Fiscal strategy may come after 13th Finance Comm report
The finance minister appropriately started the Budget with the statement that “one Budget cannot solve all problems”, indicating that few areas will assume more priority than the rest in the immediate run.
The finance minister appropriately started the Budget with the statement that “one Budget cannot solve all problems”, indicating that few areas will assume more priority than the rest in the immediate run.
Focusing on the near-term growth while laying down broader contours for the medium term, the speech initially disappointed the market as they had tall expectations from the Budget.
In specific, lack of disinvestment plans and a crystal clear roadmap for fiscal consolidation in the medium term were the spoilsports.
The government has accounted for only Rs 1,100 crore of disinvestment proceeds in this fiscal and lack of any change in the National Investment Fund scheme (which would have allowed direct usage of this fund for fiscal deficit) immediately, hardly added to the sentiment.
Also, fiscal deficit for the financial year 2009-10 was higher than market expectation at 6.8% of gross domestic product (GDP.)
However, thrust on acceleration of “inclusive growth” should help the overall growth story and market sentiments eventually. More money has been left with the consumers as tax exemption limit and benefits under sections 80dd has been increased along with scrapping off fringe benefit tax.
Higher expenditure, especially towards rural-oriented schemes such as national rural employment guarantee scheme, Bharat Nirman etc, along with higher credit target for the agriculture sector, should support rural demand with a multiplier effect.
Public infrastructure should also pick up as flow of credit (Rs 100,000 crore/$20 billion) has been assured via refinancing of 60% of commercial bank loans for public private partnership projects in critical sectors over the next 15-18 months by India Infrastructure Finance Co Ltd.
Indirect tax changes with support for the exporters should also help business activity. With all such growth and thus revenue enhancing measures and expectations of some disinvestment in the interim period (not factored in now), should prevent any negative surprises on the conservative revenue projection of 8% and thus the overall fiscal deficit target of 6.8%.
In fact, there remains some probability of the final fiscal deficit to be lower than 6.8% of GDP if some high-profile disinvestment, as mentioned by finance secretary, happens during fiscal 2010.
As far the fiscal strategy in the medium term is concerned, though nothing concrete was laid down, announcement likes committee for viable and sustainable system of pricing petroleum products, implementation of goods and services tax by April 2010, setting up of the Unique Identification Authority of India for improving governance with regard to delivery of public services, etc indicate that we can expect some concrete steps in this regard later on.
Most probably a clear roadmap for fiscal consolidation will have to wait for the 13th Finance Commission report due by October.
The government has laid down a target of 5.5% of GDP in fiscal 2011 and 4% of GDP by fiscal 2012.
This is not an overly optimistic estimate as few expenditures weighing on the fiscal balance today (like higher arrear payments for the public sector employees) will die a natural death next year.
Also, revenue generation should be better as growth improves while disinvestment sale, if allowed to fund the deficit directly, should help to achieve these targets.
The author is Associate economist, Stanchart
Focusing on the near-term growth while laying down broader contours for the medium term, the speech initially disappointed the market as they had tall expectations from the Budget.
In specific, lack of disinvestment plans and a crystal clear roadmap for fiscal consolidation in the medium term were the spoilsports.
The government has accounted for only Rs 1,100 crore of disinvestment proceeds in this fiscal and lack of any change in the National Investment Fund scheme (which would have allowed direct usage of this fund for fiscal deficit) immediately, hardly added to the sentiment.
Also, fiscal deficit for the financial year 2009-10 was higher than market expectation at 6.8% of gross domestic product (GDP.)
However, thrust on acceleration of “inclusive growth” should help the overall growth story and market sentiments eventually. More money has been left with the consumers as tax exemption limit and benefits under sections 80dd has been increased along with scrapping off fringe benefit tax.
Higher expenditure, especially towards rural-oriented schemes such as national rural employment guarantee scheme, Bharat Nirman etc, along with higher credit target for the agriculture sector, should support rural demand with a multiplier effect.
Public infrastructure should also pick up as flow of credit (Rs 100,000 crore/$20 billion) has been assured via refinancing of 60% of commercial bank loans for public private partnership projects in critical sectors over the next 15-18 months by India Infrastructure Finance Co Ltd.
Indirect tax changes with support for the exporters should also help business activity. With all such growth and thus revenue enhancing measures and expectations of some disinvestment in the interim period (not factored in now), should prevent any negative surprises on the conservative revenue projection of 8% and thus the overall fiscal deficit target of 6.8%.
In fact, there remains some probability of the final fiscal deficit to be lower than 6.8% of GDP if some high-profile disinvestment, as mentioned by finance secretary, happens during fiscal 2010.
As far the fiscal strategy in the medium term is concerned, though nothing concrete was laid down, announcement likes committee for viable and sustainable system of pricing petroleum products, implementation of goods and services tax by April 2010, setting up of the Unique Identification Authority of India for improving governance with regard to delivery of public services, etc indicate that we can expect some concrete steps in this regard later on.
Most probably a clear roadmap for fiscal consolidation will have to wait for the 13th Finance Commission report due by October.
The government has laid down a target of 5.5% of GDP in fiscal 2011 and 4% of GDP by fiscal 2012.
This is not an overly optimistic estimate as few expenditures weighing on the fiscal balance today (like higher arrear payments for the public sector employees) will die a natural death next year.
Also, revenue generation should be better as growth improves while disinvestment sale, if allowed to fund the deficit directly, should help to achieve these targets.
The author is Associate economist, Stanchart