X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Budgetary challenges for new govt - Outside View by S.S. TARAPORE
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Budgetary challenges for new govt
Jun 2, 2014

The biggest challenge before the new government is rectification of the fiscal deficit. Time and again, governments have vowed to bring about fiscal correction, but invariably, after some initial efforts, there are fiscal slippages. While undertaking fiscal correction, it is essential to eschew from fiscal gymnastics to show a lower deficit.

The new government is not a hostage to coalition imperatives and should, therefore, be better able to deliver on its basic plank of minimum government with maximum governance. While undertaking a fiscal correction, attention needs to be given to distributive justice.

Sequencing of inflation control and growth

While undertaking monetary-fiscal coordination, it is essential to appreciate that easing of monetary policy can be sequenced only after fiscal correction and inflation is brought under control. In other words, reduction in inflation must precede easing of monetary policy. To the extent there is fiscal correction, there would be headroom for easing monetary policy. Hence, there is need for caution in undertaking monetary-fiscal easing before inflation comes under control.

Key fiscal dimensions

As per the Interim Budget for 2014-15, the total Central Government expenditure is estimated at Rs 17,63,214 crore (13.7 per cent of GDP). The fiscal deficit is estimated at Rs 5,28,631 (4.1 per cent of GDP). While the size of the fiscal deficit appears to provide for some correction over the previous three years, there are two problems. First, there are strong possibilities of the Interim Budget having a large throw forward of expenditure from 2013-14 into 2014-15; again, some revenues due in 2014-15 have been advanced into 2013-14. Secondly, a staggering 30 per cent of total expenditure is financed by the fiscal deficit, which clearly reflects a weak fiscal position. The domestic market borrowing (net of repayments) is estimated at Rs 4,92,000 crore, while the gross borrowing is estimated at Rs 5,97,000 crore. Moreover, information coming out of the ministry of finance hints at the need for a further enhancement of the borrowing programme by Rs 70,000 crore. The debt servicing (repayment of debt and interest payments) in 2014-15 is estimated at about 37 per cent of revenue receipts.

Internal debt explosion

Finance Commissions in the 1980s and early 1990s repeatedly warned about an internal debt explosion and the need to provide for debt repayment. Fiscal pundits, however, provided a disservice to the nation by rejecting the theme that domestic debt is a major crisis looming on the horizon. These fiscal pundits argue that a sinking fund makes no sense while there is a fiscal deficit and furthermore, that the domestic debt burden will resolve itself. Therefore, the recommendations of successive Finance Commissions for the setting up of a sinking fund to redeem internal debt were rejected by the central government despite the Reserve Bank of India (RBI) having prepared, in 1996, a comprehensive scheme for setting up a sinking fund. It is unfortunate that the 12th and 13th Finance Commissions side-stepped the issue. The new government would be well-advised to specifically seek the advice of the 14th Finance Commission on the feasibility of setting up of a sinking fund for the central government.

Subsidies

The food, fuel and fertiliser subsidies are estimated at Rs 2,55,700 crore in 2014-15. There are reports that close to Rs 100,000 crore of subsidy on LPG and diesel is overdue. An economy cannot subsidise itself and the burden has to be borne somewhere in the system. Ultimately, the burden manifests itself in inflation. It is clear that there is a considerable degree of misapplication of subsidies. For instance, food stocks, way beyond the prescribed buffer, result in a heavy burden on the fisc by way of interest and storage costs as also wastage. Thus, there is an immediate need to unload excess stocks on to the market, which would cool food inflation. Again, the standard domestic LPG cylinder is sold at Rs 460 per cylinder, while the actual cost is Rs 1,160. The earlier proposal was to undertake all sales at the Rs 1,160 and provide a direct cash subsidy to all consumers. The intention was to cut back subsidies for all other than the target group. Once subsidies are given to all, it is difficult to claw back the subsidy. The petroleum ministry has called for a hike in the price of the LPG cylinder by Rs 250. This would be difficult to implement. It would be best to go for a quarterly increase of Rs 50 and restrict the subsidy strictly to BPL users.

Some thoughts on direct taxes

There are strong expectations in industry that the new government would provide a strong fillip to growth by providing incentives. In such a clime it is unrealistic to expect the government to increase taxes on the upper income groups.

At the same time, middle and lower income groups have experienced a significant erosion of real income in view of the relentless inflation of recent years. Hence, there will be a clamour for reliefs in these income groups via raising the income tax threshold, as also providing incentives for savings. Since dividends from companies and mutual funds received by individuals are exempt from income tax, there is a case for also exempting interest income on bank fixed deposits up to an amount, say Rs one lakh per annum.

Need for fiscal caution

There would be heavy pressures for fiscal giveaways. Given the precarious fiscal position such relaxations should be avoided. The need for caution on the fiscal front cannot be overemphasised.

Please Note: This article was first published in The Freepress Journal on June 02, 2014. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Budgetary challenges for new govt". Click here!

  

More Views on News

What They Forgot to Tell You About Sensex at One Lakh (Smart Contrarian)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

4 Things To Do When You Are Not Able To Pay EMI (Outside View)

Feb 22, 2018

PersonalFN lays down simple steps to take if you find paying EMIs difficult.

This Investor Lost US$ 444 Million! How You Can Avoid the Same Blunder... (The 5 Minute Wrapup)

Feb 22, 2018

Here's how you can minimize losses if you have invested in the wrong company...

Is This the Most Absurd Government Agency? (Vivek Kaul's Diary)

Feb 22, 2018

Is this government agency doing the job of sounding an alarm if the financial system were ever in danger?

More Views on News

Most Popular

The Foundation for Sensex 100,000 is Laid(The 5 Minute Wrapup)

Feb 17, 2018

Top three reasons for Tanushree's presentation at Equitymaster Conference to be centered around a possible 30% correction.

The Era of Easy Money is Coming to an End. What Happens Now?(Vivek Kaul's Diary)

Feb 9, 2018

The easy money policy of the Federal Reserve of the United States, which drove up stock markets all over the world, is ending, with the Federal Reserve looking to shrink its balance sheet.

The Markets Want Your Money. Don't Give It to Them.(Smart Contrarian)

Feb 9, 2018

MFs are having a gala time taking money from over-eager investors and funneling it into equities. Smart investors, though, know better than to do that.

The Big Gamble(The Honest Truth)

Feb 15, 2018

Once you accept the fact that elections are round the corner and that this budget is geared to reach a 40% target, everything makes sense.

NPAs Set to Rise Further with New RBI Rules(Chart Of The Day)

Feb 15, 2018

The RBI overhauls bad loan framework. Banks may come under additional pressure due to rising NPAs and increased provisioning.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Feb 22, 2018 (Close)

MARKET STATS