India's fiscal deficit as a percent of GDP

Feb 17, 2014

In his last Budget speech as Finance minister in the UPA-II government, P Chidambaram had a lot to say but much of it was high on intent and low on content. His vote-on-account, being a budget without any major new proposals, is important only for one reason: it tells us how honest the finance minister has been in showing a true and fair picture of the state of the government's finances.

As markets and rating agencies eagerly watch out for fiscal consolidation carried out ahead of the upcoming elections, the Finance minister reported a fiscal deficit of 4.6% of the gross domestic product (GDP), lower than his initial target of 4.8%, helped by a massive cut in expenditure and gains from telecom spectrum auction. He has also pegged next year's fiscal deficit at 4.1%. Current account deficit (CAD) will also be contained at US $45 bn. However, once the details of the fiscal deficit number are out then only the credibility of the fiscal policy statements can be ascertained. This is because the government has used many accounting tricks to bring the deficit number down.

The FM certainly deserves credit for not presenting a populist budget. The FM did not roll out freebies but the subsidy bill of Rs 2.4 trillion is likely to be another underestimate - for it is almost the same as this year, when Rs 350 bn has been rolled over. The FM has also cut excise duty on capital goods, bikes, cars and SUV. This will help consumption to pick up.

The FM has bravely tried to paint a rose pink picture of the economy. This is even as the major bottlenecks for growth remain. Chidambaram might win kudos for meeting the twin deficit target this year, but he has left a deep hole for the next government to fill. The next government needs to focus on key sectors which form an imperative part of our economy and overall growth of the country.

As far as stock markets are concerned, a budget without any major decisions on reforms is unlikely to have any effect on long term fundamentals of the economy. Hence, one would be better off not focusing on it too much. Attention should instead be paid to the fundamentals of the company and the valuations that it is trading at.

What do you think of the Finance Minister's interim budget speech?

Data Source: Business Standard