Plan cuts keep fiscal deficit at 4.6%

FISCAL DEFICIT: FM keeps his word to limit fiscal deficit to under 4.8% of GDP by cutting Plan spend

Sceptics had doubted he could do it, but Finance Minister P Chidambaram not only kept his word that he would limit the fiscal deficit to 4.8 per cent of gross domestic product (GDP) in 2013-14, but even lowered it to 4.6 per cent. He had to manage this by cutting Plan expenditure aggressively as was done last year because tax revenues fell short of the target set in the Budget Estimates (BE) due to the slowing down of the economy.

For 2014-15, the deficit has been pegged at an even lower 4.1 per cent of GDP, one percentage point lower than the target in the fiscal consolidation road map, even as the government cut excise duties to spur manufacturing growth, particularly in consumer durable goods, which fell for the 13th month in a row in December.

For 2014-15, Plan expenditure was retained at Rs 5.55 lakh crore, same as BE of 2013-14.

“Let me begin with the good news. The fiscal deficit for 2013-14 will be contained at 4.6 per cent of GDP, well below the red line that I had drawn last year,” Chidambaram said in his Budget speech. In absolute terms, fiscal deficit is lower at Rs 5,24,000 crore in FY14 against the Rs 5,42,000 crore projected by BE.

In FY14, Plan expenditure will be slashed by Rs 79,790 crore to keep the total at Rs 4,75,000, a 14.37 per cent cut from the BE. This is the consecutive year that Plan spend has been slashed to meet the fiscal deficit target. In 2012-13, Plan spend had been reduced by Rs 1,07,000 crore at Rs 4,14,000 lakh crore, which was 20.61 per cent lower than BE.

Devendra Pant, director, India Ratings says, “The fiscal deficit target has been accomplished by compressing Plan expenditure. This may have repercussion on growth in the medium term.”

The axe had to fall on Plan spend as the government was unable to control its non-Plan expenditure due to the subsidy burden. But non-Plan spend was higher only by 0.44 per cent at Rs 1,115,000 crore in Revised Estimates (RE) against Rs 1,109,000 crore in BE.

Tax revenues (after devolution to states) will fall short of the target by Rs 48,052 crore in 2013-14 or over five per cent of the BE. All the tax heads are estimated to yield lower revenues in the year against what was targeted in BE as the economy is estimated to grow sub-five per cent for the second year in a row in FY’14. All the tax heads are estimated to yield lower revenues in the year against what was targeted in BE as the economy is estimated to grow sub-5 per cent for the second year in a row in FY14.

Besides the fiscal deficit, the government was also able to check its revenue deficit, or the gap between non-capital expenditure and non-capital revenues, at the budgeted 3.3 per cent. This is projected to come down to three per cent of the GDP in 2014-15.

But it failed to maintain the effective revenue deficit at the budgeted level of 1.8 per cent and it is estimated to swell to 2.2 per cent of GDP in the current financial year. Effective revenue deficit, a concept introduced in the budget a few years ago, is revenue deficit minus the expenditure incurred on creation of assets. In effect, this means that that the government is incurring more on non-capital expenditure than was originally provided for.

One gets primary deficit by cutting interest payments from fiscal deficit. It is projected to fall to 1.3 per cent of GDP in the current year from 1.5 per cent in BE. It is now estimated to further fall to 0.8 per cent. This means that quite a high figure goes to meet interest payments on borrowings, pegged at Rs 4,27,000 crore for 2013-14 against Rs 3,80,000 pegged for 2012-13 in RE.