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Arun Jaitley talks tough on budget: What it means
The union finance budget is set to be presented on 10 July. Ahead of the budget, speeches and announcements by the government and its officials give an indication of what can be expected.
Finance minister Arun Jaitley spoke on Tuesday about the need for fiscal discipline to help cut down fiscal deficit and inflation. "Now India needs a certain amount of fiscal discipline there is hope that bold decisions will be taken now," he said. The finance minister also added that improving current account deficit was the only silver lining for the economy.
Here's what this could imply ahead of the forthcoming Union Budget for FY14-15:
The previous government spent a significant portion of its money on subsidies. This is the amount the government reimburses companies in exchange for keep prices of essential goods like fuel and food artificially low for consumers. The government also subsidizes fertilisers. Subsidies may not be economically sound, but they are politically a sensitive area. Cutting of subsidies - especially for fuel - leads to a direct increase in market prices. This is considered a negative move politically. If you indulge in mindless populism, you burden the exchequer, the finance minister said. This call for fiscal discipline and bold decisions could imply a cut in subsidies. However, this could be limited considering that a cut in subsidies could be inflationary. Although inflation has moderated, it is still beyond reasonable levels, Mr Jaitley said..
If the government cuts its subsidy bill, it leaves it room to increase Plan expenditure. This is the amount the government spends for projects and investments. This could also encourage private players to start investing, thus fuelling the economy. The UPA-led government had cut Plan expenditure for two successive years to narrow fiscal deficit. As investments fell both by the government and private players, the economy slowed.
Current account deficit:
The finance minister has indicated that current account deficit has been positive. This means the government could ease some import duties. Industry bodies have been calling for a cut in import duties on gold to help the gems and jewellery industry. Import duties were hiked last year to discourage imports of non-essential commodities like gold. This helped narrow current account deficit to 1.7% of the Gross Domestic Product (GDP) a measure of the economy. It had run up to as much as 4.8% of the GDP in 2013-14. With the current account deficit under control, the government could look to cut import duties marginally to bring down costs for the industry.
Fiscal deficit in the first two months of the fiscal year 2014-15 has already hit Rs 2,40,837 crore, according to government data. This amounts to 45.6% of the full-year target amount. This limits the amount the government has to spend without exceeding the fiscal deficit target of 4.1%.