No Populism, Only Algorism: Shubhada Rao

Bank's senior president & chief economist says next govt would still be saddled with extra burden

Within the limited scope that an interim Budget offers, the finance minister judiciously balanced the twin objectives of attempting to resuscitate growth while adhering to fiscal prudence. Having managed to restrain FY14 fiscal deficit below the red line at 4.6 per cent of the Gross Domestic Product (GDP), the finance minister now aims to consolidate the fiscal deficit position further to 4.1 per cent in FY15.

While the minister eschewed populism, which could have made the fiscal situation worse, it is quite evident that the next government would still be saddled with extra burden. This is because the given recourse in FY14 came only through “fiscal-engineering” (trimming expenditure and postponing payments). Eventually, any political party coming to power after the general elections would have to bring into effect “real fiscal correction” by raising tax revenues or rationalising subsidies.

Looking at the specifics on the revenue side, the government has pegged FY15 tax revenue growth at 19 per cent vis-à-vis 11.8 per cent in FY14, expecting a concomitant improvement in tax-GDP ratio by 50 bps to 10.7 per cent. In my view, this appears optimistic, as the statistical elasticity for tax buoyancy would require real GDP growth to increase by over 3 per cent from 4.9 per cent in FY14 to around 8 per cent in FY15. Given the loss of growth momentum in the recent years, such a sharp uptick in growth momentum in such a short time is unrealistic.

On the expenditure side, assuming that the subsidy bill would remain same as in FY14  may prove an underestimation. Accounting for Rs 35,000 crore rollover from FY14 and a higher outlay on the food security bill would compel the next administration to cut plan expenditure in a bid to attain the fiscal deficit target, yet again dampening a critical growth impulse.

The government’s low borrowing in FY15, decision to cut excise duty on capital goods and consumer durables along with sector-specific relief to the automobile and chemicals sectors are a positive. In the end, to ensure minimal deviation in revenues and expenditures from budgeted estimates, greater importance needs to be laid on policy implementation to ensure the much needed ‘crowding in’ of private investments.

Shubhada Rao
Senior President & Chief Economist,
YES Bank