New Delhi: Finance minister P. Chidambaram ensured that a fiscal deficit of 4.8% was the “red-line" as he once described it, by ensuring that the actual number came in at 4.6% of gross domestic product (GDP), although analysts pointed out that at least some of this had to do with maths.
A significant portion of the reduction in government spending came from a reduction in Plan expenditure, which could affect growth in the medium term, and some more came from deferring around ₹ 35,000 crore oil subsidy to the next fiscal which could increase the fiscal burden on the next government.
Plan expenditure is the money spent on creating assets through centrally sponsored programmes and schemes, while non-Plan expenditure refers to all other spending such as on defence, subsidies, salaries and interest payments. Plan expenditure was reduced by 14.4% to ₹ 4.7 trillion in 2013-14 from the budget estimate, although not all of this was the finance ministry’s doing, but a reflection of the inability of some ministries to spend money on substantive programmes.
The government aims to appease international credit rating agencies and the captains of finance and industry with the lower-than-budgeted fiscal deficit in 2013-14, Subrat Das, executive director, Centre for Budget and Governance Accountability, said in a statement. “However, this fiscal consolidation has been achieved solely on the basis of compression of crucial development expenditure as the government’s poor record in stepping up the tax-GDP ratio has persisted in 2013-14," he said.
In his interim budget speech, Chidambaram claimed that analysts and rating agencies had acknowledged the government’s efforts some months ago and no longer speak about a downgrade.
“I hope that domestic experts will now agree that the UPA (United Progressive Alliance) government meant what it said when it put fiscal stability at the top of the agenda," he added.
However, at least some analysts questioned the quality of the deficit.
Mukesh Butani, managing partner of tax advisory BMR Legal, said that the fiscal deficit has been achieved through deferral of Plan and non-Plan expenditure, a 48% increase in non-tax revenue and a 64% increase in dividends and profits (from state-owned firms) over the target set out in last year’s budget. “Considering that the fiscal target was achieved on the back of subdued tax collection, it could be rated as an achievement. The worrisome part, from a medium-term point, is slowness in tax collection despite aggressive tax collections due to high pitched assessments which have become the order of the day."
While the government’s tax revenue declined 5.4% than the budget target of ₹ 8.4 trillion for 2013-14, its non-tax revenues increased 12.2% to ₹ 1.9 trillion during the same fiscal, thanks to the more than expected takings from the spectrum auctions.
India raised ₹ 61,126 crore from spectrum auctions, with ₹ 18,389 crore of this coming in this fiscal itself. Still, the lower tax collections did not deter Chidambaram from cutting excise duties of several products to boost manufacturing and consumer demand.
The finance minister said the revenue outgo as a result of the excise duty reductions would be ₹ 300-400 crore by 31 March and additional ₹ 700-800 crore in April and May.
The government’s disinvestment programme did not take off as expected and it expects to garner ₹ 16,027 crore by 31 March against the target of ₹ 40,000 crore. Though the government has consented to sell its residual stakes in Bharat Aluminium Co. Ltd (Balco) and Hindustan Zinc Ltd, economic affairs secretary Arvind Mayaram said in a press conference that both transactions will now happen in the next fiscal year. Chidambaram, however, maintained that the sale of the government’s stake in Axis Bank Ltd and Bharat Heavy Electricals Ltd will happen before the end of the fiscal year.
The finance minister also achieved his revenue deficit target of 3.3% in 2013-14, mostly due to a significant cut in non-Plan revenue expenditure which was reduced by 16.1% to ₹ 3.7 trillion. What also came handy for the government was the deferment of payment of ₹ 13,927 crore to the International Monetary Fund arising from a delay in the promised governance reforms at the multilateral institution.
Chidambaram has now budgeted to reduce fiscal deficit to 4.1% of GDP in 2014-15 while revenue deficit is projected at 3% for the same year.
Rohini Malkani, India economist at Citibank, wrote in a research note that the assumptions behind the fiscal deficit projection for next fiscal are on the optimistic side. “The extent of deviation would, to a large extent, depend on the growth outturn, pick up in investment cycle—which to an extent rests on a stable political outcome," she added. The government has assumed 13.4% nominal growth estimate behind projections for next fiscal.
That translates into a growth rate in excess of 6%.
Chidambaram, speaking to reporters at a press conference, had said at the beginning of the year, that every finance minister must be ambitious.
“That is a pragmatic approach to budget. The reach must be beyond the grasp."
Ragini Verma contributed to this story.
For full budget speech, click here