Economy
Revenue optimism implies forced austerity again for India, says Nomura

The Indian government will need to continue to prune its spending in the next year as well to meet its budgeted fiscal deficit target. Therefore, the trend of forced fiscal austerity will likely continue next year, says Nomura in a research note

The Indian government has managed to improve upon the stated fiscal consolidation target in FY14, partly by pruning expenditure and partly by postponing payments, says Nomura in a research note.

 

“The government will need to continue to prune its spending in the next year as well to meet the budgeted fiscal deficit target. Therefore, the trend of forced fiscal austerity will likely continue next year. The true and final picture on the fiscal front will be known only in July following the elections,” Nomura said.

 

The government presented the interim budget (or vote on account) on Monday. A vote on account is a special constitutional provision by which the government has Parliament vote to secure funds for essential expenditures for part of the next financial year. The final budget will be presented sometime in June/ July when the next government is in place (after the elections).

 

The government set the revised estimate for the FY14 (year-end March 2014) fiscal deficit at 4.6% of GDP, which is better than the budget estimate of 4.8%. Despite the substantial slippage on the revenue front, the government cut its spending by Rs750 billion (relative to the budget target) in order to lower the fiscal deficit. In FY15, the government has set a fiscal deficit target of 4.1% of GDP, marginally better than expected (4.2%).

 

The government expects nominal GDP growth of 13.4% y-o-y in FY15 after 11.9% growth in FY14.

 

Beyond presenting the specifics of the budget, the Finance Minister also presented the intentions of the current government, in the event that it returns to power following the elections. The Finance Minister stated that the current government intends to remain committed to the National Food Security Act, fiscal consolidation (targeting a deficit of 3% of GDP in FY17), the rebuilding of infrastructure, pruning subsidies to only those that are necessary, skill development and the passage of the goods and services tax and direct tax code.

 

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