The UPA-II government will be presenting, most probably, its last budget on 28 February. And the challenge of presenting a balanced budget with please-all outlook is on Finance Minister P Chidambaram. Any one tuned with the process of budget-making knows that the allocations under the Central Plan have already been finalised. What is of considerable importance and needs to be addressed urgently is the fiscal deficit, which is currently above 5% of the GDP. An analysis of the past years' budget estimates (BE) and revised estimates shows a significant gap in expected and actual earnings. This gap results in poor spending decisions in other sectors, as those allocations are primarily based on exaggerated incomes.
Advanced estimates of national income for the financial year 2012-13 released last week by the Central Statistical Organisation (CSO) gives a grim macro-economic picture - GDP at factor cost at constant (2004-05) prices is estimated to grow at 5% compared to 6.2% in 2011-12. The level of economic activity has witnessed a sharp fall and this has implications for the finances of the government, most significant of which is poorer revenue collections. However, expenditure commitments, based on more positive revenue earnings, have already been made. Naturally, these will now have to be financed through borrowings from the market.
As a direct consequence of expenditure delinked to rational projected earnings has led to a large fiscal deficit, which is essentially the amount of money the government borrows from the market to balance its books. Any economics student would tell you that this is worrisome, as it leads to a crowding out effect of private borrowers in the market. Widening fiscal deficit in turn creates other problems such as downgrade of sovereign debt ratings, which raises the cost of our international borrowing, depreciation of the rupee resulting in a widening current account, among others.
Examining the tax revenue receipts presented in the 2011-12 Budget, it appears that very ambitious targets have been estimated for 2012-13. Gross tax revenue is estimated to grow at 19.5%. Among major taxes, corporation tax is estimated to grow at 14% and union excise duties at almost 30%. However, these are only estimates and we would know the true picture only after the presentation of the Budget. In this context, it would be a good idea to analyse the Budget and revised estimates for 2011-12. In the first nine months, gross tax revenue had grown by 13.6% as against the BE target of 17.6%. Among major taxes, growth in corporation taxes was at 9.7% as against 20.5% envisaged in BE 2011-12 and union excise duties at 8% as against the 18.7% envisaged in BE 2011-12. On the basis of this, we can say confidently that they government will not meet these targets for the upcoming budget.
Taking a look at the expenditure side, as per the BE 2012-13, non-plan expenditure is estimated to go up by 8.7% (6% non-plan revenue & 36.5% non-plan capital) and plan expenditure is estimated to be up by 22% (21.5% plan revenue and 25% plan capital). Again, these are only estimates. Analysing the Budget and revised estimates of the previous year 2011-12, one will find that when non-plan expenditure was to go up by only 0.3%, in fact, it went up by 9%. If we delve further, non-plan revenue expenditure went up by 12.3% against the estimate of 0.9%.
The government has also sought disinvestment in Central Public Sector Enterprises (CPSEs) as a means to raise money and to reduce the fiscal deficit. Once more, ambitious targets have been set. In 2010-11, Rs 40,000 crore was set but only Rs 22,144 crore was realised. In 2011-12, Rs 40,000 crore was set but only Rs 13,894 was realised. In the current financial year 2012-13, Rs 30,000 crore has been set but only Rs 931.99 crore has been realised, as on 29th November 2012. Disinvestment of CPSEs has typically been labelled as a last minute scramble for the government to raise resources, demonstrating substandard management and timing.
These streams of observations are nothing new. Indeed, the principal opposition party has raised these trends and have consistently pulled up the government for exaggerating revenues and underestimating expenditures. At this point of time, considering that the rupee has stabilised in the recent weeks, foreign exchange levels are adequate and debt and interest repayments have been budgeted, the situation may seem comfortable in the short run. However, these factors do not necessarily translate into the more impulsive investor confidence.
From no quarters would one find a view that approves the widening fiscal. Even the North Block has expressed concerns and there is hope that sincere efforts will be made to reign in the deficit. Should the government continue to base its expenditure commitments on exaggerated revenue streams, it would push itself into a vicious cycle of depleting revenues as a result of increasing unproductive expenditures, thereon and so forth. The fiscal urgently necessitates better management through better readings of the economy.
However, one cannot dismiss the fact that this is also the election year. As seen in previous governments, populist agenda usually overshadows medium and long-term policy changes. Having said that, the macro-economic situation at this point of time is indisputably negative and the Budget for 2013-14 should set realistic spending allocations with the aim to reduce the fiscal deficit to sustainable levels.
(The writer is a Research Intern at Observer Research Foundation)
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