The Hindu Business Line : Half-yearly review of Central finances

ONCE every month, the Finance Ministry issues a useful review of the state of Central public finance and the economy. The latest review for October 2004 covers the half-year April 1, 2004 to September 30.

In respect of general macroeconomic variables, the report covers some of the ground gone over by the RBI Governor in his mid-term review of the Monetary and Credit Policy. What is particularly significant is its detailed picture of the pace of public expenditure, tax and non-tax receipts, as well as the overall revenue and fiscal deficits.

Setting the background, the monthly economic report notes that the progress of the monsoon has been satisfactory. Seasonal rainfall from June 1 to September 30 was normal/excess in 64 meteorological subdivisions. This promises a good outcome in agricultural production during the year. Growth of industry was 7.9 per cent in April to August 2004, compared to 5.9 per cent in April to August 2003. In particular, the infrastructure sector achieved an average rate of growth of 5.7 per cent in the period as compared to a lower 5.4 per cent in the previous year for the same period.

The growth of industry was particularly broad-based. Output of basic goods grew by 5.2 per cent in this period compared to 3.1 per cent in the corresponding period last year. But it was accompanied by growth of capital goods output by 14.3 per cent as compared to 9.3 per cent in the corresponding period of the previous year. Consumer durables increased in output by 13 per cent in the current year compared to 5.6 per cent in the previous year.

Against this, consumer non-durables had a dip in rate of growth from 9.4 per cent to 6.8 per cent. Output of electricity increased by 7.7 per cent as compared to 2.5 per cent in the previous year. The general index of industrial output grew by 7.9 per cent in the current year as against 5.9 per cent in the last year. All told, all this leads to prospects of a picture of robust growth in industrial output in the year, promising a higher rate of GDP growth.

The trends in tax receipts are good and on predictable lines. Non-tax revenue has, however, decreased, presumably mainly due to decrease in dividends from the RBI, which gets low returns from lending its reserves to 26 rich Western economies with their low interest rate regime.

The trends in expenditure are revealing. Expenditure on interest for the first half year is running at about the same level as last year Rs 55,399 crore as against Rs 51,806 crore. This may, however, have to be revised upwards, given the higher inflation and indications of rising interest rates, disclosed by the mid-term monetary policy review. Major "subsidies" have, however, dropped from Rs 26,495 crore in April-September period of last year to Rs 21,955 crore in the current year.

This does not fully reflect the higher levels of expenditure thrust on the Government on account of its dithering on policy-related petro-product price increases. The difference between pass-through of global price increases and announced prices will be an explicit or implicit subsidy borne either by Government or by the oil PSUs, whose higher losses will mean lower dividends.

The capital account on non-Plan shows a decrease from Rs 40,604 crore in the period April-September 2003-04 to Rs 10,583 crore in the corresponding period of the current year. Obviously, this is too sharp a decrease to be explained by the customary bureaucratic delays, especially in the Ministry of Defence. But, surely, it will catch up in the rest of the year. Hopes for fiscal relief from this reduction may be misplaced.

As against this, Plan capital expenditure has, however, registered an increase from Rs 17,012 crore to Rs 18,532 crore in the current half year. The outcome in terms of total fiscal deficit is substantially lower in the first six months of current year compared to the same period of last year. It stands at Rs 53,235 crore, a substantially lower than Rs 81,014 crore in the corresponding period of last year. The reason may lie in the unexpected decline in non-Plan capital outlay and may well be a flash in the pan.

The review notes that infrastructure, in particular, showed signs of revival. Coal output grew by 6.6 per cent as compared to 4.1 per cent in the previous year in the corresponding period. Thermal power output grew by 5.3 per cent as against 3 per cent last year. However, finished steel registered a decline from a growth of 11.9 per cent in the previous year to 3 per cent in the current year.

Similar was the case in cement from 5.6 per cent to 4.8 per cent. The decline in these two items, which are important for capital investment, gives cause for worry as to the pace of growth in the economy. One relieving factor in infrastructure was that telecommunications continued the scorching rate of expansion, increase in net switching capacity being by 343.6 per cent in the first five months of the current year, as against a decrease of 66 per cent in the previous year.

The figures are difficult to reconcile with the claims of TRAI and DoT. The review gives a contradictory figure in respect of net telecommunication decreasing by 31.4 per cent as against an increase of 30 per cent in the previous year. This difference needs to be gone into.

Turning to revenue earning traffic on railways, the period under review, however, shows a slightly more modest increase, by 6.9 per cent in the current year as against 7.2 per cent in the last year.

Let us now turn to the figures relating to Central public finances, which give a bird's eye view of the fiscal scenario. The abridged Table shows the change under different heads of revenue as broadly grouped in the Finance Ministry's latest review.

The fiscal outcome for the remainder of the year will, however, depend very much on the impact of petro subsidies, the growth of non-Plan capital expenditure and the increase of tax revenue consequent on the higher than expected corporate profit growth.

The inflation numbers continue to be disturbing, although the expenditure review points out that the CPI (consumer price index) growth has not been as sharp. The consumer price index has increased by 3.6 per cent in the financial year up to August. This compares with wholesale price inflation of 7.1 per cent. But, as is natural, the WPI increase will feed into the CPI also. There is bound to be pressure all around for wage increases, both in the public and the private sectors. The fiscal scenario will, no doubt, turn out to be murkier than expected for this as well as other reasons.

The challenge before the authorities is to manage the rate of growth in the economy without straining fiscal sustainability. The latest figures show that the Government may be in a position to achieve its budgeted targets, given the trend in capital expenditure on non-Plan account. But the growth of subsidies on petro-product account may upset the apple cart. The Government may have to beware of the deadly embrace of partners in the Coalition, who have put in their pleas for populist adjustment.

Be this as it may, the outcome of the current year's Central finances and fiscal deficit in relation to GDP may turn on the way in which the GDP grows in the year. If, as expected, the rate of growth is better than the estimates of the time of the Budget, the ratio of fiscal deficit to GDP may very well settle around the level projected by the Finance Minister, Mr P. Chidambaram, on July 8. All this only goes to show that there is no magic about the percentages laid down by the FRBM Act. What is important is to steer the economy in the right direction and to preserve the fundamental objectives of meeting the investment needs for infrastructure and human development and establishing a business-friendly environment in which private sector investment is encouraged. The rest will take care of itself.

Whether or not fiscal deficit-GDP ratio is higher by a percentage point or less should not make a whole lot of difference. One should not make a mantra of the rigid targets laid down by the FRBM Act in the light of the pressures of the global oil price situation and our own security needs.

The experience of the European Union — particularly Germany and France — shows how difficult it is to keep to fiscal deficit targets. They have been forced to break the self-imposed limits laid down in the Maastricht pact.

The Government has a duty to observe the canons of fiscal rectitude, but not at the expense of imposing impossible goals of expenditure cuts and tax collections.