Finance Minister continues on the path of fiscal consolidation: Shubhada Rao

In conversation with Jinsy Mathew, Shubhada Rao, Executive Vice President & Chief Economist, YES Bank shares her take on the VoA and how the figures stack up

In conversation with Jinsy Mathew, Shubhada Rao, Executive Vice President & Chief Economist, YES Bank shares her take on the VoA and how the figures stack up

What is your take on Interim Budget?
The interim budget was very much in line with expectations which were FRBM rhetoric. It was widely expected that the Finance Minister would continue on the path of fiscal consolidation. Bringing in fiscal deficit ratio at 4.1was broadly what the FRBM dictate would want.

Second positive was that the net borrowing program which was marked lower as compared to last year. It indicates that there would be relatively lesser pressure on market borrowing. There were no incremental negative surprises in terms of rollover of subsidy payment going into the next year as widely expected.

The key take away is that they have done little supporting investment and consumption. However, the greater impact is on the Policy environment and not just on tinkering with tax rates and bringing them a bit lower. Among the sectors a clear marked support has come through excise cuts for auto sector.

FY14 Q3 & Q4 GDP growth is expected to be atleast 5.2%. Do you think this is achievable?

Key thing here is the assumption of nominal GDP growth to be over 13% which puts the arithmetic under question. This is because over the last two years we have seen nominal GDP growth of under 12%. So, for the nominal GDP to grow above 13% would imply that real GDP got to above our own estimation of 5.5%.

Was the announcement of the expenditure front in line with your expectation?

On the capital account front, it’s much lower as the growth is also lower than even the revised estimates. For example: If we look at the revised plan expenditure on capital account its just 9% in the budgeted year viz-a-viz 23% in revised FY13 expenditure. So we are seeing a lower growth in the capital spending plan expenditure as well, which ideally it should have been a switch as we need to spur growth to imbibe confidence in the private sector.

We also need government led capital spending under plan. That growth has been projected lower. One sense that I get is that they have put the tax collection higher despite the realistic nominal GDP growth which may actually turn out to be lower. My only assessment is that we can give them some benefit of doubt because in the current fiscal year the tax collection was far below the estimates because the most high yielding tax sector i.e. manufacturing was either flat or in contraction mode. Going into the next year we could see some revival in the second half in manufacturing.

How credible is FY15 projections and what do you think is the rationale?

The very fact that the nominal GDP has come in lower tells that the basic underlying driving factor of nominal GDP therefore rendering into tax collection growth etc itself maybe based on a rosy assumption. That’s why I said at the onset that one needs to take the figures in the context of nominal GDP assumption.

Having said this, the interim Budget is good enough for the next few months. The only thing that one needs to take with read into is that the Government still wants to adhere to fiscal consolidation path. More importantly, the Finance Minister had a small window of announcing anything populist which he has refrained from.

 This time around everyone was looking at financing of the fiscal deficit more than anything else and that has come in relatively as a positive. The bond markets immediately reacted to these numbers. With the fiscal deficit reigned in and the net borrowing program lower than last year, these figures are a small positive for the markets.