An internal assessment for the finance ministry has put the fiscal deficit for FY15 at closer to 4.5 per cent, way beyond the projections made by all domestic and international rating agencies and brokerages.
Correspondingly, the number for FY14 has gone close to 5 per cent. While the numbers are no reflection on the working of the month-old government, finance ministry officials are trying to convince new minister Arun Jaitley to stick closer to the projections made in the Interim Budget, by deploying unconventional methods instead. These methods include rollover of refunds on tax dues.
The plans, if they are incorporated in the Budget documents, run the risk of falling foul of criticisms made by the Comptroller and Auditor General and successive Parliamentary Standing Committees. But they will keep the domestic and international markets comfortable as bond yields will not soar. Higher yields mean lower earnings for domestic and foreign banks which principally buy these papers.
An indication of the Budget team’s intention to keep the fiscal numbers moderate became clear on Friday when the finance ministry issued its borrowing calendar for short term papers, till September.
The numbers are in line with Interim Budget numbers, which is the equivalent of deciding not to hang out publicly the dirty linen of bad fiscal projections. A lower borrowing means a lower fiscal deficit.
In the Interim Budget for FY15, the finance ministry had projected a fiscal deficit of 4.1 per cent of GDP. Experts had pointed out that the numbers seriously underestimated the additional expenditure required for meeting oil and food subsidies and overestimated the revenue projections for the year.
As the chart drawn from a paper by Rajiv Kumar, senior fellow at Centre for Policy Research shows, for food subsidy the provisions for this year do not even cover the arrears while the tax projections are way above the growth rate of the economy.
Because of the Budget exercise, no officials were willing to come on record. But criticising the trend, one of them said by foregoing the chance to show the extent of fiscal stress it could end up removing a huge opportunity for the NDA government.
Kumar said, “The new finance minister, Arun Jaitley, who is in an unenviable position, could use this opportunity to throw back unpaid bills (subsidies) he will pay now to FY14. This will make the fiscal deficit for the past year come in at a realistic 4.8 to 5 per cent of GDP instead of the claimed 4.5 per cent. It will help the new government to start with a clean slate, help improve the credibility of their estimates; all of which will stand the minister in good stead.”
But finance ministry officials reckon they face two challenges at this point. A higher fiscal deficit for FY14 and FY15 will undermine the projections they had made till recently to especially the global rating agencies and this could impact the flow of debt investments from abroad as borrowings soar. Foreign brokerages The Indian Express spoke to confirmed this assessment.
They also reckon that rewriting the budget math wholesale will raise questions in Parliament why they had allowed such questionable assumptions to decorate the Interim Budget.
Further it will make the RBI delay any rate cut as it will see that fiscal correction will take longer than anticipated. This makes a turnaround for private investment more difficult.
Instead the quick fix of rolling over of refunds from taxes will allow for a sizable cushion in the Budget. It will mean the Interim Budget FY15 estimate of tax growth of 19 per cent can be kept alive despite RBI projections that the correct number should be close to 13 per cent. (5.5 per cent GDP growth rate and 7.5 per cent wholesale price index).
The revenue department will be expected to tell its field formations to hold on to tax payments especially from the public sector companies as corporation tax and release them only after March 2015.
The sum is considerable. ONGC for instance is owed Rs 3,544 crore as per its balance sheet for excess tax paid. NTPC is owed Rs 437 crore and so on down the line.
Sticking close to the original fiscal deficits will however mean cutting back on capital expenditure, as Table 2 shows. Former finance minister P Chidambaram achieved fiscal targets by squeezing capital formation; Jaitley can hardly afford to do so.