P Chidambaram bets on demand

Palaniappan Chidambaram's swansong as Union finance minister in the United Progressive Alliance's (UPA's) second term in office was an interim Budget that he firmly insisted stayed within the "red line" he had announced for fiscal consolidation but which, nevertheless, provided some fiscal stimulus for crucial sectors. In the run-up to the general elections, his speech was laced with strong defences of UPA's 10 years in power. Chidambaram said it had delivered above-trend growth over both its five-year tenures. He also insisted the economy now was "more stable than it was two years ago", and that the growth cycle had turned in the second quarter of 2013-14. Meanwhile, the interim Budget's fine print revealed a major shift in spending power from the Centre to states.

Arguing the manufacturing sector needed stimulus that could not wait, Chidambaram announced three major changes to indirect taxation for the coming months. First, he reduced excise rates on many capital goods and consumer goods by two percentage points, to 10 per cent. Second, he targeted the automobile sector: Small cars, scooters and commercial vehicles will see a four percentage point drop in excise duty, to eight per cent; larger cars, a three to four percentage point reduction; and sports utility vehicles will be given a giant six percentage point reduction. Third, in a partial reversal of a hike last year, the finance minister proposed a restructuring that will lower duties on mobile handsets and their components. Given the choice of sectors, he is likely hoping to stimulate middle-class consumer demand.

Manufacturing sector gets ‘stimulus that couldn’t wait’

Many Union ministries practically defunded as onus for spending social-sector Plan money shifts to states

FM lays out ‘10 tasks’, including imposing macroeconomic stability and growing manufacturing, for future govts

Trumpeting a commitment to fiscal consolidation and stability, Chidambaram declared the year had ended "on a satisfactory note", with the fiscal deficit at 4.6 per cent of gross domestic product (GDP), below his "red line" of 4.8 per cent. The revenue deficit was 3.3 per cent, down from 3.6 per cent. This was achieved through sharply compressing expenditure. In particular, the revised estimate of Plan expenditure in 2013-14 was 14 per cent lower than last year's Budget provided.

Overall, non-Plan expenditure increased modestly. The increase was entirely on the revenue side, with non-Plan capital expenditure being less than a quarter of what was budgeted. Worryingly, interest payments remained high, at 43.3 per cent of net tax revenue; a 12.3 per cent increase in total interest payments has been Budgeted for 2014-15. Chidambaram proudly pointed to a decrease in the current account deficit to $45 billion for the entire year, and insisted inflation was being brought under control "in tandem" with the Reserve Bank of India.

In his projections for 2014-15, which promise a fiscal deficit of 4.1 per cent of GDP, Chidambaram has relied on optimistic forecasts for revenue buoyancy and GDP growth. Nominal GDP is figured to grow 13.4 per cent. Given the latest GDP deflator of 7.4 per cent, this means an expected real GDP growth of six per cent. That is higher by over one percentage point than 2013-14. Presumably as a consequence, gross tax revenue is expected to grow by 19 per cent over 2013-14 - although the current financial year's receipts were 6.2 per cent below expectations. That gap was 8.5 per cent for service tax, which is supposed to grow at a whopping 30.6 per cent next financial year. Other figures are also questionable. For example, Chidambaram has claimed the rollover of fuel subsidy to next financial year is only Rs 35,000 crore, compared with Rs 45,000 crore last year.

Perhaps in expectation of greater clarity about Chidambaram's forecasts, the market has responded with only tentative, cool approval to the interim Budget.

While Chidambaram insisted that UPA's welfarist schemes had been fully funded, the onus for spending social-sector Plan money has been shifted dramatically from the Centre to states. Many Union ministries have been practically defunded. The rural development department in the Union ministry was allocated Rs 74,429 crore for 2013-14, and spent Rs 59,310 crore; for next year, it has been given only Rs 7,552 crore. Other frontline social-sector ministries have suffered similarly, in a major move towards decentralisation.

Disinvestment continues to be a story of missed opportunities and targets - as well as an inability to learn from experience. Last year, Chidambaram said he expected Rs 40,000 crore from selling stakes in public-sector undertaking (PSUs). He raised barely Rs 16,000 crore. In spite of this shortfall - merely a repetition of similar failures in previous financial years - once again an ambitious target has been set for disinvestment, of Rs 36,000 crore.

In addition, it is implied in the numbers that the non-PSU stakes held by the Special Undertaking of Unit Trust of India (Suuti) will finally be sold next year. Also worth noting: The government squeezed dividends and profits worth Rs 88,000 crore out of the public sector in 2013-14 but receipts on that head for 2014-15 are being Budgeted at 12.4 per cent lower, in what might help PSUs recover from a year of unprecedented pressure from North Block.

While Chidambaram's focus was on a look back, extolling UPA's record, denying policy paralysis and insisting the economy had been stewarded well through numerous crises and was now on the mend, there was a combination of vision and populism on offer, too. He laid out "ten tasks" for future governments, including imposing macroeconomic stability, growing manufacturing and infrastructure, urbanisation and skill development.

As for populism, within the constraints of not being a regular Budget, much was on offer. Chidambaram said Congress Vice-President Rahul Gandhi's insistence on one-rank one-pension for the armed forces would be implemented in 2013-14 itself, in a clear attempt to recover lost ground in Rajasthan. A leaky interest subvention scheme for agricultural credit was extended, with an eye on rural votes. And, 900,000 student borrowers - or young voters - were given a Rs 2,600-crore transfer when Chidambaram enhanced an education-loan scheme.

THE BIG QUESTIONS
WHO BENEFITS?
Automobile, consumer and capital goods firms; handset makers; 900,000 students; defence personnel; farmers

WHERE WILL THE IMPACT BE?
Two-wheeler, car, SUV, commercial vehicle and mobile prices might fall, leading to a pick-up in consumer demand

WHAT'S THE KEY TO SUCCESS?
Manufacturing revival helping meet the growth target; ensuring revenue buoyancy and meeting the 19% tax
revenue rise target; keeping expenditure growth below 11%

WHAT ARE THE RISKS?
Target for revenue proceeds from disinvestment might not be achieved; subsidy could overshoot target;
external sector stability a concern area