Centre may trim planned expenses to control deficit

Centre may trim planned expenses to control deficit
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First Published: Fri, Aug 29 2008. 12 11 AM IST

Updated: Fri, Aug 29 2008. 12 11 AM IST
New Delhi: India’s Parliament will have to clear a grant for additional money to fund a number of programmes in its next session starting 17 October, but while a rough calculation shows the amount involved to be Rs1.25 trillion, almost as high as the estimated fiscal deficit for 2008-09, economists say that the fiscal deficit will likely be kept in check by trimming planned expenses, including capital expenditure, and other measures.
“Wherever they (the government) can cut down (budgeted expenditure), there would be some amount of saving. Capital expenditure can be postponed,” said M. Govinda Rao, director, National Institute of Public Finance and Policy and member of the Prime Minister’s economic advisory council.
Delaying capital expenditure could lead to cost and time overruns in projects, Rao said. And these, in turn, could crimp the next government’s flexibility to spend.
Currently, the government of the day does not have the flexibility to decide on the expenditure pattern in the Union budget because around 80% of total expenditure is made up of necessary expenses such as interest payments on debt and salaries, a recent report of the comptroller and auditor general, or CAG, said. CAG is the external auditor of government accounts.
Rao said that by now, the government would have an idea of the areas where expenditure is likely to be lower than estimates made in the Union budget because, often, there are “lags in implementation” of projects.
This will likely partly mitigate the impact of post-budget announcements.
Off-balance sheet items
The post-budget expenses include a Rs25,000 crore payment to banks for waiving farm loans; Rs22,000 crore towards fertilizer subsidy; and around Rs16,000 crore as raises for government employees. A major portion of the additional expense is likely to be on account of oil bonds that will need to be issued to public sector oil refiners to offset their losses for pricing fuel lower than the cost of production.
According to a senior executive at Indian Oil Corp. Ltd who did not want to be named, the government needs to issue oil bonds for the period beginning January 2008. If the bonds cover the first nine months of this year, the government may well have to spend Rs63,000 crore on them.
The issue of these will, however, not hurt the country’s fiscal deficit—at least the way the government calculates it.
Government accounting rules classify oil bonds as off-balance sheet items. Therefore, they do not form a part of the fiscal deficit, though independent economists often account for them in their projections of fiscal deficit.
Leaving aside the expenses that do not figure in the government’s deficit calculation, it would not be possible at this stage to estimate if expenses on account of post-budget developments would have an “equivalent impact” on the fiscal deficit, Rao said.
The government’s projected fiscal deficit (the excess of total expenditure over total revenue) for 2008-09 is 2.5% of gross domestic product, or Rs1.33 trillion.
Uncertain impact on the fiscal deficit
The most important reason for the uncertainty about this “equivalent impact” is the manner in which expenses for welfare projects are calculated, according to an economist who has previously worked in the finance ministry and did not want to be named.
“Lots of welfare projects are written ambitiously. Towards the end of the year there’s always unexpected space for (offsetting) deficits.”
Ministries such as health, communications and power which are among the largest spenders have fallen short of their planned expenditure in the past few years (see accompanying graphic).
According to an economist with a Mumbai-headquartered bank, who did not want to be named, in theory, the government can mitigate the impact of additional expenses by drawing from its cash balances placed with the Reserve Bank of India (RBI) or using cash placed with central bank by state governments to buy treasury bills with longer duration (six months to a year). The plausibility of using these measures could not be immediately confirmed with the finance ministry.
Generally, the government has cash balances of more than Rs20,000 crore with RBI. These can be brought down to Rs100 crore, which is the minimum reserve, the economist said, adding that this measure would typically be used towards the end of the fiscal year to keep fiscal deficit in line with the government’s budget estimate.
sanjiv.s@livemint.com
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First Published: Fri, Aug 29 2008. 12 11 AM IST