Motilal Oswal has come out with its report on Budget preview. The research firm expects fiscal deficit to be restrained within 4.9 per cent of GDP in FY14.
(i) Signs of improvement in the fiscal situation are visible. Tax collections remain robust. Significant expenditure cuts have also been effected. We estimate fiscal deficit at 5.4 per cent of GDP for FY13.
(ii) The Union Budget for FY14 is being presented amidst a challenging macroeconomic backdrop. While growth has stabilized at low levels, inflation has started showing signs of easing off. The external sector rests on a thin edge, causing periodic volatility in INR.
(iii) While apprehensions run high regarding election year bonanza, the fiscal headroom is rather limited. Besides, controlling inflation, Food Security Bill and improvement of welfare delivery through direct benefit transfer are likely to play the role of election trump cards.
(iv) The government has announced a medium-term fiscal correction plan, under which fiscal deficit is expected to decline to 3 per cent of GDP by FY17. The states are, however, in much better fiscal shape and have already bettered the target set by the 13th Finance Commission.
(v) While tax rates are likely to remain stable, the government is likely to attempt to squeeze out extra revenue either through introduction of new taxes such as super rich tax or expansion of the service tax list. Tighter administrative effort would be supportive. While we expect the Direct Tax Code (DTC) to be implemented, clarity on GAAR and other contentious issues may be provided along with an outline for implementation of Goods and Services Tax (GST). Customs duty rates may be rationalized to improve competitiveness of domestic manufacturing and trade balance. On the expenditure front, we expect major thrust on health, infrastructure, education and agriculture.
(iv) We expect fiscal deficit to be restrained within 4.9 per cent of GDP in FY14. Based on this, we place our gross (net) borrowing estimate at INR6t (INR5t).
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