Budget optimistic on revenues, mum on subsidy cuts

Market says govt's assumptions of higher nominal GDP growth too optimistic

Finance Minister Arun Jaitley's maiden budget speech should be seen more as a 'letter of intent' and not a handbook on 'bold reforms'. Like the rail Budget, the Union Budget for FY15 was high on intent and low on specifics. Investors were expecting a clear road map on three major issues - lowering the subsidy burden, recapitalisation of public sector banks and a credible fiscal deficit target -but the minister disappointed on all.

For starters, the minister has retained his predecessor's unrealistic fiscal deficit target of 4.1 per cent. While the minister has not cut expenditure to meet the ambitious target, he has assumed a 17 per cent year-over-year (y-o-y) growth in revenue receipts against 10.2 per cent in FY14. The budgeted expenditure for FY15 has risen marginally to Rs 17,94,900 crore from the estimated Rs 17,64,900 crore in the interim Budget. Revenue expenditure is expected to grow by 12 per cent y-o-y and capital expenditure is budgeted to grow by 18 per cent y-o-y.

The optimism on the revenue side stems from expectations of higher nominal GDP growth and better tax elasticity. The government is assuming nominal GDP to grow by 13.4 per cent in FY15 against 12.3 per cent in FY14. Last year, tax elasticity was 0.8 per cent and this year's revenue growth estimate is assuming an elasticity of 1.34 per cent. Dhananjay Sinha, strategist at Emkay Global Financial Services, says the estimates look very optimistic as the minister is assuming higher growth in revenue receipts, and the government may also have to slash expenditure to meet its fiscal deficit target.

Interestingly, in the last 10 months of FY14, the fiscal deficit was Rs 3.43 lakh crore and the FY15's Budget estimates the deficit to be Rs 2.90 lakh crore in the same time. Given that 46 per cent of the estimated fiscal deficit target has been reached in the first two months of the financial year, the government will find it tough to contain deficit at 4.1 per cent. Also, by raising the income tax exemption slabs, the minister has said goodbye to revenues of Rs 20,000 crore.

The minister has no credible answer to the subsidies issue. Nomura's India economist Sonal Varma says, "We had expected the government to come clean on subsidy bills with a higher number, ensuring more credibility. But this did not materialise. This suggests a slippage on non-planned expenditure or continuation of policies (subsidy rollover) or cut in planned expenditure to meet the fiscal deficit target." But Vikas Khemani, chief executive, wholesale capital markets, Edelweiss Capital, says given the sensitivity of the subject, the government has chosen not to make it a subject in the Budget. But it is not a major concern. His concern, however, pertains to the minister remaining silent on a time frame on the goods and services tax (GST). He does not expect the market to ponder too much over the Budget and focus on earnings and performance of lead economic indicators in the coming months.

The government's reluctance to capitalise capital-starved public sector banks is another disappointment. Ananda Bhoumik, senior director, banks, India Ratings, says: "The proposal to tap retail markets for Basel-III equity suggests the government's reluctance to inject capital beyond its current shareholding. This may put pressure on the ability of some weak public sector banks to raise growth capital."

But the market has given a thumbs-up to the minister's move to give sops to banks to raise capital for long-term infrastructure projects. The move would not only positively impact the net interest margins of banks but also lower borrowing costs by 190 basis points. This would be a big positive for infrastructure companies struggling with high interest costs. But the Reserve Bank has to approve this measure. The government will now have to go beyond its vision statement and implement subsidy reforms and roll out GST.