Budget 2014-15: Chidambaram to walk tightrope with sops and tax cuts

Will Chidambaram manage it?

Will Chidambaram manage it?

Finance Minister P. Chidambaram will be walking on a tight rope while presenting the interim budget for the coming fiscal year, this Monday. According to reports, he will try to woo voters towards  Congress, a party all ready reeling under charges of extreme corruption, by doling out more funds and supporting industries  in a desperate attempt to project a lower fiscal deficit before elections.

India, Asia’s third-largest economy, is going through one of the toughest phases, facing the worst economic slowdown in nearly a decade.  The continuous shrinking of the manufacturing industry in the past 5 years, coupled with a slow job growth rate has led the UPA Government to think of alternatives, but without success. High rate of inflation has tied the hands of the Government in offering sops to the voters or even to the companies to boost growth, which in turn may provide a marginal improvement in the job scenario.

A crushing defeat for the ruling alliance led by Congress in elections due in May has been predicted in a couple of opinion polls and truly speaking, the UPA government is down to its lowest stand right now. There is widespread discontent with it’s mismanagement of the economy, high rate of inflation coupled with lengthy corruption scandals.

According to officials, it is very likely that Chidambaram will try to make a do-or-die attempt  announcing more funds for health, rural jobs, roads and food subsidies to win back voters.   However, if public opinion is to be believed,  then it’s already too late. They feel little is going to be change in the coming 2-3 months, given the track record of this Government for the past decade.

The auction of telecommunications spectrum has brought in a higher-than-expected $9.85 billion. What it means is that the government will get at least $3 billion of that upfront in the current fiscal year and the rest will have to be spread out until 2026. Chidambaram may breathe easy for a while, but only for a while!

India presents an interim budget to the Parliament for approval of the planned expenditures for the three to four months in an election year. But the crucial task of taking major policy steps in the full-year budget after the polls, is left to the to-be-elected party after the declaration of the poll results.

It is expected that factory-gate duties on products like autos will be cut down to provide some support to the manufacturing sector. He is also likely to extend an interest subsidy on bank loans to farmers, exporters, and offer tax concessions for poorer regions.

ECONOMY LOSING STEAM

In the first nine months of 2013-14 fiscal year, Industrial output has fallen by 0.1% and 5% is the decline in the annual car sales. Since taking charge from last August, Chidambaram has reduced spending and gold imports to rein in the current account deficits that helped stave off the threat of credit rating downgrades last year.

But he has not been, in any way, successful to tame the persistently rising inflation rates . On consultations with RBI and top statiscians and strategist of the country, he has changed the rules of the games many times with RBI taking up reforms in its policy more often than once in a month, but the right way to juggle with these problems has remained unknown. It was projected that in the current fiscal year ending in March, the Indian economy will grow by 4.9%, much lower than the more than 9% growth seen before the 2008 global financial crisis.

For the coming 2014-15 fiscal year, Chidambaram is likely to project near 6% GDP growth and a fiscal deficit target of 4.2% of gross domestic product. It is expected that a fiscal deficit of nearly 4.8% of GDP will be reported by him for the current fiscal year which was definitely helped by sharp spending cuts, dividends from state firms, higher receipts from the sale of telecoms spectrum.

Oil, fertilisers and other subsidies worth nearly Rs 1 lakh crore may be deferred to the next fiscal year and the final figures could even be higher, and they would not be exactly known till the end of fiscal year. However, an official (on condition that he will not be named) said that for the next fiscal year, oil, fertilisers and food subsidies are likely to be budgeted at about 2 percent of GDP, compared with Rs 2.21 lakh crore budgeted subsidies for this fiscal, the second source said. These numbers may be revised by the next government when the full-year budget will be presented by it in June or July.

Officials say that the power ministry proposed that they may be granted an annual Rs 25K crore subsidy for gas-based power plants to cushion customers but it has been rejected straight by the finance minister as natural gas prices is likely to almost double from 1st April, 2014. However, the defence, railways, health and other ministries have been assured of more funds in the budget.

DEFERRING BURDEN

The Reserve Bank of India (RBI) as well as finance analysts are very much worried that Chidambaram may harm growth prospects by deferring a large amount of subsidies to the next fiscal year. They have suggested that the government should avoid deferring release of funds for expenses that have already been incurred to prevent tightening of systemic liquidity and further harm only to sluggish growth. The government has been asked by RBI to take steps to deal with food inflation and target food and fuel subsidies for fiscal consolidation.

Samiran Chakraborty, a senior economist said in a research note on Wednesday,”The quality of fiscal consolidation worries us,”.

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