Even as the NDA government’s first budget is scheduled to be unveiled on Thursday (July 10), Finance Minister Arun Jaitley has to reckon with the peculiar state of public finance that his government had inherited less than two months earlier.
The problem, simply stated, relates to a conscious attempt by the UPA II in its last days to add gloss to its lacklustre economic performance. The reasons for that are not hard to seek. In February, when the interim budget was presented by P. Chidambaram, elections were round the corner. The interim budget was no more than a vote on account to enable the government to carry on until the next government was formed. Yet, it presented the government of the day with an opportunity to project its “achievements.”
Such a strategy has its limitations. For eight quarters in a row, the gross domestic product (GDP) growth has been below 5 per cent. The UPA II was widely faulted for its lack of economic governance. Its finance Minister alone should not shoulder all the blame but he, being the most visible person, has had the thankless job of “defending” the UPA II record. That then is one explanation why the previous government resorted to window dressing. The focus has been on the fiscal deficit, containing it well below what was budgeted for in 2013-14 and consequently project an extremely ambitious deficit number for the current year, 2014-15, at 4.1 per cent.
In the interim budget, the fiscal deficit for 2013-14 was projected to be 4.5 per cent, much lower than the budgeted 4.8 per cent and even below the revised estimate of 4.6 per cent. How this was achieved and whether it can be sustained are really the meat of this story. Commenting on the interim budget The Hindu wrote (February 20) “The skepticism (over the sharply reduced deficit numbers) is on two grounds: (a) that a fair bit of window dressing —subsidies getting rolled over into next year and taking credit for dividends that would normally accrue next year might have improved public finance but correspondingly made the task of the next finance minister that much more difficult, (b) More substantial is the critics that the deficit has been brought down by cutting down on productive capital expenditure even while leaving subsidies untouched.”
Recent high quality research reports* have analysed the current fiscal situation in detail. (1) During 2013-14, gross tax revenues fell short of the budgeted numbers by about Rs.97,000 crore. Gross revenues increased by only 10 per cent as against the ambitious budgeted target of 19 per cent set in the February budget.
(2) The slowdown has impacted corporate profitability. Corporate tax collections have been less. Lower domestic industrial production, subdued export and import demand resulted in a shortfall of Rs.43,000 crore in excise and customs duty receipts. Service tax receipts have also been much lower than the budget estimate by about Rs.43,000 crore.
Disinvestment receipts were less than half the budgeted amount.
(3) Non-Plan revenue expenditure was higher by about Rs.30,000 crore mainly on account of increased subsidy payments. Despite the fall in tax and capital receipts and increase in subsidies, the previous government has managed to achieve the impossible feat of bringing down the fiscal deficit to 4.5 per cent.
The impossible feat was achieved essentially by bringing forward the revenue receipts, shelving some expenditure to the next year and most important by making unsustainable cuts in capital expenditure.
(1) Cash-rich public sector undertakings were forced to pay special dividends totalling Rs.43,075 crore in 2013-14, more than three times the previous year.
(2) The central government sharply cut down the expenditure to bridge the revenue shortfall. Plan expenditure took a big hit — about Rs.1 lakh crore was axed from the budget. Some expenditure items were rolled over into the next year. The government was essentially sacrificing growth for maintaining the level of transfer and subsidy payments.
(3) An amount of Rs.1 lakh crore of subsidy (for food, fuel and fertilizer) has been rolled over into the next year. It is estimated that at least Rs.50,000 crore to Rs.70,000 crore of expenditure has been pushed back from fiscal 2014 to this year. Clearly, for the new finance minister, there are plenty of challenges. He will most probably rework the government accounts to reflect the true position. In that case, the fiscal deficit for last year would come to at least 4.8 per cent, if not higher, instead of the 4.5 per cent claimed in the interim budget. In the circumstances, the projected 4.1 per cent fiscal deficit for 2014-15 looks very far off. In effect, Mr. Jaitley will not only be cleaning up public finance but prepare a credible road map for achieving the desired fiscal goals.
(*Macro-economic update: Centre For Policy Research June 26, 2014. The authors are: Dr. Rajiv Kumar and Geetima Das Krishna.)