Fixing the deficit
Union Finance Minister P. Chidambaram has laid the initial groundwork for bringing down the fiscal deficit, says Dr. M.S. Kapadia
Gross fiscal deficit (broadly, net borrowing of the Central government) is projected at Rs 1.37 trillion for 2004-05, or around 4.4 per cent of GDP, by the new UPA government in its budget presented on July 8, over three months after the fiscal year commenced. The budget proposals will take another one-and-a-half months to come into effect. Thus, the fiscal data for the year would be broadly an amalgam of strategies and assumptions of the earlier NDA government, as reflected in the Interim Budget presented last February and the present budget.
The performance, if achieved, would be an improvement over 2003-04. GFD for the year was placed at Rs 1.32 trillion in the RE of the Interim Budget, about 4.8 per cent of the GDP, showing not only a turnaround from worsening fiscal balances in earlier five-six years, but also, for the first time in recent years, a better-than-budgeted performance. Incidentally, actual provisional data, as available in CGA's monthly compilation of Central government finances, puts it lower at Rs 1.26 trillion, or around 4.6 per cent of GDP. The improvement was due to better-than-expected PSU equity disinvestment receipts on the one hand and expenditure containment on the other. The data finds place in the Economic Survey, but not in the budget documents, which compare BE with RE only.
Central government finances had suffered consistent slippages from 1996-97 to 2001-02. The
period witnessed the ratio of GFD to GDP shoot up from 2.4 per cent to a peak at 6.2 per cent by 2001-02. The following year had shown only a slight ease-up to 5.9 per cent.
Revenue deficit (RD), another important indicator of government finance that measures the resource gap between revenue account receipts and revenue account disbursements, has been budgeted at Rs 0.76 trillion, or 2.5 per cent of GDP. This would be a sharp improvement from 3.6 per cent in the preceding year and over 4 per cent average during 2000-01 to 2002-03. The ratio of RD to GFD would ease to 55 per cent, from 80 per cent average during 2002-03 and 2003-04 and 71 per cent in the earlier two years.
The improvement in fiscal indicators during 2004-05 is expected to result from tax buoyancy on the one hand and containment of revenue expenditure on the other. The economy is projected to grow at 7-7.5 per cent at constant prices and around 12.5-13 per cent at current prices with inflation accounting for around 5 percentage points. Gross tax receipt is expected to grow at 24+ per cent during the year, against 18 per cent average in the preceding two years and stagnation in 2000-01 and 2001-02. Only around a half of the current year would reflect the impact of tax proposals, that too expect only Rs 2,000 crore from direct tax proposals and Rs 3,990 crore from the tax on new services. The new 2 per cent education cess on taxes would yield Rs 4,910 crore. While revenue expenditure would rise by 6 per cent, Plan expenditure would go up by 20 per cent against 9-10 per cent in the previous two years. Among non-Plan expenditure, defence capital outlay is budgeted to double to Rs 33,483 crore. This is ambitious considering that the yearly increase has remained under Rs 4,000 crore in the recent past, with 2002-03 actually recording a fall in the outlay. Among other non-Plan expenses, interest payment is projected to rise by a nominal 4 per cent, factoring in the likelihood of a benign interest rate regime during the year.
On balance, the budgeted buoyancy in tax receipt appears to be an overestimate, particularly if the economy performs below par. Therefore, much would depend on the government's ability to contain the growth, particularly in revenue expenditure, to continue improving fiscal indicators.
Incidentally, last year's fiscal show was helped largely by a sounder economic performance of 8+ per cent at constant prices and 12+ per cent prices.
Lastly, in the Mid-term Fiscal Policy Statement issued for the first time together with the Union Budget documents, a commendable fiscal initiative, the Finance Minister has laid down a path, along with underlying assumptions and strategies, to bring down the ratio of GFD to GDP to 3.6 per cent and RD to 1.1 per cent by 2006-07.
Fixing the deficit