Financial Daily from THE HINDU group of publications
Tuesday, Mar 26, 2002
Industry & Economy
Budget figures show poor marksmanship by Government: CAG
NEW DELHI, March 25
THE Comptroller and Auditor-General of India (CAG) has characterised the Union Government finances as a `paradox', because despite the contraction in Government expenditure, its fundamental fiscal problem appears intractable'.
In a report of Union Government for the year ended March 2001, presented to Parliament, that reviews critical changes in major fiscal aggregates over the 16-year period between 1985-2001, the CAG said that aggregate expenditure declined from an average of 23.44 per cent of GDP during the second half of 1980s (Seventh Plan 1985-1990) to 19.38 per cent during the second half of 1990s (Ninth Plan- 1997-2002).
The report observes that despite this "extraordinary contraction'' of over four percentage points, fiscal deficit was no lower than the trend during the early 1980s and throughout the 1990s.
While the balance of payments crisis of 1991 did focus some attention on the fiscal deficit, as soon as the BOP issue was addressed, fiscal consolidation was largely left "unattended''. It was not, therefore, "surprising'' that the fiscal deficit, far from retreating had become endemic.
It faulted the Union Government for having "consistently underestimated its fiscal imbalances''. In the last 16 years, the Union Government had underestimated the revenue deficit in 13 years and the fiscal deficit in 15 years, the CAG said.
What was worse was that the magnitude of these deviations as percentage of the budgeted figures showed an uptrend indicating ``continuing poor marksmanship by the Government''.
The Government also "overestimated its revenue receipts and capital expenditure''. Revenue receipts were overestimated in nine of the last 16 years with the average deviation being around 4 per cent. The magnitude of these deviations was greater in tax revenue.
In case of expenditure, the deviation was markedly higher for capital expenditure and actual expenditure usually fell short of the Budget provisions, it said adding that "significant reduction in capital expenditure was invariably used or moderating aggregate expenditure growth''.
The report said that in a situation where over 70 per cent of revenue receipts are applied to meeting charged expenditure on interest payments, Government's control over its finances is `limited'.
Similarly, for every rupee of borrowed funds, repayment of principal and interest account for over 96 paise. Thus, both on revenue and capital accounts, Government has very little freedom over "the application of the enormous resources that flow to its coffers''.
This is not because of the level of expenditure; nor is it due to any increase in loans and advances, which again have retreated markedly from 4.07 per cent of GDP during 1985-90 to 1.91 per cent of GDP during the last four years or for that matter capital expenditure.
Pointing out that the problem was not the high expenditure but the absence of efficient tax collection, the CAG said with the dismantling of controls and globalisation, non-tax revenues generated through an administered price mechanism would continue to diminish and could not help shore up Union finances.
Tax revenues, which were expected to fill this void, had "failed to do so'', the report said adding that "while other countries collect on an average 18 per cent or more of their GDP as taxes, our tax collection is less than two-thirds of this figure''.
Considering that the fiscal deficit was around 6 per cent of GDP, a gradual increase in tax-GDP ratio by around 5 to 6 percentage points, could address the fiscal problem.
An important issue is the dismal collection of taxes from the services sector, which has been the engine of growth during the 1990s. Taxes levied on services have led to modest results and most of the tax collection occurs through self-assessment and advance payments and "little credit can be given to the tax collection machinery''. Hence, the CAG said the single most crucial issue in addressing the finances of the Union was to secure "greater tax compliance''.
With a downward revision in the GDP growth in 1999-2000 and a moderate growth in 2000-01 and 2001-02, the overall GDP growth during the Ninth Plan (1997-2002) would be "significantly lower than the target''. One of the key factors to this deceleration is a decline in the capital formation by the public sector and its negative savings.
Commenting on the quick estimates of National Income for 2000-1 by CSO on January 31, revised its earlier advance estimates, the reports said this revision has altered the basic fiscal parameters of the Union Government, particularly in terms of their ratios to GDP.
Thus, the tax/GDP ratio, consequent upon a downward revision in GDP, increases from 8.70 per cent in 2000-01 to 9.03 per cent. Similarly, ratio of revenue receipts to GDP also improves from 11.82 per cent to 12.26 per cent. But there is deterioration on the fiscal front, since the revenue and fiscal deficits increase to 4.15 per cent and 5.79 per cent of GDP respectively.
Debt sustainability assumes even more significance since average interest rate at 9.22 per cent in 200-01 for the first time exceeds the GDP growth of 8.2 per cent.
Aggregate fiscal liabilities/GDP ratio increases to 59.33 per cent in 2000-01 from the pre-revision assessed level of 57.17 per cent, thereby further increasing "the vulnerability of the Union Government finances'', the CAG said.
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