Axe on plan expenditure helps FM meet fiscal deficit targets

Skeptics had doubted, but Finance Minister P Chidambaram not only adhered to his red line on reining in the Centre's fiscal deficit at 4.8% of gross domestic product (GDP) in 2013-14, but brought it lower at 4.6%. For this, he had to cut plan expenditure aggressively like last year, as tax revenues fell short of target set in the Budget Estimates due to slowing down economy. 

 

For the next financial year, the deficit is pegged at 4.1% of GDP, one percentage point lower than targeted in a fiscal consolidation road map, even as the government cut excise duties to spur manufacturing, particularly production of consumer durable goods which fell for the 13th month in a row  in December.

 

"Let me begin with the good news. The fiscal deficit for 2013-14 will be contained at 4.6% of GDP, well below the red line that I had drawn last year," Chidambaram said in his Budget speech in the Lok Sabha. 

 

In absolute terms, fiscal deficit is pegged lower at Rs 5.24 lakh crore in FY'14 against Rs 5.42 lakh crore projected in BE.

 

Plan expenditure will be slashed by Rs 79,790 crore at Rs 4.75 lakh crore in FY'14, a 14.37% cut from the BE. This is the second year in a row, when plan expenditure was cut drastically to meet the fiscal deficit target.

 

In 2012-13, plan expenditure was reduced by Rs 1.07 lakh crore at Rs 4.14 lakh crore, which was 20.61% lower than BE.

 

Axe fell on plan expenditure as the government could not control its non-plan expenditure due to subsidies. However, non plan expenditure was higher by just 0.44% at Rs 11.15 lakh crore in RE against Rs 11.09 lakh crore in BE.

 

Tax revenues (after devolution to states) will woefully fal short  of the target by Rs 48,052 crore in 2013-14 or over five% 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-5% for the second year in a row in FY'14.

 

However, non-tax revenues will rise by Rs 20,974 compared to estimates in BE at Rs 1.72 lakh crore as  dividends yielded more money and spectrum sales would  more  or less meet  the projections.

  

Together with fiscal deficit, the government was able  to check its revenue deficit, which is a gap between non-capital expenditure over non-capital revenues, at the budgeted 3.3%. This is now estimated to come  down to 3% of GDP in 2014-15.

 

However, it could not retain the effective revenue deficit at the budgeted level of 1.8% and it is estimated to swell to 2.2% of GDP  in the current financial year. This was the new concept introduced a few years back. Effective revenue deficit is basically revenue deficit sans  the expenditure incurred on creation of assets. This means that the government is incurring more  on non-capital expenditure than was originally estimated.