Fiscal prudence lost with the new budget

The people of India voted in change however the Budget for the first financial year of the new government’s tenure lacked the change. The budget presented in the house today for the most part lacked a clear direction and seemed like a chaotic presentation of some good and some confused ideas. Given India’s precarious fiscal situation- controlling deficit and inflation would have seemed like the most obvious goals for the new government to work towards however this was not the case

Excessive and disorderly infrastructure spending

The total budgeted expenditure for 2014-15 is 12.9% higher than the revised estimates for 2013-14. The government aims to increase its net tax revenue receipts by 16.9% this year which can only be seen as a gross over-estimation. The minimal direct tax reforms including the increase in the income tax slab by INR 50,000 or increase in the investment allowance for individuals is unlikely to raise the tax to GDP ratio. It is not a laffer curve issue with the Indian masses but rather the lack of a crackdown on the abundant tax offenders in the nation. The all-cash/ black money economy will not be tempted to convert and start paying taxes with an increase in the income tax exemption limit.

The government will set up Infrastructure Investment Trusts (InvITs), a modified REITs type structure for infrastructure to reduce the pressure on banking for infra as well as increase fresh equity available for the same. Infrastructure however for the most case is depreciative in nature and public infrastructure rarely functions on the given time schedule. The cash flow from these projects would be a distant reality dampening the allure of such a product.

The most disheartening sight in all of this is however the excessive government spending on public infrastructure undertaken in a disorderly manner in an inflationary environment. The government for example is awarding 16 port projects this year with spending INR 116 billion on a single harbor development project itself. This is despite the total traffic being handled at these ports witnessing a decline for the past two years. With not a sizeable increase in export production the construction of 16 ports seems mistimed. The focus on roads (INR 378 billion expenditure) is however welcome for a nation finally looking forward to building a manufacturing sector.  Developing inland waterways and roads provides the manufacturers with much needed transport infrastructure. These domestic networks need to be prioritized over international transportation avenues and fiscal prudence would suggest that the latter be saved for later. Maintaining the fiscal deficit at 4.1% of GDP is not likely to be a reality.

Inflation remains uncured

With such immense government spending lined up for the coming financial year, price stability will be a distant reality. In an emerging economy facing an annual inflation rate of 8% and with 29% of the population staying below the poverty line food affordability remains a major concern. The budget however lacked any provisions to deal with the 30% of annual grain production that gets wasted in India due to poor warehousing facilities.

Barring a minor cut in customs duty on imported apparel, small TV’s and other non-essential consumer products there was not much relief for the Indian consumer. The government additionally imposed a 5% excise duty on imported met coal and a 7.5% duty on imported flat rolled steel (to deal with idle Indian steel capacity).

Select sectors receive attention however the ‘wow’ factor was missing

FDI cap was raised to 49% (from 26%) in defense manufacturing and insurance sectors of the economy. The management however is to remain completely Indian. The rationale for increasing the cap in defense is to counter the flow of foreign currency reserves brought about by the large amount of arms’ imports in India. The defense budget has also been increase by 12.4% this fiscal year. Reforms in the rest of the industrial sectors or for the business environment in general are missing.

The government’s recognition of the need to implement for a unified, central sales tax code in India and the conclusion of the debate around it is welcome. The business community however hoped for a clear deadline for when this new regime would be in play. The hopes for a streamlined tax administration were however not fulfilled in this budget. This was the ‘wow’ factor that businesses were waiting for that would have increase the ease of doing business in the nation.

Good developmental intentions are marred with misplaced allocation

There were several new initiatives undertaken by the government in developing the human capital of the nation. This was however not expected to be the focus of the budget. The budget had more welfare undertones than expected, even though a lot of the initiatives were marred with misplaced allocation. The starkest of these distinctions can be seen in the fact that the cause of girl child (and her education) received only half the money the construction of a statue warranted (33 million USD). The most upsetting fact in this allocation would be the fact that the state government had already spent 16 million USD on this statue.

The good intent of the government was however visible in the healthcare allocations announced. The focus on TB care (the pathogen is said to be present in 95% of Indians) shows the health ministry’s focus in containing a disease that affects almost all Indians. Construction of new All India Institutes for Medical Sciences coupled with the new government central drug regulatory authority will help enhance the quality of healthcare in India in a systematic, focused manner.

The expenditure (INR 5 billion) on training programs and motivation for teachers in primary education is crucial in improving the dangerously bad quality of teachers in public schools in India. The creation of new IIT and IIM (technology and management institutes) is however a populist move. These institutes are regarded as the best in the nation however with quickly deteriorating quality except for in a few locations has diminished the brand value of these schools. Other subjects that needed impetus in higher education were once again ignored by the Indian government.

The above stated are only a few of the developmental projects undertaken by the government with its new budget. The immense amount of spending and promised spending by the government makes a fiscal deficit of 4.1% this year, 3.5% in 2015 and 3% in 2016 seem like an impossible dream.