New Delhi: The fiscal consolidation that the Union government is looking to achieve through expenditure reforms, and which has been recommended by the 13th Finance Commission (TFC), may be delayed because of projected lower revenue realization and higher outgo to states.
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The Centre accepted that the task ahead to eliminate revenue deficit is “more challenging”, keeping in view the need to bring in its liabilities on account of oil, food and fertilizer bonds into the fiscal accounting. “This is a major challenge, as many of the components of revenue expenditure are rigid in nature and difficult to come down in the medium-term,” the Centre said in its medium-term fiscal policy statement.
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For 2010-11, the government has budgeted to reduce the expenditure-to-gross domestic product (GDP) ratio to 16%, from 16.6% a year ago. It said the adjustment would primarily be on non-Plan expenditure so as to provide adequate funding for flagship schemes such as Bharat Nirman for developing rural infrastructure. Total expenditure as a percentage of GDP had increased from 14.4% in 2007-08 to 16% in 2009-10.
The gross tax-to-GDP ratio is estimated to improve from a projected 10.8% in 2010-11 to 11.5% in 2011-12 and 11.8% in 2012-13, but this would be still lower than the 12% tax-to-GDP ratio achieved in 2007-08.
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During the previous Congress-led United Progressive Alliance government, between 2004 and 2008, fiscal consolidation was driven by higher tax buoyancy, which has reversed, at least for the medium term, post the economic downturn.
TFC has recommended the debt to GDP ratio of the Centre be brought down to 45% by 2014-15. It has also worked out a road map for fiscal deficit and revenue deficit for 2010-15. For the Centre, it has recommended revenue deficit be eliminated and fiscal deficit brought down to 3% of GDP by 2013-14. While fiscal deficit in 2010-11 is projected to decline to 5.5% of GDP from 6.9%, the revenue deficit is expected to decline to 4% of GDP from 5.3%.
The finance ministry said TFC’s recommendation for increasing states’ share in Central taxes to 32% from 30.5% during its award period, 2010-15, would impact the availability of resources for the Union government. The Centre has already accepted the key TFC recommendations.
Interest receipts from states are likely to decline in the medium-term, mainly due to their disengagement from financial intermediation following TFC’s recommendation on lending to states.
For 2010-11, an additional devolution of 1.5% of Centre’s net tax revenue to the states would result in around Rs9,800 crore, amounting to 0.14% of GDP.
The government, however, said it would be able to bring down its debt to GDP ratio to 45%—the recommended level by TFC—by 2014-15, though the government’s road map varies significantly from TFC.
The government expects Rs35,000 crore from the auction of high-speed third-generation mobile licences. It aims to garner Rs40,000 crore from asset sales, which will be used to fund social sector schemes aimed at creating capital assets.
In 2009-10, non-Plan expenditure exceeded non-debt receipts, which means the government has to borrow for meeting commitments such as salary and interest payments. The Centre expects this trend to continue in 2010-11 and said that if not addressed, it would further squeeze the fiscal space for developmental works.
Graphics by Yogesh Kumar / Mint