While presenting his maiden budget (on July 10, 2014) for 2014-15, finance minister, Arun Jaitely had accepted a daunting challenge of achieving fiscal deficit (excess of central government’s expenditure over receipts) of 4.1% GDP – a number set by his predecessor P Chidambaram in the interim budget.
Fiscal deficit at 4.1% of GDP translates to Rs 531,000 crores. During April – October, 2014 or just 7 months of current year, about 90% of this or Rs 478,000 crores has been exhausted. This has led many experts to doubt the capability of present government to stick to the target for the whole year.
The doubt is reinforced when one looks at increase in tax revenue which was only around 5% during April – October, 2014 as against the budget projection of around 20% for the whole year. This is expected to lead to a shortfall of over Rs 100,000 crores (net of transfer to states) vis-a-vis the budget estimate.
In other areas too, slippages are anticipated. Thus, government may lose about Rs 15,000 crores due to deferral of selling its residual stake in Hindustan Zinc Ltd (26%) and BALCO (49%) to next year. There will be further erosion of Rs 11,000 crores towards compensation promised to states for loss of revenue due to reduction in central sales tax (CST) in the past. All this add up to an aggregate shortfall of Rs 126,000 crores.
Unlike previous 2 years when the erstwhile UPA dispensation resorted to massive cut in plan expenditure (around Rs 92,000 crores in 2012-13 & Rs 80,000 crores during 2013-14) to rein in deficit, this government cannot afford similar recourse. In fact, there is urgent need for a major push, or else current recovery in GDP growth which is nascent (5.5% during April-June & 5.3% during July-September), could be nipped in the bud.
Even the mid-year review presented by chief economic adviser (CEA) stresses the imperative of boosting public expenditure in the backdrop of private sector faltering due to their huge debt laden balance sheets and hence inability to garner funds for stepping up investment. Are we then to conclude that Jaitely will miss the bus?
The answer is an emphatic ‘no’. The finance minister has indeed, exuded confidence that despite the adversities – a legacy from previous regime – he would be able to achieve the fiscal deficit target. Jaitely confidence is not just rhetoric. Let us take a look at some positives which can be directly linked to good initiatives of the present government.
First, it vigorously pursued the calibrated diesel price hike road map leading to complete elimination of under-recovery by November, 2014 (this was also helped by drop in international price of crude and appreciation of the rupee). Consequently, there won’t be any subsidy pay out during remaining 4 months of current fiscal yielding saving of around Rs 15,000 crores.
In regard to food subsidy, an allocation of Rs 115,000 crores was made on the basis that all states would have implemented Food Security Act (FSA) by October 1, 2014 which has not happened. This together with government disallowing un-restricted purchases and payment of bonuses by states (Madhya Pradesh & Chattisgarh) will result in saving of close to Rs 25,000 crores.
The government can also garner close to Rs 70,000 crores by offloading about 15 million tons of food lying in central pool plus proceeds from divestment of SUUTI (Specified Undertaking of Unit Trust of India) holdings in Larsen & Toubro and Axis Bank. And, finally we must not ignore an additional receipt Rs 23,000 crores over last year vide transfer of profits from RBI.
These savings add up to Rs 133,000 crores which will more than offset shortfall in tax collections, deferment of residual stakes offload in BALCO & HZL et al. Thus, FM would have comfortably managed to rein in fiscal deficit within target 4.1%. Further, if compensation to states – in lieu of CST cut – can be postponed to next year [after all the offer made by Jaitely is ‘voluntary’, a gesture to garner support of states for GST (Goods and Services Tax) and therefore nothing compulsive about it], that will serve as icing on the cake.
The above does not factor in huge carry forward payments of food, fertilizers and petroleum subsidies from 2013-14 estimated to be over Rs 121,500 crores to current year. In other words, it pre-supposes that subsidy payments of this magnitude are rolled over to 2015-16. However, from this, it would be a grave error of judgment to infer that NDA is merely repeating what UPA did.
Under UPA dispensation, humongous roll over involving thousands of crores year-after-year were the result of gross mis-management, splurging expenditure under welfare schemes (most of it never reached the beneficiaries). That was unconscionable. In contrast, the present government has already given ample evidence of its seriousness towards fiscal discipline and reforms.
Even spending under MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) is being linked to productive schemes and projects in the agriculture/rural sector. In this backdrop, if pending subsidy payments – a spill over from past – are deferred to next year in the overall interest of fiscal consolidation, that is perfectly justified.
Next year will doubtless reflect the impact of bold steps being taken by government to rejuvenate investment and boost growth. The projected GDP growth of about 6.5% will inevitably lead to buoyancy in tax revenue and higher collection of non-tax revenue as well. Besides, we will have the full impact of elimination of subsidy on diesel which has already been decontrolled.
The government has plans to do away with LPG subsidy for better-off sections of the society who any way corner bulk of the subsidy payments. For kerosene also, steps are already underway to restrict its use only for fuel and completely disallow use for lighting. Even for former, use of bio-gas is being encouraged. These will make a big dent on subsidy.
In budget for 2015-16, big bang reform in fertilizer sector too is expected as by then, ‘interim’ report of Expenditure Management Commission (EMC) would be available. Meanwhile, the committee on restructuring of extant food procurement & distribution system has submitted its report. Implementation of its recommendations will result in substantial saving in food subsidy.
In a nutshell, Modi government is not only on track to achieve the deficit target for current year, it is also laying the foundation for ensuring fiscal consolidation over medium to long-term on a sustainable basis.