Hope on revenue collection growth clashes with scepticism on spending, fiscal deficit.
Except for exports, every other economic indicator points to moderating growth for 2011-12, with repercussions for the central government’s fiscal deficit targets.
In exports, the cumulative figures in the first two months of this financial year, April and May, were $49.8 billion, up 45.3 per cent compared to the same period last year. But analysts say this may not continue so in the remaining part of the year.
In this scenario, only the finance ministry seems still hopeful of reining in the fiscal deficit at the year’s targeted level of 4.6 per cent of gross domestic product (GDP). The slowing-down hypothesis was corroborated by the Index of Industrial Production (IIP) figures released earlier this week. (Click here to see Fiscal Factsheet)
It showed industrial growth had again slipped to below four per cent, after registering a little over seven per cent growth in March. The growth has been below five per cent since November. However, this data is based on the old series of IIP (taking 1993-94 as the base year). In the new series (taking 2004-05 as the base year), IIP growth does not seem as dismal, since it recorded 6.3 per cent growth in April. However, even here it was a seven-month low expansion in factory output.
Shubhada Rao, chief economist at YES Bank, said, “If you take it sequentially, industrial growth has been slowing. If we juxtapose the old series, 4.4 per cent shows it is slowing ...Slowing because of continuous tight monetary policy. The high level of inflation warranted it.”
Rajrishi Singhal, head-policy and research, Dhanlaxmi Bank, said while some of this contraction could be due to the year-end ‘March phenomenon’, there was no denying the perceptible slowdown across all industries. The low IIP numbers come on top of a year’s low GDP numbers in the fourth quarter of 2010-11, at 7.8 per cent, and a 20-month low of PMI (the HSBC Purchasing Managers Index).
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‘Address causes’
While stating that a consistent trend of slowdown was yet to be established and one needed to wait and observe the post-monsoon trend, Anis Chakravarty, director, Deloitte, Haskins & Sells, said, “It is important that structural impediments in the economy such as capacity constraints, high input costs and clearance delays are addressed actively by policymakers. The statistical effect of this is already being felt. Second, the persistent policy intervention by the Reserve Bank (RBI) is expected to continue the adverse impact on industrial growth.”
The finance ministry’s revenue department already fears there would be a shortfall in its tax mop-up this year, but the economic affairs department does not think the target would be missed. As such, the latter is confident that the fiscal deficit target would be met this year as well. Total indirect tax collections for 2010-11 were Rs 3,42,824 crore, exceeding the revised estimate of Rs 3,34,500 crore by around Rs 9,000 crore. The ministry also met the revised tax collection target of Rs 4,46,000 crore.
For 2011-12, the government has projected a growth of 17.4 per cent, at Rs 3,92,908 crore, in indirect tax collections over the revised estimates and about 20 per cent in direct tax collections at Rs 5,33,000 crore. But over the actuals, it would mean a growth of 14.6 per cent in indirect tax collections.
Debate on outcomes
“If we could register over 40 per cent and 18 per cent growth in indirect and direct tax collections, respectively, in 2010-11 when the economy grew at 8.5 per cent, there is no reason why we should not meet the target of 14.6 per cent and 20 per cent this year, even if the economy slows by 50 basis points (from the projected nine per cent),” said an official in the economic affairs department.
Confident over tax collections this year, the official was also hopeful of keeping the expenditure target. He said even if fuel prices remained elevated, which would mean higher subsidy, the fiscal deficit would remain at the targeted level.
He said the ministry had already provided Rs 23,640 crore for the oil subsidy in 2011-12, whereas nothing was provided in the budget last year.
However, others do not agree. They say oil marketing companies have already provided this amount in their books and any further subsidy will have to be provided through supplementary allocations.
The finance ministry official said even if high global crude prices mean more outgo, it would be matched by savings on the other head. Others doubt this. Chakravarty said, “It is difficult to contain the fiscal deficit at 4.6 per cent. Where will they cut expenditure? I don’t see any head, unless they show political will and cut fuel subsidies and increase fuel prices.”
Rao said there were upward risks to the fiscal deficit.
On whether the government could compress expenditure to target the fiscal deficit, she said, “I can’t say compression. But they are rationalising expenditure and are allocating money only if it is spent.”
Last year, the government had also garnered an additional Rs 70,000 crore from spectrum sale for 3G services and wireless broadband access over the budgeted level of Rs 35,000 crore.
This year, that kind of windfall isn’t likely, economists said. Also, they doubt whether the Rs 40,000 crore expected from disinvestment in 2011-12 could be achieved, given market conditions.