The overall backdrop to this year's budget is one that any finance minister (FM) would wish to avoid. On the macroeconomic front, the FM needed to address the major challenges of dwindling growth, stubborn inflation, high fiscal and current account deficits and falling savings
On the political front, he was expected to improve the mood of the electorate via populist moves. The FM has tried to meet all these, often conflicting, objectives by presenting a practical budget.
With the focus on cutting the deficit, the budget will not stimulate growth in the short run. But these steps will encourage domestic savings and boost the confidence and expectations of domestic and foreign investors. What does the budget mean for growth and inflation and interest rates?
High deficits indicate that the government is living beyond its means. The FM has tried to correct this imbalance by cutting expenditures and scouting for new sources of revenues. He plans to end 2013-14 with fiscal deficit at 4.8% of the GDP.
The budget is premised on an aggressive revenue growth of 23.4% along with expenditure growth of 16.4% in 2013-14 as compared to the revised estimates of 2012-13.
With the revenue collection falling below the budgeted revenue in four of the past five years, including the current fiscal, the revenue target for 2013-14 looks ambitious.
Therefore, we expect the fiscal deficit target to slip marginally.
When the government cuts fiscal deficit, it can dampen short-run growth prospects. Thus, the budget will not give a direct stimulus to GDP growth in 2013-14 via increased spending. But it does create a climate for interest rates to come down.
Taking cues from the fiscal consolidation effort of the government, we expect the RBI to cut interest rates by 50-75 basis points. Lower interest rates will be one of the drivers of GDP growth in 2013-14, which we expect at 6.4%.
An important push will come from agriculture, if monsoon stays normal. The improvement in global growth will also stimulate India's exports.
However, some of the announcements that would have a positive impact on private sector investment are - allowing deduction of an investment allowance of 15% on investment of Rs. 100 crore or more in plant and machinery, continuation of Technology Upgradation Funds Scheme for textile sector in 12th plan, setting up of two new industrial corridors, etc.
Allowing additional deduction of Rs. 1 lakh on interest up to a housing loan of Rs. 25 lakh is expected to spur housing construction activity.