Home / Politics / Policy /  Govt announces austerity measures to narrow deficit

New Delhi: India announced a slew of austerity measures, including a 10% cut in certain types of government spending and curbs on foreign travel and conferences, to meet its deficit-reduction goal amid slower-than-estimated revenue growth and spiralling expenses.

The government is aiming to narrow the nation’s fiscal deficit to 4.1% of gross domestic product (GDP) for the current fiscal, a goal that has been termed as challenging by economists as well as the government, prompting the expenditure-reduction measures on Thursday.

Prime Minister Narendra Modi’s government aims to cut non-Plan expenditure, which includes so-called non-productive expenses such as interest payment on debt and subsidies, by 10% across all departments. The reduction plan will, however, exclude interest payments, repayment of debt, defence capital, salaries, pension and Finance Commission grants to the states, the finance ministry said in a notification. In addition, ministries have been asked not to spend more than one-third of the money allocated in the budget in the last quarter of the fiscal year with expenditure in March restricted to 15% of the budgeted amount.

The austerity steps have also placed restrictions on foreign travel and a ban on first class air travel. The finance ministry has also banned conferences in five-star hotels, purchase of vehicles and creation of new posts.

These measures are similar to the steps taken by the previous United Progressive Alliance government last year to curb expenditure, in addition to the cuts in Plan expenditure.

The government should ideally focus more on revenue enhancement rather than cost cutting, said Rajesh Chakrabarti, executive director at Bharti Institute of Public Policy.

“Cutting non-Plan expenditure is an emergency measure that every government falls on. But it is only a stop-gap solution. Revenue enhancement is the long-term solution to this problem. The tax department should look to widen the tax base to garner more revenues," Chakrabarti said.

Care Ratings, in a survey report released on Wednesday, said a majority of the respondents (56%) expect the government to miss its fiscal deficit target. They expect the deficit between 4.1% and 4.5%.

Finance minister Arun Jaitley has, however, expressed confidence that the government will meet the target, with the economy expanding at 5.8% in the fiscal first-quarter after two straight years of sub-5% economic growth.

The government is also banking on its disinvestment or assets sale programme to take off to meet the shortfall in revenue collections. In addition, the sharp drop in crude oil prices compared with the government’s $110 per barrel estimate during the July budget coupled with the deregulation of diesel prices will help the government slash its subsidy bill, estimated at more than 2.6 trillion for 2014-15.

Still, the fiscal deficit for the five months ended 31 August already stands at three-fourths of the full-year target with expenditure outstripping revenue by a significant margin as tax revenues failed to keep pace with budgeted growth. As of end-August, total expenditure stood at 38% of the full-year allotment, while revenue receipts lagged at 22.7% of the budgeted numbers. Of this, tax collections in the first five months of the fiscal year were only 19% of the budgeted number, with both indirect and direct tax collections growing at a slow pace.

On the other hand, while non-Plan expenditure was at 40.6% of the budget estimates, Plan expenditure was at 30.9% of the budgeted amount.

The fiscal balance for the April-September period is due on Friday.

The progress on the fiscal consolidation plan has been slow, Radhika Rao, an economist with DBS Bank Ltd, said in a report released on Wednesday. However, she added that the annual deficit target of 4.1% of GDP might still be met.

“A mix of external/one-off developments and late start to the divestment programme will aid efforts. Firstly, lower global oil prices have provided considerable comfort to the subsidy bill. Added to this was the recent move to deregulate the diesel sector, which helps lower the fuel subsidy allotment for second half of the year," she added.

The government aims to collect more than 58,000 crore in divestment proceeds in the current fiscal.

Tapping the black money circulating in the Indian economy rather than looking for it overseas may also help the government, said B.M. Singh, former chairman of Central Board of Direct Taxes.

“Circulation of black money domestically will be much higher than the unaccounted money that is stashed in overseas accounts as everyone does not have a recourse to open an account overseas," said Singh. “Domestically, black money is mainly in real estate deals as properties are not registered at the value at which they are purchased. Also, the circle rates don’t keep up with the actual market value, giving scope for such deals."

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