Positive surprise

The final fiscal numbers for 2004-05 show that the fiscal deficit was 4.1 per cent of GDP, appreciably below the revised estimates of 4.5 per cent presented by the finance minister in February.

In the context of the targets for deficit reduction laid out by the Fiscal Responsibility and Budget Management (FRBM) Act, this puts the finance minister in a potentially awkward position.

He had committed to a deficit target of 4.3 per cent for 2005-06, which, being higher than that for the previous year, would violate if not the letter then certainly the spirit of the act!

However, that judgment can wait a while. Of immediate significance are the reasons behind this positive surprise and the question of whether they are sustainable or not.

The biggest contributor to the achievement is non-tax revenues, which account for about a third of the central government's inflows and turned out to be 7 per cent higher than the revised estimates, totting up about Rs 80,000 crore.

These include dividend receipts from public enterprises, and considering that some of them are benefiting from the boom in commodity prices, the government should clearly make hay while the sun shines.

However, where there is a boom, there is inevitably a bust, whether it comes this year or the next. Tax revenues have also overshot the revised estimates, albeit by a more modest 1.4 per cent.

Buoyant industrial activity, contributing to excise revenues, booming imports, adding to the customs kitty and soaring profits, boosting corporate and capital gains taxes, have all chipped in.

For this year, a judgment on whether the party will continue or not depends on one's assessment of whether these three tax bases will continue to perform. While they are unlikely to accelerate, sustaining momentum over most of the year does seem likely.

Finally, the public offerings that the government managed to get through during the year provided Rs 4,400 crore as against a target of Rs 4,000 crore. This was substantially below the previous year's take of almost Rs 17,000 crore but, still, no small potatoes.

On the expenditure side, Plan expenditure fell short of revised estimates by 3.8 per cent, which is never a good thing, while non-Plan expenses fell short by a mere 0.6 per cent. As always, the concern with government expenditure is not that it cannot be kept in check but what value it delivers to the intended beneficiaries.

Again, that is another story. From the macro-economic perspective, it is heartening to see that the trend towards fiscal discipline, at the central government level at least, is robust and seemingly independent of the party or coalition in power.

With all other indicators in the pink, this is one more step towards arguably the most hospitable macro-economic environment the country has ever been in.

It is, therefore, a good time to press ahead with fiscal correction by banking on revenue buoyancy, and the finance minister's promise of lower than budgeted borrowings augurs well.