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Interim Budget 2014 -15: Non-innovative budget

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Finance Minister P Chidambaram presented his first and India’s 13th interim Budget on February 17, 2014. As per the expectations, being the last budget before the elections, the budget didn’t initiate major reforms and decisions. The budget has indicated that India has witnessed slight improvement in its economic conditions especially in terms of current account deficit and fiscal deficit.

The interim Budget did not disappoint the market as it exceeded market expectations on fiscal deficits for both FY14 (4.6 per cent revised versus 4.8 per cent consensus) and FY15 (4.1 per cent budgeted versus 4.2 per cent consensus). The government was able to better its FY14 fiscal deficit target with the help of considerable one-offs in the form of bumper telecom spectrum collections and a sizeable dividend contribution from Coal India.

 

Overall fiscal scenario: GDP growth has improved and will be 4.9 percent for the current financial year. Economic growth had slowed to a decade’s low of 4.5 percent in 2012-13. The GDP slow-down which began in 2011-12 reaching 4.4 per cent in Q1 of 2013-14 from 7.5 per cent in the corresponding period in 2011-12 has been controlled by numerous measures taken by the Government. Growth in the third and fourth quarter of the current year is expected to be 5.2 per cent and that for the whole year has been estimated at 4.9 per cent. India’s current account deficit (CAD) will be contained at USD 45 billion this financial year, well below the record high level of 2012-13. In the first half (April-September) of 2013-14, CAD narrowed to USD 26.9 billion (3.1 percent of GDP) from USD 37.9 billion (4.5 percent of GDP) in the first half of 2012-13. The savings rate was 31.3 per cent in 2011-12 and 30.1 per cent in 2012-13. The corresponding investment rate was 35.5 per cent and 34.8 per cent, respectively, indicating there was no steep decline in investment, except in mining and manufacturing.  WPI inflation down to 5.05 percent and core inflation down to 3.0 percent in January 2014. Food inflation down to 6.2 percent from a high of 13.8 percent.

Deficit management: The government has been able to contain the fiscal deficit — a measure of the amount of money that the government has to borrow to fund its expenses — for 2013-14 at 4.6 per cent of GDP, a nearly 0.2 percentage point lower than the budgeted 4.8 per cent; and the revenue deficit at 3.3 per cent As per this, the Budget has proposed a fiscal deficit of 4.1 per cent and revenue deficit of 3.0 per cent. As per current indications, the fiscal deficit has come down mainly on account of expenditure compression and higher realisation from the 2G spectrum auction. After taking over as Finance Minister in August 2012, Chidambaram had drawn up a financial consolidation road map to lower the fiscal deficit to 4.8 percent of GDP in 2013-14, 4.2 percent in 2014-15 and 3.6 percent in 2015-16.

One rank, one pension scheme: The Government would transfer Rs 500 crore to the defence pension account for implementing ‘one rank, one pension’ scheme. The decision, which is expected to benefit around three million defence pensioners, will come into effect from fiscal 2014-2015. ‘One rank, one pension’ scheme will ensure that soldiers of the same rank and the same length of service receive the same pension, irrespective of their retirement date.

Disinvestment: The government has set a target of Rs. 36,925 crore that it expects to earn by selling equity in state-owned companies in 2014-15 even as it halved target by more than half to Rs. 16,027 crore for the current financial year. In the Budget 2013-14, finance minister P Chidambaram had estimated to mobilise Rs. 40,000 crore by selling minority stakes in state-owned companies. As per the interim Budget 2014-15 presented in Parliament, the receipts from disinvestment for 2013-14 have been revised downward to Rs. 16,027 crore from Rs. 40,000 crore. The target seems to be quite unrealistic as till date, the government has been able to raise about Rs. 3,500 crore by selling stake in public sector companies. Over the medium term frame work, an amount of  Rs. 55,000 crore each has been taken for the years 2015-16 and 2016-17.

Defence expenditure: Finance minister announced that the defence budget for 2014-15 had been hiked from Rs. 203,672 crore to Rs. 224, 000 crore, a 10 per cent increase over last fiscal’s outlay. The capital outlay has been increased from Rs. 86,740 crore to Rs. 89,587 crore in the interim budget for 2014-15, a hike of barely 3.2 per cent. This meagre increase in the capital expenditure could hit the modernisation plans of the armed forces. It is to be recollected that India is years behind the Chinese military with the neighbour currently outnumbering the country’s combat power by a 3:1 ratio. India’s hopes to bridge the gap in the next 15 years hinge on availability of funds.

Tax reforms deferred: Two of India’s biggest tax reform initiatives — the Direct Taxes Code (DTC) and the Goods and Services Tax (GST) — was again deferred. If adopted, GST can dramatically alter tax administration by giving a one-shot solution to a welter of levies such as excise, value-added tax (VAT) and octroi and stitch together a common national market. Under the system, the Centre and states will tax goods and services in identical rates. For instance, if 20 per cent is the agreed rate on a certain good, the Centre and states will collect 10 per cent each on that good.

Tax rates: The domestic automobile industry that is poised to witness an unprecedented second successive annual decline in 2013-14 received a booster dose. The excise duty on small cars, mid size cars, motorcycles, scooters and commercial vehicles was reduced by 4 per cent. Duty on large cars saw a 3 per cent reduction while SUVs that had seen increase in taxation in the last few budgets, got a 6 per cent reduction.

Agriculture: Food grain production estimated for the current year is 263 million tonnes compared to 255.36 million tonnes in 2012-13. Agricultural GDP growth for the current year estimated at 4.6 percent compared to 4.0 percent in the last four years.

Manufacturing: The sluggish import is a matter of concern for manufacturing and domestic trade sector. Due to deceleration in investment, the manufacturing sector has witnessed a sluggish growth. The National Manufacturing Policy has set the goal of increasing the share of manufacturing in GDP to 25 percent and to create 100 million jobs over a decade. 8 National Investment and Manufacturing Zones (NIMZ) along Delhi Mumbai Industrial Corridor (DMIC) have been announced. 9 Projects had been approved by the DMIC trust. 3 more Industrial Corridors connecting Chennai and Bengaluru, Bengaluru and Mumbai & Amritsar and Kolkata are under different stages of preparatory works.
The ministry of micro, small and medium enterprises (MSME) will create an India Inclusive Innovation Fund to promote grassroots innovations with social returns to support enterprises in the MSME sector. An initial contribution of Rs 100 crore has been made to the corpus.

Infrastructure: Seven nuclear power reactors are under construction, with the aim of achieving an installed capacity of 10,080 Mw by the end of the Twelfth Plan. The Kudankulam Nuclear Power Plant Unit 1 achieved criticality and is generating 180 million units of power. Furthermore, the 500 Mw prototype fast breeder reactor at Kalpakkam is nearing completion.
Thrust on solar power: Four ultra mega solar power projects, each with a capacity of 500 Mw, are proposed to be taken up in 2014-15. After exceeding the target and achieving 1,684 Mw of grid-connected solar power, the National Solar Mission entered the second phase on April 1, 2013.

Social sector:

  1. Nirbhaya Fund expanded: To make it clear the Nirbhaya Fund is a permanent one, the government proposes to declare the grant of Rs 1,000 crore as non-lapsable. To support more proposals, it will contribute another Rs 1,000 crore to the fund next year. So far, the government has approved two proposals that will receive support from the fund.
  2. More money for skill development: Rs 1,000 crore allocated to the National Skill Monetary Reward Scheme will be transferred to the NSD Trust and another sum of Rs 1,000 crore will be given next year to enable the Trust to scale up the programme of the National Skill Development Corporation rapidly. The National Skill Certification and Monetary Reward Scheme was launched in August 2013. At last count, 204 job roles had been finalised, 168,043 youth had enrolled and 77,710 had completed their training.
  3. A Venture Capital Fund to provide concessional finance to Scheduled Caste will be set up by IFCI with an initial capital of Rs. 200 crore which can be supplemented every year.
  4. The restructured ICDS, under implementation in 400 districts, will be rolled out in remaining districts from 1.4.2014.
  5. A National Agro-Forestry Policy 2014 has been approved.
  6. A mechanism for marketing minor Forest produce has been introduced and an allocation of Rs 444.59 crore has been made to continue the Scheme in 2014-15.
  7. A new Plan Scheme with an allocation of Rs 100 crore has been approved to promote community radio station
  8. New technologies such as JE vaccine, a diagnostic test for Thalassaemia and Magnivisualizer for detection of Cervical cancer have been delivered to people. Additional Central Assistance to some States
  9. A sum of Rs 1200 crore as additional central assistance to North Eastern states, Himachal Pradesh and Uttarakhand in this financial year.

Technology: Space India joined a handful of countries when it launched the Mars Orbiter Mission. The Country has acquired capability in launch vehicle technology, cryogenics and navigation , meteorological and communication satellites. Several flight tests, navigational satellites and space missions are planned for 2014-15.

The vision document

  1. Fiscal Consolidation: The Government should achieve the target of fiscal deficit of 3 percent of GDP by 2016-17, and remain below that level always. The Economic Survey has called for staying on the path of indicated fiscal consolidation. This, it says, is critical to sustaining the desirable macro-economic outcomes not only in terms of higher growth in real GDP and lower inflation, but also in easing the financing of the widening current account deficit (CAD), for which India’s sovereign credit rating is important. The Survey also emphasizes widening tax base and privatization of expenditure as key factors in effecting the desired reduction in the Central Government fiscal deficit over the medium term and in reducing the key risks in fiscal marksmanship (different between actual outcomes and budgetary estimates as a proportion of GDP). The Survey underlines that addressing the key fiscal risk of petroleum subsidies is critical in better fiscal marksmanship. “ With recent reforms in diesel prices and efforts at expenditure reprioritization, the medium term fiscal consolidation plan is credible and could yet again yield macroeconomic dividends in terms of higher growth and price stability,” the Survey notes. The non-Plan expenditure of over Rs.12 lakh crore gives an impression of a fat government which needs to reduce its size so that more resources are left for development.
  2. Current Account Deficit: India is likely to run a Current Account Deficit every year for some more years, as it can be financed only by foreign investment, whether it is FDI or FII or ECB or any other kind of foreign inflow.  Hence, there is no room for any aversion to foreign investment. The government has approved eight foreign investment proposals, including plans by L&T Infrastructure Development Projects and Welspun Renewables Energy, totalling Rs 1,024 crore. There is a huge opportunity for foreign investment in India as the government focuses on rapid infrastructure development in the country.
  3. Price Stability and Growth: In a developing economy, the aim should be to maintain a high growth with moderate level of inflation.  RBI must strike a balance between price stability and growth while formulating monetary policy. But in the recent past, the RBI has to focus more on price stabilization than growth.
  4. Financial Sector Reforms: The recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) that require no change in legislation must be implemented immediately and, for the other recommendations, we must draw a timetable for passing legislation.
  5. Infrastructure: Every proven model must be adopted and the PPP model must be more widely used.  New financing structures must be created for long term funds and pooling of investments.  The total investment requirements for power, roads, ports, civil aviation, etc during the 12th Plan period is projected at $1 trillion, nearly half of which is expected to come from the private sector. The Viability Gap Funding (VGF) Scheme has been further strengthened by adding many new sectors like modern storage, education, health, irrigation, etc. There are many projects with high economic returns, but the financial returns may not be adequate for a profit-seeking investor. For instance, a rural road connecting several villages to the nearby town. This would yield huge economic benefits by integrating these villages with the market economy, but because of low incomes it may not be possible to charge user fee. In such a situation, the project is unlikely to get private investment. In such cases, the government can pitch in and meet a portion of the cost, making the project viable. This method is known as viability gap funding.
  6. Manufacturing: There should be a minimum tariff protection so that there is an incentive to manufacture goods in India rather than import them into India. India is looking to create as many as 100 million skilled jobs in the manufacturing sector by raising its share of GDP to 25 per cent from 16 per cent.
  7. Subsidies: Subsidies that are absolutely necessary and give them only to the absolutely deserving. But due to populist politics, the subsidies are ever increasing. In all, the interim budget has provided Rs 65,000 crore towards fuel subsidy in 2014-15. The Government had given fuel ret ailers Rs 27,772 crore cash subsidy for selling diesel, cooking gas and kerosene below cost in the first nine months of 2013-14. The subsidy was Rs 16,000 crore short of the amount demanded by the Petroleum Ministry to cover for losses incurred on diesel and cooking fuel sales in the April-December period. The Interim Budget also provides Rs 2,500 crore to fuel retailers for paying cash subsidy directly to cooking gas consumers. The revised estimate for petroleum subsidy for 2013-14 is Rs 85,480 crore against a budget estimate of Rs 65,000 crore.
  8. Urbanisation: Cities have wealth, cities also create wealth. That wealth should be tapped for resources to rebuild the cities with a new model of governance. Urban India today is“distributed” in shape—with a diverse range of large and small cities spread widely around the nation. India will probably continue on a path of distributed model of urbanization because this suits its federal structure and helps to ensure that migration flows aren’t unbalanced toward any particular city or cities. Technology and Public Transportation are the key to Sustainable urbanization and there is a need for an innovative, sustainable and creative urbanization process.
  9. Skill Development: Skill development must rank alongside secondary education, university education, total sanitation and universal health care in the priorities of the Government. National Skill Development Corporation (NSDC), the Public Private Partnership (PPP) initiative that aims to impart skills to the Indian workforce through training programs, is on track to train 150 million people by 2022. The National Skill Development Corporation India (NSDC), a Public Private Partnership, aims to promote skill development.
  10. Sharing responsibility between States and Centre: States have the fiscal space to bear a reasonable proportion of the financial costs of implementing flagship programmes and must willingly do so, so that the Central Government can allocate more resources for subjects such as defence, railways, national highways and telecommunications that are its exclusive responsibility.