By: Punam Sharma
In India after years of high fiscal deficit it has become inevitable to go through a phase of Fiscal consolidation. Though fiscal consolidation will result in lower inflation possibly lower CAD and greater room for monetary easing in the short run it also lead to lower GDP growth. How fast and how sustainably the GDP will grow in the medium term will depend on the quality of fiscal consolidation.
The fiscal deficit to GDP ratio came in at 4.8% in FY 14 as widely expected and communicated by the Finance minister. The intent for fiscal consolidation was there with overall restraint in the growth of non plan expenditure however the credibility will be tested with the GDP numbers clocking 4.5% in Q3 FY13 and pending elections. Also fiscal consolidation has not come at the cost of throttling plan expenditure which is imperative for growth of productive assets in the economy. 16% increase in total expenditure contributed by 28% increase in plan expenditure and 10% increase in non plan expenditure is balanced and conducive for a stable growth regime.
The flavor of the budget remains socially oriented. Direct cash transfers, increased allocation for food security remained in focus. The stress on vocational training and skill development will improve employability and disposable income in the long term. Some incentives to facilitate infrastructure sector viability and growth also found their due in the budget. We were expecting some reforms on the taxation side but all that is work in progress and no announcements were made which could changes the quality of resource mobilization (higher contribution of taxes to total receipts)
Annexure – 1 – Fiscal Aggregates
Explanation to Annexure – I
On the fiscal aggregates, the fiscal deficit target for FY14 stands at 4.8% vs. 5.2% In FY13
This is to be achieved through a combination of increased tax receipt (19%) and non tax receipts (increase of 33%). The revenue/ resource mobilization in the long term needs to shift towards higher contribution from tax revenue. Currently nearly 47% of total Receipts is coming from non tax and capital receipts. The key risk in meeting the revenue receipts emanate from telecom auction (20000 cr) and disinvestment (PSU and Non PSU of 54000 cr)
On the expenditure side, the planned expenditure estimates an increase of 28% and the total expenditure increases by 16% – Key themes were restraint on the subsidy side, and some incremental spending to facilitate infrastructure sector viability and growth.
View Going Forward
The net takeaways have been nothing different from the last couple of budgets by the current Government. A lot of direct spending on the social sector – some indirect intervention to channelize money into the investment economy and a little focus on incentivizing financial savings. Profitability is unlikely to be affected significantly. The day does not change materially the events of the rest of the year. The budget is not an event that would trigger out a return to either the investment economy or a revival of growth rates. But it has been an admission that all is not well at a macro level. Under such environments asset market recoveries would at best remain muted.
Takeaways for Investors:
Equity investing is all about a long term disciplined approach to investments. Event like budget just helps formalise and formulate views on trends for polarization of capital and growth in the economy. Overall we continue to invest in companies in line with our philosophy i.e. leaders in their respective space, efficient allocators of capital and having minimum leverage
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