The Hindu Business Line : Tight control over Govt expenditure

Though the numbers are not as good as they seem in the first glance, they are not too bad either. The April-October numbers for 2004-05 and 2003-04 are not exactly like for like, but a small adjustment will almost make it so. Let us try to figure out what that adjustment is.

The way in which the debt-swap scheme works is that the States use their extra market borrowing and a part of their small savings proceeds to prepay costly Central Government debt. The Central Government then uses this money to prepay its high-cost debt to the NSSF (National Small Savings Fund). In the Central Government's books of accounts, the inflow from the States appears as a receipt under the `recovery of loans' sub-section of capital receipts. The prepayment to NSSF however, appears as a non-plan capital expenditure thereby making the whole exercise fiscal deficit neutral.

2004-05 is the first year where the Government has decided to use around Rs 11,000 crore out of the debt swap inflow towards the modernisation of our defence and not use it for prepaying the NSSF, thereby breaking the fiscal deficit neutrality of this exercise. If there was no debt swap, then the Government would have to borrow Rs 11,000 crore extra to fund its modernisation plan, thereby pushing up the fiscal deficit by that amount.

In other words, the budgeted fiscal deficit for 2004-05 is understated by almost Rs 11,000 crore.

Now, the inflows from the States keep on flowing into the Central Government coffers at regular intervals whereas the NSSF prepayments are lumpy. In most cases they are done at the end of September and March annually. That is why you will see gradual and regular increases in the `recovery of loans' of the Central Government whereas few bunched up jumps in its non-plan capital expenditure.

Non-plan capital expenditure jumped up by a whopping Rs 34,000 crore during September last year whereas this year it has remained unchanged from its level in August.

What it means is that the Government ended up prepaying the NSSF to the tune of almost Rs 30,000 crore last September whereas it hasn't done any this time.

It is very difficult to estimate exactly how much prepayment the Government should have done this September to maintain the fiscal deficit neutrality of the exercise but a number close to Rs 20,000 crore looks most likely.

A back of the envelope calculation will tell you that a Rs 46,000 crore `recovery of loans' in April-October last year put the non-plan capital expenditure at Rs 42,000-odd crore for that period. With little having changed this year, a Rs 38,000-crore `recovery of loans' this year should have ideally put the non-plan capital expenditure at around Rs 34,000 crore which is almost Rs 20,000 crore less than the actual.

I agree that the methodology of trying to arrive at the ideal NSSF prepayment number this year is poor, but I am sure it is not inaccurate. So one should ideally add Rs 20,000 crore to the non-plan capital expenditure of April-October 2004-05 to make it like for like with 2003-04.

The Government's revenue receipts are almost Rs 13,000 crore higher than last year. Although the budgeted revenue increase for the year is close to 17 per cent, the actual increase up to October is only 10 per cent. It is quite likely that its tax collection will gather momentum in the last quarter of the financial year, but is unlikely to bridge the gap between the budgeted and the actual revenue numbers completely.

On the expenditure front, the Government has done well. Its non-plan revenue expenditure is on track and plan expenditure is much lower than the budget estimate. The Finance Minister had planned a 20 per cent increase in plan expenditure this year whereas on actuals he is just about at the last year's level.

Although it is not a healthy saving from an economic point of view but its saving none the less.

Even if you add Rs 20,000 crore to the fiscal and primary deficit numbers in the table for this year (for reasons mentioned above), all the three deficit parameters are lower than last year's. No wonder the government has cancelled two scheduled auctions back to back.

(The author is senior trader, Interest Rates at HSBC Mumbai. The views expressed herein are his own and not necessarily those of his employer.)