The >austerity measures unrolled by the Finance Ministry last week send out a clear signal that all is not well with government finances; at least, not yet. Though business sentiment has improved noticeably and some key indicators point to a pick-up in growth, government expenditure is running well ahead of revenues, which have not grown at the expected pace. Thus, the Finance Ministry has been forced to order a cut in all discretionary spending; the target is to prune expenditure, other than Plan-related, by 10 per cent. The only exceptions are interest payments, debt repayments, defence capital, salaries, pensions and grants to States. These occupy a large proportion of non-Plan expenditure, which means that the savings might not be much. Yet, the fact that the government deems this necessary shows the seriousness of the problem that it faces in keeping the fiscal deficit in check. Indirect tax collections have grown at just 5.8 per cent in the first half of this fiscal compared to the budgeted target of 25.8 per cent. On the direct taxes front, refunds have eaten away almost half of the incremental collections, which have otherwise been on target. Adding to the government’s woes is the sharp rise in defence pensions due to the implementation of the ‘one-rank, one-pension’ scheme. Outgo on this is expected to shoot up by 40 per cent, or Rs.16,000 crore, this fiscal. Importantly, this was not budgeted for fully.
It is not all gloom, though. The fall in global commodity prices, notably of crude oil, and the freeing of diesel prices, have given elbow room to the government in pruning subsidies. The subsidy on cooking gas and kerosene, as also on fertilizers, will fall significantly. Oil prices are down by about a quarter since the time the new government assumed office and look set for a subdued phase, barring a rise in geopolitical tensions in the Middle East. Meanwhile, the government should push forward on disinvestment, receipts from which are budgeted at Rs.58,425 crore this year. After an initial burst of activity in September, action appears to have slowed down on this front. The markets are on song now and this is the best time to capitalise by offloading stakes in public sector undertakings to retail investors. Experience shows that it is not a great idea to push back the share-sale process closer to the end of the fiscal. The spectrum auction, expected in February 2015, is another big revenue source-in-waiting. With 83 per cent of the fiscal deficit already reached by the end of September, the government will be hard-pressed to keep the deficit down to the target of 4.1 per cent of GDP for this fiscal. While austerity will help, all possible avenues to boost revenues have to be explored so that capital spending does not suffer.
