Finance Minister P Chidambaram on Monday presented the interim Budget amid chaos in the Parliament.
Despite the economic slowdown, Monday’s interim Budget will likely show the Centre’s FY14 fiscal deficit being a trifle lower than the projected 4.8% of GDP. It could also reveal that the revenue deficit target of 3.3% has not been met despite unexpected gains from the 2G spectrum auction and the milking of Coal India and some other cash-rich PSUs.
Finance minister P. Chidambaram may announce a 4.2% fiscal deficit target for FY15 and gross marketing borrowings for the year at close to Rs 6 lakh crore, figures likely to be reviewed by the next government in July’s full-year Budget. The markets have seen a 920.55-point fall so far in 2014 and could somewhat discount the interim Budget’s borrowing numbers.
A jump in small savings collection has allowed the government to reduce gross market borrowings this year to Rs 5.64 lakh crore from Rs 5.79 lakh crore estimated earlier and yet seemingly have a big cash surplus.
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Like last year, Chidambaram appears to have leashed in growth-inducing capital expenditure to report that his deficit-cutting plan hasn’t faltered. Given the restraint even in FY12, this implies a flattening of capital spending growth (negative growth in real terms) for three consecutive years.
The cut in total expenditure could be of around R70,000-80,000 crore from the budgeted Rs 16.65 lakh crore.
Chidambaram will flag the improvement in the two most-watched deficit numbers — the fiscal and current account deficits — and also outline an economic plan to be pursued by the the UPA if voted back to power.
The task before the next government, whatever its political hue, will primarily be to restore revenue-led fiscal consolidation seen between 2005 and 2008 during the UPA-I regime. Even the Reserve Bank of India has been sceptical about the sustainability of reining in the fiscal deficit through cuts in productive spending.
However, with niggardly growth in tax revenue due to the economic slowdown, a spurt in interest payments and grossly inadequate controls on subsidies, the minister has had few other options.
Tax revenue, which accounts for over four-fifths of the Centre’s revenue receipts after transferring a third of the collections to states, is believed to have grown at a much lower rate than the targeted 19.2% (during April-December, gross tax receipts grew 9.15% only; of course, as is customary, the last few weeks could see collections pick up, but the gap is too big to be bridged).
Interest payments projected at Rs 3.7 lakh crore (up 17% over FY13) could prove to be much higher. Outgo on account of interest payments is seen to have grown over 65% between FY11 and FY14, imposing a big burden on the exchequer.
The partial reform in petroleum pricing and the relative respite in crude prices in recent months have helped the minister in his subsidy rationalisation effort, but not to extent desired. The subsidy to be budgeted this year would be higher than the budgeted Rs 2.3 lakh crore (around 2% of GDP), even after deferring payments of close to Rs 1 lakh crore to next year.
The just-concluded spectrum auction would get the government an additional Rs 8,000 crore (Rs 19,000 crore against the budgeted Rs 11,000 crore) this year. The dividend/profit receipts could exceed the budgeted Rs 74,000 crore by around Rs 15,000 crore.
If the planned sale of government’s “SUUTI shares” in Axis Bank doesn’t materialise by March-end (there doesn’t seem to be a hurry), the stake sales in PSUs and two private companies (Vedanta Group’s Hindustan Zinc and Balco) would fetch only Rs 37,000 crore as against the budgeted Rs 54,000 crore.
For the government’s finances to really improve, the revenue to GDP ratio has to be taken to 25% from 18% (Centre and states) now. This needs higher GDP growth and a broadening of the tax base (from 35 million now to 50-60 million), for which implementation of tax reforms like the goods and services tax and Direct Taxes Code without diluting their basic tenets is necessary.
The tax collection growth of 25% seen between 2005 and 2008 enabled the Centre to raise the tax-GDP ratio to 12% in 2007-08 but it declined subsequently and needs to be moved up now. For FY14, the ratio is projected to be 10.9% but could turn out to be a bit lower. The medium-term tax-GDP ratio target of 11.2% for 2014-15 and 11.5% for 2015-16 would likely rely on Vodafone and others paying up the huge tax amounts demanded, rather than an expansion of the tax base, which would take longer.
India’s non-tax revenue receipts, which include dividend income, interest receipts and non-continuous flows like spectrum revenue, have been very volatile. These have never exceeded 3% of GDP. For this year, these receipts are projected to be 1.5% of GDP, but could be a bit a higher due to the higher dividend income and robust spectrum revenue.
To boost non-debt capital receipts, the policy on PSU disinvestment has to be made more liberal. The current norm that the government’s stake in listed PSUs won’t be brought down below 51% would require to be reviewed. As suggested by the Kelkar committee on fiscal consolidation, the Centre could also look at monetisation of land resources, especially to fund urban infrastructure.
The open-ended food security law is inimical to the efforts to curb revenue expenditure. Effective steps to curb oil and fertiliser subsidies and improve targeting of these to the really needy are also called for. These are, however, options before the next government, which also has to find resources to implement the steep salary increases for government employees likely to be recommended by the Seventh Pay Commission. The Sixth Pay Commission had increased salaries by 21%, causing an additional annual outgo of Rs18,000 crore for the Centre, besides a one-time payout of arrears of Rs 30,000 crore.