Big fiscal squeeze inevitable before March despite weak oil

Deficit crossed year's budgeted total by Dec, show latest data; previous order to cut some spending won't suffice

The Centre will have to keep its revenues above expenditure in the last quarter of the current financial year (January-March) to ensure its fiscal deficit target of 4.1 per cent of gross domestic product (GDP).

For, the level of the deficit had crossed the Budget Estimate (BE) for the entire year in the first nine months.

This was despite the softening of oil prices, which enabled the government to raise excise duty twice (till December) and reduce subsidies of the oil marketing companies. The fiscal deficit data was issued the controller general of accounts (CGA) on Friday, even as news came of the government collecting Rs 22,000 crore from disinvestment in Coal India.

The data showed the deficit was Rs 5.32 lakh crore over April-December, surpassing the full-year BE of Rs 5.31 lakh crore by 0.2 per cent . For the corresponding period last year, the deficit was 93.9 per cent of the full-year BE.

If revenues are not forthcoming, it is inevitable that Finance Minister Arun Jaitley will in the final quarter have to enforce massive spending cuts.

"We expect a shortfall of around Rs 80,000 crore relative to the budget estimates for Government of India's net tax revenues for 2014-15, in spite of the expected impact of the hikes in excise levied on petrol and diesel on taxes garnered in the ongoing quarter," Aditi Nayar, senior economist with ICRA said. 

The stake sale in Coal India is encouraging, if the full-year target for disinvestment is missed, the impact of the anticipated shortfall in tax revenue would be exacerbated, she said.

For the first nine months, the Centre's tax revenue has been Rs 5.45 lakh crore, about 55.8 per cent of the full-year BE of Rs 9.77 lakh crore. For April-December last year, it was higher at 58.6 per cent of the full-year target. This is, as mentioned earlier, despite the government collecting more from the two excise duty rises on petrol and diesel, in November and December. 

Non-tax revenue was Rs 1.48 lakh crore, about 70 per cent of the full-year target of Rs 2.13 lakh crore, compared to 67.5 per cent for the corresponding period last year. There should not be much problem under this head, as the government expects the targeted Rs 45,000 crore from spectrum sale and other revenues in the telecom sector.

Non-debt capital receipts were Rs 10,000 crore, only 13.8 per cent of the full year's target of Rs 74,000 crore. The Coal India sale has not been factored, as it came in January and will be taken into account in February. Till endp-December, the government had raised only Rs 1,700 crore from disinvestment, this being the five per cent stake sale in Steel Authority of India.

Total revenue was Rs 7.04 lakh crore. This is 55.7 per cent of the full-year BE of Rs 12.64 lakh crore. The government had also realised 55.7 per cent of the BE in 2013-14 at this point. Expenditure has been a bit more compressed this year. It stood at Rs 12.36 lakh crore, representing 68.9 per cent of the BE of Rs 17.94 lakh crore. The difference between expenditure and revenue is the resultant fiscal deficit. Expenditure was 69.9 per cent of the BE in the first nine months of the previous year.

Non-plan spending was Rs 8.84 lakh crore, about 72.4 per cent of the full-year target of Rs 12.2 lakh crore, compared with 73.2 per cent for the first nine months last year. Softening of global crude oil prices and the resulting impact on subsidies helped cap spending. Plan spending for April-December was Rs 3.52 lakh crore, about 61.3 per cent of the full-year target of Rs 5.75 lakh crore, compared with 63.3 per cent for April-December last year.

However, it was capital expenditure that faced  the axe much more than revenue outlay. For example, capital plan expenditure was just Rs 70,487 crore, representing just 58 per cent of the BE at Rs 1,21,497 crore. At the point of time, expenditure under this head constituted 68.9 per cent of BE last year.

Nayar said,"The contraction in capital spending in the first nine months of FY15 as compared to the same months of FY14 raises concerns regarding the quality of the fiscal outcome for this year, even if the fiscal deficit is eventually restricted to the target."

Jaitley's ministry has already instructed other central departments to effect a 10 per cent cut in non-plan spending, excluding interest payment, repayment of debt, capital spending for defence, salaries, pensions and grants to states. It is is likely there will be substantial cuts on plan spending as well, which will affect centrally-sponsored schemes.