Budget targets hinge on growth

Last year’s Budget promised a continued effort at fiscal consolidation, and pegged FY13 fiscal deficit at 5.1 per cent of GDP from 5.7 per cent in FY12. At the core of 5.1 per cent deficit number was the GDP growth assumption of 7.6 per cent (give or take 0.25 per cent), leading to a revenue receipt growth of 22 per cent.

The growth assumption was based on a turnaround in economic growth in general, and industrial growth in particular, from the second half of FY13. However, the economy is expected to grow by 5.0 per cent in FY13. This has resulted in revenue receipt growth slowing down to 16.0 per cent (FY13 revised estimate, or RE) from 22.0 per cent (FY13 budget estimate, BE).

RECEIPTS FORECAST

The petro price reforms from mid-September 2012 and aggressive disinvestment drive from end-2012 helped the government, both on the receipt and expenditure fronts. The Plan expenditure, which was budgeted to grow by 22.1 per cent in FY13, increased by 4.1 per cent in FY13 (RE). However, the rather optimistic non-Plan expenditure growth target of 8.7 per cent was breached and it grew by 12.3 per cent. Plan expenditure compression resulted in revenue expenditure increasing by 10.2 per cent in FY13 (RE) from 10.7 per cent growth in FY13 (BE).

Disinvestment receipts are also expected to be lower than the Budget target, and capital expenditure growth, at 5.8 per cent in FY13 (RE), is way below 30.6 per cent budgeted in FY13 (BE). All this yielded a minor slippage in fiscal deficit from FY13 (BE). However, the fiscal deficit in FY13 (RE) declined to 5.2 per cent from 5.7 per cent in FY12. The Union Budget 2013-2014 portrays a picture of continuing fiscal consolidation and pegged fiscal deficit in FY14 at 4.8 per cent, which is in line with the revised fiscal consolidation roadmap suggested by the Kelkar Committee. At the core of the FY14 budget is real GDP growth of 6.1-6.7 per cent and a nominal GDP growth of 13.4 per cent.

Based on present global and domestic macro-economic conditions, it is more likely that the FY14 economic growth will be around the lower bound of assumed economic growth for FY14 (India Ratings forecast for FY14 growth: 6.1 per cent).

The Budget arithmetic is somewhat optimistic. The FY14 budget assumes 21.2 per cent growth in revenue receipts of the central government, marginally lower than the FY07 (25.2 per cent) and FY08 (24.9 per cent).

The tax revenue growth in FY14 is budgeted at 19.1 per cent, with 13.4 per cent nominal GDP growth; this translates into a net tax revenue buoyancy of 1.4, similar to FY05 and FY06. The economic growth in FY05 and FY06 was 7.0 per cent and 9.5 per cent, respectively. More importantly, industrial growth as measured by IIP in these two years was 11.7 per cent and 8.6 per cent. The global economy also provided support to industrial growth performance.

A closer scrutiny of gross tax revenue growth assumption of five broad taxes reveals that it would not be very difficult to achieve growth targets. Corporation tax is assumed to grow by 16.9 per cent in FY14 (BE), against 11.2 per cent in FY13. Corporation tax grew by 14.7 per cent in FY10, when IIP growth was 5.3 per cent.

The income tax growth assumption in FY14 (BE) is lower than the FY13 (RE) growth, while the tax credit of Rs. 2,000 is proposed to be given to income tax payers in the lowest income tax slab (Rs. 2,00,000 – 5,00,000). The 10 per cent surcharge on income tax for taxpayers earning more than Rs 10m is likely to compensate the tax credit given to income tax payers from the lowest income tax slab.

While the customs and excise duties collection targets are plausible, service tax collection targets are slightly pessimist. Service tax in FY13 (BE) was expected to increase by 30.5 per cent and as per FY13 (RE) it is likely to grow by 35.8 per cent. India Ratings expects a minor slippage in tax revenue collection from FY14(BE).

OPTIMISTIC TARGETS

While tax revenue targets are slightly optimistic, non-tax revenue targets are even more so. The Budget has made a provision for non-tax revenue collection of Rs 1,722.52 billion in FY14 (BE), against the revised estimates of Rs 1,297.13 billion, a growth of 32.8 per cent. Revenue from proposed telecom auction in March 2013 is likely to accrue to government in the beginning of FY14.

Disinvestment receipts in FY14 are budgeted at Rs. 558.14 billion (FY13(RE): Rs. 240 billion).

Subsidies are budgeted to decline by 10.3 per cent in FY14 (BE), which are in line with the central message of the Economic Survey — cutting down wasteful expenditure. Allocation for food subsidy has increased, the same holds for sale of decontrolled fertiliser with concession to farmers, while petroleum subsidy has declined. Decline in petroleum subsidy to Rs 650bn in FY14 (BE) from Rs 968.80 billion in FY13 (RE) is in line with petroleum pricing reforms. A reduction in subsidy on sale of decontrolled fertiliser with concession to farmers implies that the government in FY14 will undertake fertiliser subsidy reforms. Total subsidies in FY14 (BE) is likely to be 2.0 per cent of GDP, down from 2.6 per cent in FY13 (RE).

The key to the success of FY14 budget proposals is how fast economy can turn around. The Budget has made certain proposals to revive investment sentiments by allowing investment allowance of 15 per cent. Some efforts have also been made to increase savings in general, and the proportion of financial savings in particular. Allowing an additional deduction of interest up to Rs. 1,00,000 for first time home buyer for loans up to Rs. 2.5m will help the realty sector and credit for iron and steel, and cement sector.

The Budget also has a number of proposals for the infrastructure sector; however, implementation of these is the key. Infrastructure investment crowds in investment in other sectors and can help in investment revival. While on the receipts side, tax revenues targets are not overly optimistic, the non-tax revenue and disinvestment target certainly are. However, the government has enough leg room in controlling expenditure growth and achieve its budgeted FY14 deficit target of 4.8 per cent. However, excessive expenditure contraction could lead the economy into a prolonged low growth phase.

(The author is Chief Economist, Sr. Director and Head — Public Finance, India Ratings, a Fitch group company.)