The new NDA government has inherited a problem on the macroeconomic front, reveals the latest fiscal deficit data for the first two months of the current fiscal (FY15). A mere 10 days before his maiden budget, Finance Minister Arun Jaitley has to grapple with the fact that in just April and May, the fiscal deficit — the difference between the government’s earnings and expenditure — touched 45.6 per cent of the budget estimate for the entire financial year (it was 33.3 per cent in the same period, last fiscal). Even more worrying, non-plan spending (unproductive expenses such as interest, subsidy and defence) touched 18.3 per cent of the budget estimate, against 13.4 per cent during the same period last year, even as plan expenditure declined to 10.7 per cent, against 12.3 per cent last year, something that does not augur well for an economy struggling to grow.
Jaitley is widely expected to revise the former finance minister’s fiscal deficit target of 4.1 per cent of the GDP, projected in February’s interim budget, as the revenue side was clearly overbudgeted, with the estimates assuming a 19 per cent rise in tax revenue. In the first two months, tax revenues are up just 3.4 per cent, with growth remaining sluggish, as underscored by core sector estimates that were also released on Monday. Core sector output rose just 2.3 per cent in May, around half the 4.2 per cent rise in April, indicating that the economy is still not out of the woods. There is more trouble expected on the inflation front, with food inflation already starting to build up again and likely to be precipitated further by the failing south-west monsoon.
The FY15 budget should offer a credible roadmap for a good-quality fiscal correction — even as it has to rework the arithmetic of the interim budget. The critical challenge for the new government is to improve revenue generation, when growth is expected to hover around 5-5.5 per cent. An internal assessment of the finance ministry is reported to have pegged 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. While buoyant markets may take some upward correction in their stride, a sharply higher target could run the risk of being punished. What will not help is the government chickening out when it comes to taking tough measures to get the fisc back on track, and taking decisions like rolling back the suburban rail fares, hiking subsidies for sugar exports and increasing duties on sugar imports.