributed to down-scaling of the estimate for tax collections in 2013-14. One-third of the reduction is on account of corporation tax.

However, ICRA expects actual net tax revenues in this fiscal to be lower than the level projected by the revised estimates for 2013-14 by around ₹110-120 billion, which would result in a fiscal deficit closer to the original target of 4.8 per cent of GDP, and not 4.6 per cent.

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