FM sticks to fiscal consolidation goal, pegs deficit at 4.8%

Third quarter GDP growth at 4.5% threatens to derail FM's fiscal target

Finance Minister P Chidambaram today stuck to the fiscal consolidation roadmap by pegging the Centre's fiscal deficit at 4.8 per cent of GDP, relying largely on an expenditure squeeze and a higher disinvestment kitty. However, December 2012 quarter GDP numbers released later in the day pointed at an uphill task. The economy grew by 4.5 per cent in Q3 pulled down by poor performance of farm, manufacturing and mining sectors.

Expenditure curbs, particularly Plan expenditure, will help rein in the fiscal deficit to 5.2 per cent for the current fiscal, a small improvement over the fiscal consolidation target of 5.3 per cent. This, despite the expected fall of Rs 30,000 crore in net tax revenues over the previous Budget Estimate (BE). The target is, however, a bit higher than 5.1 per cent in the 2012-13 BE.

The finance minister's fiscal deficit target for 2013-14 is based on a nominal GDP growth of 13.4 per cent to Rs 114 lakh crore over Rs 100 lakh crore pegged in advance estimates of the Central Statistics Office for the current financial year. Given that inflation is pegged at 7 per cent, economic growth is expected to be 6.4 per cent.

The finance minister's target could, however, be considered ambitious. Reining in the Fisc is partly predicated on disinvestment proceeds of over Rs 55,000 crore in 2013-14. This can be considered optimistic given that the government will earn just about Rs 24,000 crore in 2012-13, less than the original target of Rs 30,000 crore.

 

He is also banking on non-tax revenues of Rs 1.72 lakh crore for 2013-14 against Rs 1.29 lakh crore expected for the current financial year. As much as Rs 40,000 crore is expected to come from the proceeds of telecom spectrum auctions. However, this too looks a tough ask, since earnings from spectrum auctions are nowhere near the Rs 40,000 crore expected in the Budget for the current financial year. Not surprisingly, non-tax revenues for this fiscalwere also way behind that the original target of Rs 1.64 lakh crore.

On the revenue side, tax receipts (net to the Centre) are projected to yield Rs 8.84 lakh crore in the next financial year against Rs 7.42 lakh crore this financial year. The latter figure is, again, lower than initial projections of Rs 7.71 lakh crore.

On the expenditure side, given that the axe fell on Plan expenditure, Chidambaram has been able to use the lower base to show small increases in outlays for the next financial year and escape criticism of cutting Plan expenditure significantly, at least for next year.

For the next financial year, he pegged total Plan expenditure at Rs 5.5 lakh crore, almost 30 per cent higher than Rs 4.29 lakh crore in revised estimates for 2012-13. This was achieved since plan expenditure was lowered by 17.6 per cent over Rs 5.21 lakh crore estimated in the Budget for 2012-13.

Overall, total expenditure is pegged to rise 16.43 per cent at Rs 16.65 lakh crore for the next financial year over the Revised Estimates (RE) of Rs 14.31 lakh crore for 2012-13. But then the RE were lower by Rs 6,000 crore over the BE for the current financial year.

The bigger issue is that the revenue deficit will widen to 3.9 per cent over a BE of 3.4 per cent. Thus, the pressure on the fiscal deficit is coming from expenditure that is not generating capital assets. This is evident because capital expenditure is expected to fall 18 per cent to Rs 1.67 lakh crore in 2012-13 against over Rs 2 lakh crore pegged in the BE. The revenue deficit is pegged to narrow to 3.3 per cent for the next financial year.