The rosy picture of government finances as highlighted in the Interim Budget 2014-15 has posed an uphill challenge for the new government in FY15.
As the finance minister put it, the good news first: the fiscal deficit has been contained at 4.6 per cent of GDP for FY14, as against the Budget Estimate (BE) of 4.8 per cent. For FY15, that number is further down to 4.1 per cent. The government expects to control the current account deficit to $45 billion, along with an addition of $15 billion foreign exchange to the reserves.
Analysts say that the targeted fiscal consolidation would be difficult to come by in FY15. “It is hardly a secret that the fiscal deficit has largely been achieved by pushing back expenditures and moving forward tax and dividend collections. It, therefore, implies that the targeted fiscal consolidation will be more difficult to come by next fiscal year,” said HSBC in a research report.
The deficit has been contained below the “red line” through cuts in plan expenditure that could impact growth but real progress on spending reforms seems to be missing. “This trend of containing the fiscal deficit by cutting plan expenditure and not subsidies must be reversed as it has an impact on growth,” said DK Joshi, chief economist, CRISIL.
But Chidambaram said the cuts were not significant to impact growth. “Of the total spending of Rs 15.9 lakh crore, only 5 per cent or Rs 75,000 crore has been cut due to internal savings or slow growth,” he told reporters after tabling the Interim Budget in Parliament on Monday.
Refuting claims of an over-ambitious Budget, he further said, “Every finance minister must be ambitious. If you set the target too low, results will be lower. So your reach must be beyond your grasp.”
The revenue deficit, which is pegged at 3.3 per cent of the GDP in FY14 has been kept at 3 per cent in the BE for 2014-15. Further, the effective revenue deficit, which does not include grants for capital expenditure, is set to slip from 2.2 per cent of the GDP in Revised Estimate 2013-14 from the BE of 1.8 per cent.
This is evident in the 11.5 per cent rise in the subsidy bill of the government to Rs 2,46,397 crore in BE 2014-15 from the BE of Rs 2,20,972 crore this fiscal. Spending on major subsidies increased to Rs 2,45,452 crore in the RE of 2013-14.
A Rs 35,000 crore rollover in the fuel subsidy has also helped improve the government’s fiscal deficit in FY14, but could pose major challenges in FY15, where Chidambaram is betting on at least 6 per cent GDP growth to tax revenues. Though net tax revenues are expected to fall short by at least Rs 27,000 crore this fiscal, in FY15, the government is betting on a 19.5 per cent growth in tax collections to Rs 11,67,131 crore.
The plan expenditure in 2014-15 has been maintained at the same level as the Budgeted level of the current fiscal of Rs 5,55,322 crore. The Budget has also cut short the target for disinvestment proceeds in the current fiscal to Rs 19,027 crore while indicating that the improvement in the Centre’s fiscal health was on the back of higher dividend payouts.
While non-tax revenue exceeded the BE for FY14 by nearly Rs 21,00 crore to Rs1,93,226 crore on the back of good response to spectrum auctions and higher dividend, it is expected to see a marginal decline of 4.9 per cent in the BE 2014-15. The Budget document further said, “This has to be seen against the fact that RE 2013-14 included special dividends in certain cases and also higher dividend pay-outs by banks etc.”
For FY15, Chidambaram has kept up an ambitious target of Rs 36,925 crore from disinvestment receipts along with another Rs 15,000 crore from residual stake sales in Balco and Hindustan Zinc.
Meanwhile, net market borrowings are pegged at Rs 4.57 lakh crore in 2014-15, which is Rs 11,580 crore less than the revised estimates of the current fiscal.