The Budget, as an exercise in accounting credibility, seems better than many in recent years. If we were to accept for a moment the assumption that GDP growth for FY14 will exceed 6% (as forecast by the economic survey), a 15% increase in excise collection, or a 17% increase in corporate tax made in the Budget does not appear to be very challenging.
Some figures seem optimistic – a 35% increase in service tax, high growth in divestment and dividend income and high telecom licence revenues.
However, this is nitpicking. Largely, the Budget seems to have a reasonably consistent set of assumptions. So where is the nub?
The issue seems to revolve around the question of growth. While it may be credibly argued that the Budget is not expected to resolve all policy problems, one usually looks at the Budget more from the point of view of the stated goal of the fiscal policy and not just from the prism of numbers. This is where Budget fails to provide an inkling of government’s plans to increase growth. Why will growth rate go up – other than because it will?
If resumption of high growth is a major concern and the private sector is not investing, would it not be logical to increase government spend on capex? Instead, we see the government reducing capital expenditure in the current year by 22%. Why the excessive focus on fiscal deficit in a cyclically weak year?
The argument that interest rates will go up have been proven to be untrue – we continue to have negative or near zero real interest rates. And, inflation remains high because of government policy of passing on price of its inefficiency to the public.
The economic survey itself is confused on its understanding on interest rates. At one point, the survey states that household savings in financial assets have fallen since inflation reduces attractiveness of financial instruments and suggests that inflation linked bonds should be introduced – a suggestion which the finance minister too takes up. This would imply that interest rates should go UP.
The writer is CEO, JRG Securities
