No interim relief from vote-on-account

It was billed as an opportunity for the Congress-led UPA regime to announce further measures for stimulating a sluggish Indian economy. However, it turned out to be more than a damp squib. Acting finance minister Pranab Mukherjee, who was presenting a budget after 25 years, announced no fresh initiatives to accelerate economic growth and quell the financial gloom. The Government merely presented a vote-on-account to enable it to incur expenditure in the months before the new dispensation comes to power and the next budget is passed.

May be the Government was constrained by the constitution, which doesn't permit big-bang measures to be incorporated in an interim budget. Still, the markets were highly disappointed with lack of action on the part of the Congress-led coalition. The Government's assertion that fiscal deficit will overshoot FY09 budget target by a long margin also had a negative impact on the markets. Given the current economic environment, the Centre has abandoned the fiscal responsibility targets for the time being.

It expects FY09 fiscal deficit at 6% of GDP as against the original target of 2.5% of GDP. Including off-budget items and states, the consolidated deficit soars well above the 10% mark. The interim budget for FY10 has projected a fiscal deficit of 5.5% of GDP. This is also likely to be overshot and effectively reverses the headway that the UPA government had made on the fiscal front over the past four years. Though part of the fiscal slippage can be attributed to the unprecedented global financial meltdown, the Centre could have avoided some of the populist measures.

The expectations on revenue are also rather optimistic, with the Government budgeting for a 10% increase in corporate tax and 8.4% in total revenue. This is in the
backdrop of a less than 4% (expected) revenue growth this year with a 7% GDP growth. With expectations of FY10 GDP growth pegged at 5-6%, a revenue growth of 8% looks unlikely. This may further constrain the spending target of the government. Thus, high fiscal deficit looks inevitable in FY10 as well and the 5.5% target for FY10 may be revised upwards.

The focus of the interim budget was to increase allocations on central government sponsored schemes. Accordingly, there were increases in spending on rural employment (NREG) and rural infrastructure (Bharat Nirman). Defense spending was also increased from 2.1% of GDP to 2.4% of GDP. Going forward, the mantle of providing stimulus to the economy will fall disproportionately on the Reserve Bank of India (RBI), as the government cannot take any further measures before a new government is in place. We expect the RBI to cut key policy rates before end-March.