The fiscal deficit target of 4.6%, 0.2 percentage points lower than Pranab Mukherjee’s target set last year, rests on two crucial assumptions: global prices of oil and fertilizers will remain in line with the current fiscal’s prices and the finance minister can resist political pressure to enhance spending on consumption during the year. Add to these two assumptions the forecast of 9% growth next fiscal and 18% rise in tax collections, and government borrowings are expected to be kept under check
New Delhi: The Arab street and the political will to rein in borrowing for consumption may decide the fate of finance minister Pranab Mukherjee’s desire to peg the fiscal deficit in 2011-12 at 4.6% of the gross domestic product (GDP).
The fiscal deficit target of 4.6%, 0.2 percentage points lower than Mukherjee’s target set last year, rests on two crucial assumptions: international prices of oil and fertilizers will remain in line with the current fiscal’s prices and Mukherjee can resist political pressure to enhance spending on consumption during the course of the year.
Add to these two assumptions the forecast of 9% economic growth next fiscal and 18% increase in tax collections, and the government expects to keep borrowings under check and ease the pressure on the Reserve Bank of India to push up interest rates to combat inflation.
“There is scepticism about the estimates—both revenue and expenditure, especially subsidies,” Morgan Stanley India Co. Pvt. Ltd said in a report. “However, the starting point is encouraging. Global factors such as commodity prices become even more critical for inflation and rate outlook.”
The fiscal deficit, which represents the borrowing to cover the excess of expenditure over revenue, has been at the heart of the budget exercise. Mukherjee’s speech identified private investment as a key driver of economic growth and indicated the government has tried to curtail its borrowing to give private sector more space to raise money.
The budget documents were far more explicit on the government’s approach to Monday’s budget.
“The net borrowings from the open market in 2011-12 have been estimated after factoring private sector requirements,” the budget’s fiscal policy statement said.
Subsequently, the budget has been constructed on the premise that the subsidy of retail oil products in 2011-12 can be lowered by 38% to Rs23,640 crore.
“We won’t assume a number for the whole year,” finance secretary Sushma Nath said at a post-budget media conference, while answering a question on the average price of crude for fiscal 2012 that had gone into the oil subsidy forecast.
Brent advanced to more than $100 a barrel at the end of January for the first time since 2008 after weeks of anti-government protests in Tunisia and Egypt, which have since spread to Libya and Oman.
International crude price may be out of the government’s control, but it is confident it can resist political pressure to enhance domestic spending on consumption.
Non-Plan expenditure is a proxy for the magnitude of consumption. Typically, the larger the non-Plan expenditure, the less the money left for development-oriented spending.
For fiscal 2012, non-Plan expenditure is expected to be Rs8.16 trillion, around the current year’s level. In relative terms, it has come down to 103% of the government’s revenue as compared to a level of 126% in 2009-10. The budget documents said the aim is to bring consumption to 90% of revenue receipts by 2013-14 so as to free up space for developmental expenditure.
The budget document also pointed out: “The challenge, however, remains to adhere to these allocations and not to resort to substantive augmentation through supplementary demand for grants,” while discussing non-Plan expenditure used purely for current consumption such as salaries and handouts to select groups.
The assumptions made by the budget on subsidies and non-Plan expenditure have allowed Mukherjee to forecast an improvement in the primary deficit to 1.6% of GDP in 2011-12 from the current year’s expectation of 2%.
The primary deficit is arrived at by deducting interest payments from the fiscal deficit. Interest payments represent an obligation of past borrowings. The primary deficit, by removing the impact of interest payments, is a measure of current imbalances.
In his Monday budget speech, Mukherjee introduced a new term—“effective revenue deficit”—to describe the excess of expenditure over revenue incurred to meet the normal running of government. This indicates the extent to which the government is living beyond its means to meet regular expenses such as salaries. This measure, however, is a bit controversial as finance ministry officials pointed out that some expenses that are classified as revenue expenditure go into creating long-term assets such as rural roads.
Effective revenue deficit subtracts grants to states, which are used for asset creation, and has allowed Mukherjee to forecast it would come down to 1.8% of GDP in 2011-12 as compared with the 2.3% expected this fiscal. The normal revenue deficit for 2011-12 was much higher at 3.4% of GDP and remains unchanged from the current fiscal’s level.
Bloomberg contributed to this story.