The comfort of numbers

The comfort of numbers

If numbers could be a source of comfort, then the fiscal deficit figures for the April-December 2010-11 period, posted by the Union government are a good reason for cheer. When seen against the backdrop of huge government expenditure in 2010-11, fiscal deficit being restricted close to 45% of the budget estimate for the fiscal year, the lowest in over a decade, is a source of comfort.

Perhaps. A break-up of the figures, however, tells an old story. The source of this good feeling lies on the revenue side, while the expenditure story remains scary. Net tax revenue in the April-December period grew by 27.2% on a year-on-year (y-o-y) basis. (Total receipts increased by 50%). Much of this was powered by a galloping rise in corporate tax collection. This grew by 20.4% (y-o-y). Indirect taxes also posted neat gains in this period. All this is the result of the high economic growth.

The other side of the coin, that of government expenditures, tells a different story. Total expenditure in this period stood at a whopping Rs7.86 trillion, higher by Rs794 billion from the same period in 2009-10.

Such high levels of expenditure have been made possible by three factors. One, high growth of the economy; two, tax buoyancy made possible by this and the revenues from one-off items such as spectrum auctions and, finally, weaknesses in the global economy that have kept fuel and commodity prices in check. There is a question mark over the last two conditions while a decline in the savings rate in the past two years coupled with rising interest rates could lead to lower investment growth, casting a shadow over overall growth and the macroeconomic environment. If consumption growth continues to gallop while the investment rate lags behind the savings rate in comparison, as it does now, inflation cannot be checked. Higher interest rates to tame inflation will have their own costs.

The government is confident of keeping the fiscal deficit in check and even bringing it down in 2010-11. The question, however, is about 2011-12. By that time, the political cycle will have closed the window of expenditure compression. With 2014 in sight, the spigots of spending will have been opened fully. The present-day fiscal hurrah may still be premature.

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