A lacklustre plan to reduce the fiscal deficit and unconvincing allocations for subsidies in the budget may disturb the fiscal calculations of the government as it did in the financial year ending 31 March.
Finance minister Pranab Mukherjee promised to bring down the fiscal deficit, which represents government’s gross borrowing, to 5.1% of gross domestic product (GDP) from the current year’s revised estimate of 5.9%. Although the prescribed fiscal correction is not sharp enough, the government’s track record in the current fiscal year led economists challenge the basis of this number.
Deutsche Bank in a report on the budget said it does not think the government can bring down the fuel subsidies as planned.
“The government of India attempted fiscal consolidation last year but failed as its assumptions were faulty from the beginning; this year’s parameters are more realistic but with high oil prices and below-trend growth likely to persist, reducing the deficit would be no less onerous,” it said. The note said it expects deficit to be at about 5.3% of GDP.
While the finance ministry budgeted Rs 23,640 crore for petroleum subsidy in 2011-12, it ended up spending Rs 68,481 crore. This is because while it assumed $90 per barrel for crude oil for the current fiscal, prices shot up to $110 per barrel during the period. For the next fiscal year, it has assumed oil price will average $115 per barrel.
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Kunal Kumar Kundu, senior economist and India general manager at economic research and analysis firm Roubini Global Economics, said with that background the budget estimate of Rs 43,580 crore for next fiscal is inexplicable when there is no sign of oil prices softening.
Economist AditiNayar discusses the budget’s initiatives to cut the subsidy bull and reign in the fiscal deficit.
“The mathematics of the budget calculations is again muddled up like last year,” he said.
The fiscal deficit target for 2012-13 is higher than the 4.2% of GDP recommended by the 13th Finance Commission and 4.1% targeted in the budget statement of 2011-12.
The finance ministry in its statement laid before Parliament said though the deficit levels projected are higher than the 13th Finance Commission recommended target, it is estimated that debt and liabilities would still be lower as a percentage of GDP at 44% and 41.9% in the two respective years than the recommended debt target.
In the budget, Mukherjee has assumed a robust growth in revenue collections next fiscal, while aiming to keep a check on expenditure. While total expenditure is projected to decline from 14.7% of GDP in 2012-13 to 14.1% in 2013-14 and 13.6% in 2014-15, gross tax revenue as a percentage of GDP is targeted to be increased from 10.1% in 2011-12 to 15% of GDP in 2012-13.
The finance ministry statement said this level of growth is achievable once the impact of additional resource mobilization proposed in indirect taxes is felt.
“While increase in tax as percentage of GDP is mainly on account of further roll-back of stimulus measures in indirect taxes, increase in non-tax revenue is on account of estimated receipts of Rs 40,000 crore from auction of telecommunication services,” it said.
The ministry said its move towards nutrient-based subsidy regime in fertilizer is expected to reduce expenditure on this component on fertiliser subsidy. It has budgeted Rs 60,971 crore for 2012-13 against the actual expenditure of Rs 67,199 crore on this head in the current fiscal.
The finance ministry said the increase in fiscal deficit this year may also be seen in the context of continuation of the policy of the government, introduced during 2010-11, not to issue government securities in lieu of cash subsidies to oil and fertilizer companies.
Mukherjee said in his budget speech that to reinforce its commitment towards fiscal consolidation, the government is amending the Fiscal Responsibility and Budget Management (FRBM) Act.
As part of the amendment to the FRBM Act, the finance ministry proposed to give statutory recognition to the concept of “effective revenue deficit,” which was introduced in the budget for 2010-11. This is the difference between revenue deficit and grant for creation of capital assets.
The ministry said this would allow the government to address “the structural component of imbalance in the revenue account, namely, consumptive expenditure, in right earnest without sacrificing development-related expenditure.” It proposes to bring down effective revenue deficit to 1.8% of GDP in 2012-13 from 2.95% in 2011-12, while aiming to eliminate it by 2014-15.
The second proposed amendment in the Act is the introduction of a medium-term expenditure framework statement, along with the existing three FRBM statements. This new statement would provide certainty of allocation to ministries and departments over a three-year time frame.
“This would help ministries and department in undertaking exercise for allocating resources on prioritised schemes and weeding out such schemes which have outlived their utility. This statement would set forth a three-year rolling target for expenditure indicators with specification of underlying assumptions and risk involved,” the finance ministry said.
Graphics by Ahmed Raza Khan/Mint