Bullish assumptions to power budget

Bullish assumptions to power budget
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First Published: Mon, Feb 19 2007. 05 03 PM IST
Updated: Mon, Feb 19 2007. 05 03 PM IST
New Delhi: The entire Union budget is being built on an assumption that India’s economic growth rate will be at 9%, somewhat slower than what it is now, and that the inflation rate will be 4%, sharply lower than the current rate, which is a shade below 7%, says a government official familiar with the economic modelling behind the 28 February exercise.
These assumptions on macro-economic growth are critical as they form the basis on which the finance minister projects the vital statistics of the budget.
In last year’s budget too, the finance ministry had assumed the same growth rates they are now assuming for 2007-08. But both sets of assumptions have proven to be off-mark so far, with the government underestimating both the health of the economy and the rate at which prices will rise.
India is now projected to end the fiscal year, which runs through March, with a substantially higher growth rate, a record 9.4%. And, as opposed to the assumed 13% nominal growth (which factors inflation) in the national income, the economy is now projected to end up with a rate of growth of around 15%. This is premised on an inflation rate of around 5.5%, which is still significantly higher than what the government is assuming for the next budget year.
Higher levels of GDP also mean a higher denominator and hence a much more rosy picture in terms of critical statistics such as the revenue deficit, excess of revenue expenditure over revenue receipts, and fiscal deficit or gross borrowings by the Centre.
With the government managing to slow down its market borrowings this fiscal, the ratio of fiscal deficit to GDP is expected to show a substantive improvement—as opposed to the projected 3.8%, actual fiscal deficit for 2006-07 is expected to be around 3.6%.
Senior government officials, however, cautioned that the challenges in the next fiscal are going to be greater, not only because of uncertainty about the macro health of the economy, but also due to the fact that it is bound by statute to lower the fiscal deficit to 3% and eliminate the revenue deficit by the end of fiscal 2008.
Under the Fiscal Responsibility and Budget Management Act (FRBM), 2003, the government is bound to these limits and any deviation will require prior approval of Parliament.
“The fiscal deficit target for the next fiscal is likely to be 3.2-3.3%. The bigger concern is the revenue deficit. The next year’s target has to be close to 1% in order to attain the FRBM target of bringing it down to zero by 2008-09,” said a senior government official, who didn’t want to be identified.
The concern on the revenue deficit for the next fiscal is mainly on account of Plan expenditures, which finance an array of the Centre’s social programmes and are reported as revenue or current expenditures. These are the ones that tend to be more populist, susceptible to political pressures and sweeping in terms of the claims of potential benefits to millions of people.
“Non-Plan expenditure (which includes items such as interest payments, subsidies and wage bill) has been under control and the trend is expected to continue next fiscal. However, the projections show that the Plan expenditure next fiscal would be at least 15-16% higher than the estimate of Rs1.72 lakh crore in the current fiscal,” the official said.
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First Published: Mon, Feb 19 2007. 05 03 PM IST
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