Expenditure cut drives fiscal consolidation: India Ratings

India Ratings' release

Fiscal Consolidation on Track: Last fiscal after the recommendation of the Kelkar committee a roadmap followed by an amended Fiscal Responsibility and Budget Management Act, 2012 was adopted by the Union Government to undertake fiscal consolidation with a revised target. However, due to dwindling GDP growth, stretched revenue receipt targets, and rising food/fuel subsidies attaining fiscal deficit target for FY14 appeared unachievable as the year progressed. However, the government has once again delivered on the fiscal front by keeping fiscal deficit at 4.6% of GDP, lower than the budgeted 4.8%.

Arithmetic of Fiscal Consolidation: India Ratings & Research (Ind-Ra) believes that while containing the fiscal deficit at 4.6% of GDP is indeed commendable, it has been achieved primarily by compressing plan/capital expenditure, a soft target. Revised revenue (RE) receipts were lower by 2.6% and revised total expenditure was lower by 4.5% from the FY14 budgeted estimate (BE). Within total expenditure the onus of compression fell on plan expenditure which as per the RE fell by 14.4% as compared to BE. Similarly, the total capital expenditure as per the RE declined by 16.7% as compared to BE. This shows the decline in fiscal deficit notwithstanding, the quality of fiscal deficit will continue to be an issue because compression in plan/capital expenditure will adversely impact asset creation and in turn be detrimental for the medium-term growth prospect of the economy.

Debt Sustainability: Another fiscal indicator that has shown improvement is the primary deficit. As per the RE it has declined to 1.3% of GDP from BE of 1.5%. It has been budgeted at 0.8% of GDP for FY15. A sustained decline in the primary deficit along with nominal GDP growth in excess of average interest rate on debt can bring the debt/GDP ratio to a more manageable level.