No policy steroids needed
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But even with these spending cuts, reaching the revised fiscal deficit target of 5.3 per cent of the GDP in FY'13 is going to be a daunting task. However, the fiscal outturn for this year isn't that interesting anymore. Instead, how large the oil subsidy bill ends up being, and how low tax collections get are really the only matters of interest remaining. This is because it was the palpable underestimation of the subsidy bill and the overestimation of tax revenues that rendered the FY'13 budget dubious within days of its announcement.
For FY'14, the government has promised a deficit target of 4.8 per cent of the GDP. This is a large adjustment, especially with GDP growth unlikely to be much higher than 6 per cent. Consequently, the quality of the adjustment will be closely watched. If the revenue projections are based on a reasonable nominal GDP growth (say around 11-12 per cent) and oil subsidies on import price averaging $105-110 a barrel and the USD/INR exchange rate around Rs 53-54, the deficit target will be credible. Otherwise, it could well meet the same fate as the last budget.
Many believe that the forthcoming budget will be a bouquet of election giveaways. However, one doesn't get that feeling for two reasons. First, it would be completely out of character for this economic team to squander the hard-earned credibility of the last six months. Moreover, this team knows only too well that the threat of a credit downgrade is still alive. A misstep now could well force the credit rating agencies to act before the May 2014 elections. Second, and a bit cynically, why give out election sops now? Yes, there are several state elections coming up, but the big one is still 15 months away. Isn't it more effective to give the sops in a supplementary budget later in December?