The Hindu Business Line : Ballooning revenue, fiscal deficits

ACCORDING to the figures till end-December 2001 released by the Controller of Accounts, the Centre's revenue receipts were only 57 per cent of the projected receipts for financial 2001-02; the corresponding figure for end-December 2000 was 65 per cent of the projected receipts for 2000-01. Tax revenues by end December 2001 were only 52 per cent of the projected receipts for financial 2001-02, whereas the corresponding figure for end December 2000 was 63 per cent

Total receipts, including from the capital account, by December 2001 were just 56 per cent of the projected receipts, whereas in the previous financial year by December end the total receipts had been about 62 per cent. Total revenue expenditure for 2001-02 was projected at Rs 3,11,000 crore; and by December end revenue expenditures had amounted to Rs 1,99,000 crore — 62 per cent of that projected. The total expenditure by December end of 2001-02 was about Rs 2,34,000 crore, against the projected figure for the year of Rs 3,75,000 crore.

If we assume that revenue receipts during the next three months of the present financial year 2001-02 will be more by 40 per cent of the receipts for the nine months, the aggregate revenue receipts will be about Rs 1,86,000 crore; to this we must add the probable disinvestment receipts of Rs 10,000 crore. Even if the projected expenditure stays within the limit of Rs 3,11,000 crore, the revenue deficit will amount to Rs 1,25,000 crore.

This will amount to 4.9 per cent of GDP at market prices in 2001-02. (Note that we assume a 9.7 per cent growth rate for nominal GDP at market prices for 2001-02; this is as per the latest estimates of the CSO but, according to us, the figure might turn out to be lower than the CSO estimate.). Anyway, unless expenditure during January-March 2002 is cut absolutely, and the total revenue expenditure turns out to be less than that projected, the revenue deficit will be about 5 per cent of GDP for 2001-02; at the time of the Budget last year the revenue deficit projected was 3.2 per cent of the estimated GDP.

Let us now estimate the probable fiscal deficit for 2001-02. We have noted that the revenue deficit may amount to Rs 1,25,000 crore. In the Budget estimate for 2001-02, the Finance Minister had targeted non-debt capital receipts of Rs 27,200 crore, of which disinvestment receipts were projected at Rs 10,000 crore. We assume that the disinvestment receipts will be equal to the projected figure, thanks to the ingenuity and hard work of Mr Shourie. The aggregate capital expenditure projected for 2001-2002 was about Rs 60,000 crore. Let us deduct Rs 27,200 crore of non-capital receipts from this. Hence, the residual deficit to be covered — borrowings, etc. — would be about Rs 33,000 crore. The aggregate fiscal gap on both revenue and capital accounts would be about Rs 1,58,000 crore. This is on the assumption that in the next three months the aggregate expenditure for the whole year will be contained at Rs 3,75,000 crore, as budgeted last year.

The fiscal deficit would amount to 6.9 per cent of the projected GDP for 2001-02, against the budgeted 4.7 per cent. In fact, the revenue deficit, at 5.5 per cent, may turn out to be larger than the projected fiscal deficit!

The Graph indicates the frightening course of the soaring revenue and fiscal deficits from 1994-95 to 2001-02 (Expected).

The `fiscal deficit' figures given in the Graph are on a comparable basis. (They exclude loans to States against net small saving collections.). Most worrisome is the steep rise in revenue deficits after 1996-97. The aggregate size of the revenue deficit ratio seems to have risen from 2.4 per cent in 1996-97 to 3.9 per cent in 2000-01, and soared to about 5.5 per cent (probable) in 2001-02.

In fact, if we assume a M3 growth rate of 16 per cent, it seems more than a third of the above is taken up in financing the revenue deficit. Note that this portion of increase in money supply does not have any production counterpart effects. It is just credit expansion without output expansion. Potentially, if there was no scope for borrowing from the banks/RBI, the huge measure of increase in revenue expenditure would have to be covered by additional tax and non-tax revenues, especially on the absolutely and relatively better-to-do classes.

The popularity of the Finance Minister and of the Government with the vocal better-off classes under our conditions would have touched rock-bottom had he sought to cover the increase in revenue expenditure wholly by additional taxes. Had we done the latter and used borrowing to finance infrastructure projects, etc., the fiscal deficit would have been counterparted by long-term public investments in areas where the private investors, even from abroad, are not willing to venture. One wonders whether the fiscalists in New Delhi are aware of what the country is foregoing by fiscal deficits, which are mostly revenue deficits.

Actually, 80 per cent of the fiscal deficits are revenue deficits, and some portion of the difference is in capital expenditure on Defence. Very little of the excess of the fiscal deficit over the revenue deficit goes for long-term public investments. Just imagine if the Government and the Finance Minister had covered revenue expenditure by tax and non-tax sources of receipts. In that case, the bulk of the fiscal deficit would have been for the long-term productive investments in the public sector and there would have been room for more private investment in medium-term lines after some time.

If we assume that inadequate supplies and projects of power, water, fertilizers, dams, embankments, roads, bridges, etc., are coming in the way of private investment, it would take some time before the public investments yield current supplies and remove the bottlenecks. We do not know when the horizon of opportunities for private investments will be lifted. India, as a nation, seems wholly preoccupied with day-to-day, short-term problems. Probably, but for the Prime Minister and Drs Manmohan Singh, Rangarajan, Jalan, and naturally Mr Sinha, very few seem concerned about the long-term economic future.

Short-term politics and make-shift adjustments are eating up our future. The courage that Mr Sinha had when in the Chandrashekar Ministry, when he is said to have threatened resignation if not allowed the freedom to introduce measures to bring the economy on an even keel, seems to be now lacking in the Finance Ministry. According to the Controller of Accounts, market borrowings estimated for the whole year 2001-02 at Rs 77,400 crore, had already reached the figure of Rs 77,000 crore by December 2001. But, according to the RBI Weekly Bulletin, by January 25, 2002, the net amount raised had crossed Rs 79,500 crore. The gross amount raised till January 25, 2002 was Rs 1,06,000 crore, against Rs 94,000 crore by January 26, 2001.

What is disturbing is that private placement on RBI was Rs 25,600 crore despite the considerable liquidity in the economy. Had the fiscal deficit been larger than what was projected last year, as we fear on the basis of the Controller's statement, the Government's borrowings from the RBI and/or from the banks would exceed by a large amount the projected borrowings last year.

This means that unless expenditure is severely curtailed by the Finance Minister during January-March this year, the growth rate of money magnitudes may turn out to be higher than projected. These estimates are, of course based on the assumption that window-dressing is not resorted to.

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