Budget Math | Is FM overreaching with estimates?
FM’s target of lowering the fiscal deficit to 4.8% of GDP in next fiscal is based on assumptions of tax receipts growth and subsidy reduction
Premium(Ramesh Pathania/Mint)
New Delhi: Finance minister P. Chidambaram’s target of lowering the fiscal deficit to 4.8% of gross domestic product (GDP) in the next financial year is based on assumptions of robust growth in tax receipts and compression of the subsidy Bill, but analysts say he risks overshooting his estimates.
To his credit, Chidambaram managed to contain the fiscal deficit for the current year to 5.2% of GDP, a tad lower than his own revised target of 5.3%. He achieved the reduction by mercilessly cutting plan expenditure meant for developmental projects by ₹ 91,838 crore. The minister failed to curb non-plan expenditure, which includes defence expenditure, interest payments and salaries, which rose by ₹ 31,738 crore.
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The finance minister’s inability to curb such expenditure was reflected in the revenue deficit number. Revenue deficit, or the difference between current expenditure and current receipts, as a portion of GDP has actually risen in 2012-13 to 3.9% from the budget estimate of 3.4%. In 2013-14, Chidambaram is targeting a revenue deficit of 3.3% of GDP.
Credit rating agency Standard & Poor’s (S&P), which had warned India that it risked having its sovereign rating lowered to junk status, or non-investment grade, because of its deteriorating financials, said in a statement on Thursday that the current year’s deficit outcome had been achieved mainly by cutting spending.
“At the same time, there is little progress in structural reforms to reduce the vulnerability of the government’s fiscal position," it said. India remains vulnerable to spikes in the price of oil and other commodities, the credit assessor said.
“Although the government allowed a gradual increase in diesel prices earlier this year, the timing and the extent of such increases are uncertain. If the government enacts the food security Bill, the fiscal burden from food subsidy can increase. As a result, the total cost of subsidies may exceed the government’s budgeted 2% of GDP in fiscal 2013-2014, compared with 2.6% in the current year," S&P said.
Although the government presented a “relatively prudent budget," potential exists for the government to exceed its budgeted expenditure.
“We therefore believe the budget would be vulnerable to economic conditions in the next fiscal year. The outcome will be important in judging the commitment of the administration to medium-term fiscal consolidation," it added.
Chidambaram said at a post-budget press conference that the budget calculations were credible and he expects fuel subsidy to come down in the next year. “We have made correct assumptions," he said.
The budget has also significantly reduced the petroleum subsidy outgo for 2013-14 by allocating ₹ 65,000 crore for 2013-14, a cut of 33% from the revised estimate of ₹ 96,879.87 crore for 2012-13. The revised estimate is almost 122.3% higher than the budgeted estimate of ₹ 43,580 crore.
The government has so far paid ₹ 30,000 crore to state-run oil marketing companies (OMCs) for selling fuel at prices below the cost of production and has already budgeted a payment of an additional ₹ 25,000 crore in the current fiscal. It has also made a payment of ₹ 38,500 crore this year for the previous year’s dues. The government’s share in the total under-recoveries—the revenue loss from selling products below cost—are expected to be around ₹ 96,000 crore for the year to 31 March, which is ₹ 41,000 crore less than the revised estimate for the current fiscal.
Kunal Kumar Kundu, an economist and independent consultant, said that if the government does not compensate OMCs in full, the companies would have to bear the burden, which will, in turn, significantly escalate their borrowing costs.
The government’s expectations of raising around ₹ 55,814 crore through stake sales in public sector units and ₹ 40,850 crore through spectrum sale may be overestimates given the past experience and volatile market conditions, Kundu said.
The economic survey released on Wednesday said projected economic growth of between 6.1% and 6.7% in 2013-14.
N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, said the growth estimate in the budget was not unrealistic. “The budget math is based on two institutions. One is recovery of economic growth and substantially reduce leakages of subsidies through the direct cash transfer scheme," he said.
Utpal Bhaskar contributed to this story.
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