Impact of union budget on fiscal policy

Economists at rating agencies and fund houses have described the 5.1 per cent fiscal deficit target for the next fiscal as an uphill task considering the absence of a clear fiscal roadmap and the still uncertain global environment.

They also said the deficit target will most likely overshoot by 20-40 bps to 5.3-5.5 per cent as the projected revenue increase and subsidy cuts may not materialise.
"We do expect some fiscal slippages relative to the Budget target, with the final figure possibly slipping to around 5.3-.5.5 per cent of GDP," said HSBC chief economist for India Leif Eskesen, though he described the Budget as "more realistic, and low on ambition".

Eskesen said fiscal slippages are likely to come from non-tax revenues and subsidy fronts. Increasing indirect taxes, divestment target and spectrum receipts and cutting subsidies will not be sufficient, he added. Global rating agency Standard & Poor's also said the uncertainty regarding policy implementation will keep the deficit high next fiscal. "While the Finance Minister announced various fiscal reforms, the timing of the implementation of key reform measures such as GST, DTC, and targeted direct subsidy remains uncertain. Also, deficit is likely to remain high, as uncertainty surrounds the path to subsidy consolidation and to lowering the fiscal vulnerability to volatile commodity prices," it said.

It further said that the nominal GDP growth will exceed the ratio of government deficit to GDP next fiscal. "We expect debt-to-GDP ratio to fall to 74.7 percent in FY 2013, from 74.9 percent in FY2012. But large public funding programmes, with new market borrowing of Rs 4.8 trillion, will put some pressure on financial markets, adversely affecting recovery. "With the 2014 general elections, we believe the chances of achieving a deficit target of 3 percent for fiscals 2014 and 2015 seem remote," S&P said.

Citi India economist Rohini Malkani said the Budget is safe economically as well as politically, but lacks on the reform front that the market has been hoping for.
"We see slippages on revenue and expenditure fronts. The revenue numbers are dependent on growth sustaining and the markets holding up. On the expenditure front, the slippage may stem from fuel subsidies," Malkani said.

The bottom line is "FY 2013 deficit being missed by over 40 bps, to 5.5 percent". Care Ratings managing director D R Dogra said achieving 5.1 percent fiscal deficit target will be tough, given the tepid growth in the country as well outside. Moreover, he said, the Budget has not exactly put a leash on expenditure but has tried to rationalise subsidies on fertilizers and oil, though one needs to see if they do work out at the end of the day.