Budget 2014’s fiscal arithmetic: Whiff of Deja- vu
In the new government’s maiden budget, the Finance Minister announced that the government will stick to the fiscal deficit target for 2014-15 at 4.1 per cent of GDP, as proposed by his predecessor in the Interim Budget. His roadmap for consolidation also entailed achieving a fiscal deficit of 3.6 per cent by 2015-16 and 3 per cent by 2016-17, in line with the FRBM Act. Fiscal deficit is the difference between the revenue receipts plus non-debt capital receipts and the total expenditure including loans, net of repayments. It indicates the total borrowing requirements of Government from all sources.
While the government’s commitment to fiscal consolidation is applause- worthy, the quality of the fiscal consolidation seem to be an issue. Almost 46 per cent of the fiscal deficit target already been reached in the first two months of the financial year, indicating that the government will find it tough to contain deficit at 4.1 per cent. Considering that there has been no cut on the expenditure to meet the deficit target and revenue growth targets are too optimistic, the current strategy of deficit reduction could be a d�j�- vu- curtailing capital expenditure and garnering additional revenue from other sources such as disinvestment and the non-tax segments. This will be a copy paste of what the previous governments have done to cut down the deficit.
On the expenditure side, the budgeted expenditure for FY15 has risen marginally to Rs 17,94,900 crore from the estimated Rs 17,64,900 crore in the interim Budget. Failing to come clean on the subsidy bills, the total subsidy outgo on major subsidies (96 per cent of the total subsidies), are in fact seen rising marginally to Rs 2,46,397 crore this year from Rs 2,45,451 crore for last year. The budget expects the expenditure on subsidies to fall to 2.0 per cent of GDP (a seven year low) from the current 2.3 per cent, but there is little detail on how the government proposes to achieve this. Any slippage on subsidy front (unproductive expenditure) could mean that the government would slash the capital expenditure (or the productive expenditure) in order to rein in the deficit.
On the revenue front, the budget estimates the revenue receipts to increase by 17 per cent (y-o-y) as compared to the 10.2 per cent last year. Tax revenues are budgeted to go up by 17.7 per cent over the last year. However, the last time such a big increase in tax revenues took place was in 2010-11 but it was a result of the base- effect (flat revenue in the previous, crisis year of 2009-10) aided by a rollback of some tax cuts. The current optimism on the revenue front is based on the assumption of a 13.4 per cent of nominal GDP growth. But, with weak monsoon and lagging manufacturing sector posing as a downside risks to growth, and Rs. 20,000 of revenue foregone due to rise in the income tax exemption slab, it will make it difficult to raise the tax to GDP ratio to the budgeted level of 10.6 from 10.2 currently.
However, the government expects to meet its deficit target through higher receipts from disinvestments and larger dividend receipts from Reserve Bank of India. Public-sector disinvestments are expected to fetch the government an estimated Rs 63,425 crore in the current year, up 145 per cent over Rs 25,841 crore collected last year. Dividends from RBI and other financial institutions are expected to be Rs. 62414 crore in 2014-15 against Rs. 45113 crore in the previous year.
Even if the government is successful in raising such ambitious disinvestment revenues (given that equity markets remain buoyant) and is successful on meeting the fiscal deficit target, such a kind of fiscal model cannot form the basis of sustainable fiscal consolidation. Instead, a sustainable model of fiscal consolidation has to be based on efficient expenditure management and greater tax revenues. The government has missed out on any concrete steps in the budget targeting these two.
Undoubtedly, the task of fiscal consolidation will not be easy for the government. With very little room to cut overall expenditure, the government has to instead focus on switching expenditure from unproductive subsidies to productive sectors and raising tax revenues. The budget has struck a right note by forming Expenditure management Commission which is expected to come up with an overhaul of the subsidy regime and ensure an efficient resource allocation (to more productive expenditure). However, the non- implementation of GST is a big miss. Implementation of GST would not only mean increased tax revenues (through simplified tax regime), it will reduce the cost of doing business and increase profitability by eliminating multiple central and state taxes.