Fiscal deficit: Amid low revenue, a tight fist to help meet target

A compression in both Plan and non-Plan expenditure could help govt limit gap to 4.1% of GDP

With the government’s revenue falling short of its Budget projections, there are concerns over meeting the target of limiting the fiscal deficit for 2014-15 at 4.1 per cent of gross domestic product (GDP). According to economists, a compression in both Plan and non-Plan expenditure could help meet the target.

In the Budget, Finance Minister Arun Jaitley had projected Plan expenditure to grow 20.9 per cent over last year. However, data for the current financial year show Plan expenditure has fallen 0.4 per cent in the April-October period. Ten ministries, which together account for roughly two-thirds of the total Plan expenditure, had till October spent only 44 per cent of the budgeted amount. Expenditure by all ministries, except finance and power, in the current financial year has been lower than in the same period last year. The urban development ministry spent only 36 per cent of its total budget allocation, while the human resource development, drinking water & sanitation and water resources ministries have spent 42, 29 and 10 per cent of their respective Budget allocations.

Given that government rules stipulate “not more than one third of the budget estimate may be spent in the last quarter of a financial year”, Plan expenditure this year will fall short of the Budget amount, unless expenditure is significantly ramped up in the months of November and December. This will contain the fiscal deficit.

According to Icra senior economist Aditi Nayar, “while 21 per cent growth in capital expenditure was targeted in the Budget for 2014-15, 48 per cent of the Budget estimate had been released by October. Based on these trends, the government’s capital expenditure is likely to fall short of Budget estimates.” CARE Ratings Chief Economist Madan Sabnavis concurs, adding “some prioritising of expenditure will be done to decide where to cut expenditure, to meet the 4.1 per cent target”.

This reduction in Plan expenditure, coupled with the recent decision to cut non-Plan expenditure by 10 per cent (which Citi estimates at Rs 40,000 crore), will help compress the government’s expenditure.

Further, expenditure incurred on account of subsidy allocations is also likely to be lower than budgetary allocations. The finance minister had estimated major subsidies to be at Rs 2.51 lakh crore — food, fuel and fertiliser subsidies at Rs 1.15 lakh crore, Rs 63,427 crore, and Rs 72,970.30 crore, respectively. But expenditure on these major subsidies in the April-October period stood at 75 per cent of Budget estimates. This was 83 per cent in the corresponding period last year.

According to Nayar, “expenditure on account of subsidies is likely to be lower than the Budget estimate”. This is due to two reasons. First, the moderation in underrecoveries due to a sharp fall in crude oil prices over the past few months, coupled with deregulation of diesel prices, will reduce pressure on non-Plan revenue expenditure in the second half of the current financial year. Second, with the deadline for state governments to identify eligible households under the National Food Security Act extended, to April 2015, expenditure incurred on food subsidy is likely to be lower than the budgeted amount.

On revenue, the government is likely to miss its target, with tax collection growing at a much slower pace than what was assumed in the Budget. The government’s total receipts in the April-October period grew only 4.8 per cent over last year, compared with the Budget assumption of 18.6 per cent, as net tax revenue grew 3.5 per cent (against an assumption of 16.9 per cent). With economists expecting GDP growth to be sluggish in coming quarters, a sharp increase in tax collections — to meet the Budget projections — is unlikely. But Sabnavis points out that “government revenues could increase substantially due to its recent decision to increase the excise duty on petrol and diesel. Also, transfers from the Reserve Bank of India and some public-sector companies could help shore up finances”.

The last quarter of the current financial year will be crucial for government finances, with the spectrum and coal block auctions likely to take place, and with its disinvestment programme expected to pick up.

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