The Finance Minister, on the face of it, has kept his fiscal consolidation promise. The revised estimate for the 2013-14 fiscal deficit is 4.6 per cent of GDP, against the budgeted 4.8 per cent, despite a significant shortfall on the revenue front. For FY15, the Government has pencilled in a fiscal deficit target of 4.1 per cent of GDP, marginally better than expected (4.2 per cent). About 87 per cent of this deficit will be financed by market borrowing (net borrowing: ₹4.57 lakh crore).
Actuals may be more
However, the fiscal consolidation in 2013-14 has been achieved by a sharp cut in Plan expenditure.
The total revenue receipts in FY14 were lower by ₹56,904 crore from the budgeted estimate as gross tax revenue declined by ₹76,964 crore due to a growth slowdown. Disinvestment receipts were also lower by about ₹35,000 crore. Part of the tax revenue shortfall was met by higher dividends from PSUs. These totalled ₹43,075 crore, much higher than in earlier years (₹13,354 crore in FY13) and also higher than the budgeted amount of ₹29,870 crore. This is clearly unsustainable.
Non-Plan expenditure went up by only about ₹5,000 crore as a higher subsidy of ₹24,416 crore (mostly higher oil subsidy) was offset by a cut in non-Plan capital expenditure by ₹29,853 crore.
The fiscal deficit target was primarily met through a sharp cut in the Plan expenditure. Total Plan expenditure was cut by a whopping ₹79,790 crore in the revised estimate.
Despite these measures, it might still be difficult to achieve this revised fiscal deficit target of 4.6 per cent of GDP because of the following reasons. The actual net tax revenues collected during the first nine months (April to December 2013) of this fiscal were ₹5,17,661 crore. To achieve the revised target of ₹8,36,026 crore for the full year, the net tax revenues need to grow at 24 per cent in the last quarter of 2013-14. Similarly, based on the actual numbers for April to December, the expenditures for the last quarter of this fiscal need to grow at mere 2 per cent to stay within the revised estimate for the full year. These assumptions are a bit unrealistic and may result in the fiscal deficit being higher than not only 4.6 per cent but even 4.8 per cent for this year.
Next year’s estimates The FY15 fiscal deficit target, budgeted at 4.1 per cent of GDP, will be tough to achieve. This is because of the following:
Nominal GDP growth assumption is optimistic: The nominal GDP growth assumed in FY 15 at 13.4 per cent is higher than our expectation. If inflation, measured by WPI, is assumed to average 6.5 per cent in 2014-15, this implies a real GDP growth rate of 7.0 per cent next year, which is much higher than our expectation of GDP growth being between 5.5-6 per cent in 2014-15.
If we assume a higher inflation rate, it will not be compatible with the inflation target set by the RBI. The confusion arises because the RBI now sets the inflation target in terms of consumer prices.
It will, therefore, be useful for the government to come out with an explicit GDP estimate for 2014-15 and clarify if it is using retail or wholesale inflation rate to estimate nominal GDP growth.
Estimates of tax receipts are also unrealistic: The tax revenue growth assumptions in FY 15 are on the higher side. Net tax revenues are expected to grow at 18 per cent Y-o-Y against a nominal GDP growth of 13.4 per cent Y-o-Y. The responsiveness of tax revenues to growth averaged around 0.9 for the last five years. It is assumed at 1.3 for FY15. Based on past trends, the net tax revenue growth for next fiscal might be around 14-15 per cent Y-o-Y. If nominal GDP growth disappoints, it would be difficult to achieve the budgeted tax revenue target.
Disinvestment targets are unlikely to be achieved : The Budget aims to garner about ₹52,000 crore in FY15 through divestments and stake sale in non-government companies. This assumption is optimistic.
Expenditure assumptions are unrealistically low: The oil subsidy of ₹63,427 crore includes a roll-over of about ₹35,000 crore from this fiscal. This leaves only ₹28,400 crore for the three quarters of next fiscal. So, unless government continues with diesel price deregulation, or global crude oil prices remain range-bound, or the rupee appreciates, the oil subsidy will overshoot the budgeted amount. Expenditure growth is assumed at only 11 per cent Y-o-Y, even lower than this year’s 13 per cent growth, after the sharp cut in expenditure during this year. This is not realistic.
The next government will do well to keep a very sharp eye on the assumptions while preparing the budget for FY15. It will have to find some innovative measures for restoring the fiscal balance, while preventing further deterioration in the conditions for generating growth and employment.
(Kumar is senior fellow and Krishna Das senior researcher, Centre for Policy Research, New Delhi)