Experts discuss roadmap for fixing fiscal deficit

'Fixing the fisc' a special four part pre-Budget series focuses on the central theme of the Budget exercise itself to cut the fiscal deficit size. 

The first edition highlights the actual Budget numbers of this year, FY13, and what economists are forecasting till date. Two experts will broadly discuss what approach the finance minister needs to take to cut the deficit without sacrificing revenues.

The second edition, will concentrate only on revenue generation issues.

Third edition will focus on the details of expenditure control and last edition will highlight a composite picture of how the Budget may look like.

This edition focus on the broad numbers of the revenue and the expenditure budgeted for the current year.

The Budget of February 2012, assumed that the total revenues will grow 22 percent to Rs 9.3 lakh crore. Of this, tax revenues will grow by 20 percent to Rs 7.7 lakh crore. But with growth coming in much lower than assumed last February, most economists now expect tax revenues to grow by 13 percent to 7.3 lakh crore.

Non-tax revenue was expected to grow by 21 percent to Rs 1.6 lakh crore, which may fall short marginally, if lower flows from spectrum sale are not offset by higher divestment collections.

Total expenditure was budgeted to rise 14 percent to Rs 14.9 lakh crore. Most economists expect the finance minister to deliver but with a different expenditure composition. Subsidies will be 25 percent higher than budgeted at Rs 2.3 lakh crore, while plan expenditure plus non-planned capital expenses will be 25 percent lower than budgeted. With this, the economists calculate the deficit at 5.6-5.8 percent of the gross domestic product (GDP).

The finance ministry sources said that plan expenses alone may be cut by 30 percent from the budgeted Rs 5.2 lakh crore, only Rs 3.8 lakh crore will be spent. S

uch a steep cut has never happened before. Possibly, due to slowdown, planned expenses like viability kept funding for road projects, for instance will not have been sought but can the government cut back Rs 1.4 lakh crore of plan expenses or will the government end up postponing some of it. Will such a cut give a body blow to growth in FY14?

In FY14, economists say that revenues should grow by 20 percent and expenditure by 10 percent to deliver 4.8 percent deficit. The question is, can revenues next year grow by 20 percent? given the drop in investments this year and will the government have the political will to keep expenditure growth to 10 percent in a pre-election year.

Govinda Rao, National Institute of Public Finance and Sudipto Mundle, outgoing DG at National Statistical Commission, both formally associated with the National Institute of Public Finance and Policy (NIPFP), the premier body which deals with public finance issues, discuss how the finance minister can go ahead.

They also held a wide range of policy-making positions. Rao has been member of the Economic Advisory Council and Mundle has been member of the Reserve Bank of India’s (RBI) Technical Advisory Committee. Both will join the 14th Finance Commission in the first week of February, and so this interview was recorded on January 30, before they officially became members of the Finance Commission.

Below is the edited transcript of the interview.

Q: Economists on the street are still working with a fiscal deficit of 5.6-5.8 percent for the current year, primarily because the revenue growth assumption by the Budget was about 23 percent but the revenue growth has been tepid because GDP has been much below our forecast. So revenue growth assumptions in the street have come down to about 13 percent. So people are still working with 5.6-5.8 percent deficit. Also fuel subsidy although there is a promise to cut in subsequent months, at the moment the government has paid perhaps subsidized kerosene for the full year, liquefied petroleum gas (LPG) for nine months of the year, diesel I think the subsidy of Rs 6 was cut against an asking amount of Rs 16 per litre. Do you think growth of 5.3 percent is achievable?

Rao: I am optimistic about 5.3 percent growth due to couple of factors. First, so far the revenue growth rate has not been very high, but the service tax growth is about 30 percent year-on-year, if we look at the collections until November. The tax base to all the services has been expanded only from July 1, generally in the last quarter the collections are much better. But, there may be some shortfall.

Secondly, plan expenditures on various flagship schemes have not progressed as budgeted. In fact, there is a significant slowdown in spending. Disinvestment and spectrum money are likely to realize. If the government falls short by certain amount of money then they may ask various cash-rich public sector enterprises to give extra dividends.

So, there are varieties of options open to the finance minister and then of course there will always be some passing to the next year. Basically, it is cash budgeting. Some amount of burden will be pushed to next year but I think one has to stick to 5.3 percent, there is no choice.