The Hindu Business Line : Declining deficit-GDP ratios: Untold story of numbers

The tax-GDP ratio for the next fiscal is estimated at 9.7 per cent; given the fact that the already pronounced cut in the taxes would not improve the tax collection this appears an overestimation.

THE INTERIM Budget proposals for 2004-05 are significant for two reasons: First, the timing and, second, the estimated downturn in fiscal deficit. A cursory look at the earlier election year Budget proposals reveals that most were aimed at claiming some brownie points for the incumbent government for better fiscal management, but the fact was they were mostly populist and had throw-forward implications for the next few Budgets.

For example, in this Interim Budget, the proposal of merging of 50 per cent of dearness allowance with the basic pay for Central government employees will necessitate continuous outflow in all ensuing Budgets under salary and pension heads.

Besides the time factor, the much highlighted issue of the Interim Budget is the declining ratio of fiscal deficit to GDP. Is this a note of cheer that we are on track towards achieving fiscal prudence?

Or, is it a sheer mirage of numbers? A look at the broader array of related numbers may help capture the untold story.

To appreciate the proud statement of the Finance Minister that the fiscal deficit-GDP ratio has come down, let us raise three questions: Is the decline the result of augmented revenue resources? Or, is it because of expenditure compression? Or, is it simply because of guesstimate of higher GDP?

The Revised Estimate of revenue receipts for 2003-04 shows an increase of Rs 14,000 crore over the Budget Estimate. This is largely due to increased non-tax revenue from interest receipts and economic services. While higher recoveries for economic services are welcome, there is a problem with higher revenues assumed in respect of interest receipts. Realisations on this count are likely to impose a burden on the States.

The tax-GDP ratio is also not impressive; it has inched up from 9.2 per cent in the Budget Estimate for 2003-04 to 9.3 per cent in the Revised Estimate. As the actual revenue of 2002-03 is down by about Rs 3,000 crore, from the corresponding Revised Estimate as was the case on most previous occasions, we can expect this history to repeat itself.

Even if the actual revenue is lower than the Revised Estimate of 2003-04, there will hopefully be an increase in the revenue receipts over the Budget Estimate. On the capital receipt side, the higher Revised Estimate for 2003-04 is mainly because of increased revenues from recoveries of loans from the States and disinvestment receipts.

The problem with higher inflows from enhanced loan recoveries is that it simultaneously triggers a fiscal imbalance at the State level. It would be safe to say that in the short term there is little prospect of any structural improvement in State finances and so higher recoveries on loans to States by the Centre should result in higher borrowings by them or lead expenditure compression in all probability, on social sector outlays.

In other words, the success at the Central level is neutralised by adverse performance on the fiscal front by the States. Since the macroeconomy responds to fiscal situation on a consolidated basis and not just that of the Centre alone, there is no cause for cheer.

On the expenditure side, the Finance Minister has claimed that the Revised Estimate shows a net decrease in the total expenditure from the Budget Estimate.

The main element of expenditure compression was the lower social sector expenditure by about Rs 1,400 crore, and grants to the States by about Rs 3,300 crore. The Centre has really dealt a double whammy to the States, here. There are higher recoveries on outstanding loans as mentioned earlier. This is supplemented cutting down on resource transfer to the States by way of grants.

The fiscal deficit-GDP ratio has been pegged lower from 5.6 per cent in Budget Estimate to 4.8 per cent in the Revised Estimate for the year 2003-04. With the estimated GDP remaining the same, there is no significant change in the quality of fiscal correction.

With not-so-great a jump in the tax revenues, the total revenues are up mainly due to the higher interest receipts and recoveries of the loans. The expenditure compression is also done at the cost of lowering grants to States, which are already hard pressed for resources. This will push the States deeper into fiscal crisis. The cut in social services expenditure will have an adverse impact on the long run development of the country.

Considering the Interim Budget proposal, wherein the fiscal deficit-GDP and revenue deficit-GDP ratios are pegged at 4.4 per cent and 2.9 per cent respectively. These are much lower than the Revised Estimates of 2003-04.

This projected decline in the deficit-GDP ratios is mainly due to higher projected revenue growth, expenditure compression and higher GDP .

In spite of the liberal tax sops the collections are expected to go up in 2004-05 by more than Rs 32,000 crore and notwithstanding the Budget give-outs to Central staff and the creation of new infrastructure funds for agriculture and industry, the total expenditure is expected to be compressed by more than Rs 17,000 crore over the Revised Estimates for 2003-04.

The tax-GDP ratio for the next fiscal is estimated at 9.7 per cent; given the fact that the already pronounced cut in the taxes would not improve the tax collection this appears an overestimation. Thus, Budget Estimates for 2004-05 on revenue and expenditure have to be taken with a pinch of salt.

The other dimension of the story of fiscal correction is the higher projected nominal growth rate of GDP, which is estimated at 13 per cent. With the expected inflation of 4-4.5 per cent, the real growth rate should be 8.5-9 per cent, which appears unlikely given the little-over-5 per cent real growth rate achieved over the last five years.

It can, therefore, be concluded that much of the projected decline in the deficit-GDP ratios in 2004-05 is due to the higher projected growth rate of GDP.

The financial and economic estimates presented in every Budget have been quite different from the actuals.

For example the fiscal deficit-GDP ratio was estimated at 5.1 per cent, 4.7 per cent and 5.3 per cent for 2000-01, 2001-02 and 2002-03 respectively. The actual figures were higher at 6.2, 6.7 and 5.8 respectively. The Budget and the Revised Estimates of the deficit-GDP ratios presented by the Finance Minister in the interim period do not appear reliable.

The fiscal corrections expected by the Minister for 2003-04 and 2004-05 rely heavily on the projected growth rates of the economy and the expenditure compression in sectors that are vital for the overall socio-economic development. If the guesstimates fail, the efficiency of fiscal conduct by the government would be questioned.

Even if the guesstimates prove correct, the nature of fiscal correction will affect the long run growth of the economy.

Though the projected estimate shows an improved tax-GDP ratio, it cannot be attained for obvious reasons. In short, the outline of the story of fiscal correction by the Government is different from the inside story as revealed by array of numbers on public revenue, expenditure and GDP.

(The authors can be contacted at: srsethu@hotmail.com)