On February 17, Finance Minister P. Chidambaram presented the interim Union Budget in Parliament to cover expenditure until a new government is formed after elections in April-May 2014.

An interim budget is usually expected to be a non-event because it only covers the short transition period between two governments. Since this is an election year in India, the newly elected government will present a budget after it comes to power. One of the reasons an interim budget is not considered to be very significant is that as per the Election Commission’s Code of Conduct, the government is not allowed to announce any major welfare schemes or changes to income tax rates and slabs.

Many were pleasantly surprised

Assocham President Rana Kapoor told the Economic Times: “Despite being low on expectations in an election year, Finance Minister P Chidambaram’s Interim Budget has given a pleasant surprise at least partly to the manufacturing sector which has been bleeding. The excise duty cut on automobiles and capital goods will provide a much-needed relief to these sectors.”

Excise duties on automobiles – SUVs, large and mid-segment cars, small cars, motorcycles and commercial vehicles – were reduced by various rates. Excise duty on capital goods was cut from 12 to 10 percent.

“While industry expectations were limited from an Interim Budget formality, the emphasis laid on turning around the growth trajectory and reviving the manufacturing sector in particular are well received,” Federation of Indian Chambers of Commerce and Industry (FICCI) President Sidharth Birla said, as reported in the Hindu Business Line.

The excise duty revisions are also likely to have an impact on engineering goods. According to the Times of India, Anupam Shah, chairman of the Engineering Export Promotion Council India said, "The cut in excise duty for the automobile sector will help the export of these key engineering goods to other markets."

The deficit target was achieved but remains a concern

In his speech, Chidambaram announced that the fiscal deficit for the current year would shrink to 4.6 percent (of GDP) and 4.1 per cent for the next financial year, thus steering clear of the 4.8 percent “red line” he had drawn last year.

Although Chidambaram emphasized that fiscal consolidation had stayed on track, he has taken some flak from analysts, rating agencies and brokerages for being “too optimistic” and underestimating the fuel subsidy burden. As reported in the Economic Times, Citi and ICRA (Indian Credits Rating Agency) believe the 4.1 percent target for 2015 is based on an assumption of a nominal GDP growth of 13.4 percent, which is too ambitious. 

The other concern is that tax revenue collection is still low and the government has simply postponed expenditure to the next year to maintain fiscal targets. Subrat Das, executive director, Centre for Budget and Governance Accountability said in the Livemint, “This fiscal consolidation has been achieved solely on the basis of compression of crucial development expenditure as the government’s poor record in stepping up the tax-GDP ratio has persisted in 2013-14.”

Going forward

Despite the optimism in certain quarters of India Inc., many others believe that the interim budget was not significant, given that a new government will be in power in a few months. For instance, as reported in the Economic Times, analysts at Morgan Stanley said, "In any case, we believe the fiscal deficit estimates for FY15 are largely irrelevant as the final budget to be released post the formation of the new government will override these estimates." 

The Economic Times reported that the interim budget proved to be a non-event for stock markets. The consumer durables sector too was not very excited. In spite of the reduction in excise duty from 12 to 10 percent, it is wary of the temporary nature of the revision. “The benefit will only kick in when actual manufacturing activity takes place and this decision is only valid for a quarter,” Shantanu Dasgupta, Vice President - Corporate Affairs and Strategy at Whirlpool India Limited told Businessworld. Some analysts believe that even the 2 percent reduction in the excise duty of capital goods is unlikely to revive the flagging sector at this time. For instance, Karvy Stock Broking predicted in the Business Standard that the sector would only see some recovery from 2016-17 onwards after capital expenditure is allocated for the 13^th Five Year Plan.

Analysts believe that investors are likely to be cautious till clarity emerges. As reported in the Economic Times, Angel Broking said, “Going forward, we believe that the general elections due in May 2014 are likely to take the centre stage for markets and their outcome would be crucial for determining market direction.” The government that comes to power and the annual budget it will present in July 2014 will determine to a much larger extent the mood and performance of the market.