Fiscal consolidation and investments likely to be at the centre of Union Budget ’15

With the Reserve Bank of India meeting out of the way, the focus of policy shifts to the union budget due to be released on February 28. The central bank decided to hold rates in the current meeting following the surprise 25bp rate cut on January 15. As for easing in future, RBI has set quality fiscal consolidation as an important pre-requisite.

There might be some good news there, as the government has indicated that it is unlikely to shift from the path set by previous government for the fiscal deficit and reiterated by the current government in the interim budget presented in (July 2014). The government has committed to the fiscal deficit target of 4.1 per cent of GDP and is likely to undertake sharp expenditure cuts in the current quarter to achieve the target. The fiscal deficit target for next fiscal is likely to be set at 3.6 per cent and 3.0 per cent for FY2016 and FY2017, respectively.

In the next year’s budget, the government is expected to increase the share of capital expenditure and also other measures to boost public investment in infrastructure. On one hand, savings and more optimised allocation by the government on the revenue side with a cut down in subsidies owing to the fall in oil price, which are considerably down over the last year, and realignment of welfare schemes are likely to help the government create the much needed space of raising capital expenditure. 

At the same time, the government will also be able to reap benefits from a higher tax revenue collection in turn owing to a stronger GDP growth and continued divestment in various public sector companies. For instance, the success of the current Coal India stake sale should provide impetus to the government for further divestment projects. 

From the financial markets perspective, the government is expected to delay the implementation of General Anti Avoidance Rule (GAAR) by two years and not raise the withholding tax rates. From an individual’s perspective, there are expectations that the government may raise the minimum threshold of income from Rs 2.5 lakh to Rs 3 lakh to boost the disposable income of households.

From a medium term standpoint on tax reforms, while the government is also working hard to move from the current system of plethora of indirect taxes to more simplified Goods and Services Tax (GST), it (government) can start moving towards the ultimate goal by working around the current indirect taxes, maybe rationalise the number of tax rates as a step towards GST, which is expected to be rolled out in April 2016. 

As for the sectors, those that are the key focus of the ‘Make in India’ campaign such as defence, electronics and aviation may find special mention in the budget. The government may also decide to announce certain measures to give a fillip to the ‘Digital India’ campaign by announcing incentive for the public sector to develop digital infrastructure and provide digital services across the nooks and corners of the country. The government could also announce measures to boost private investment in the ‘Smart Cities’ initiative.

In all, sticking to the fiscal deficit targets, boosting public investment in infrastructure and providing a flip to ‘Make in India’, ‘Digital India’ and ‘Smart Cities’ initiatives are likely to be the key themes of the union budget this year. Meeting these three seemingly contrary but nonetheless important goals will require ingenuity on part of the government.

(Aman Mohunta is India economist at Nomura.) 

As told to VCCircle's Ishaan Gera in a telephonic interview.

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