Stubborn deficits

Last July, when P Chidambaram presented the Budget for 2004-05, his revenue projections had seemed altogether too optimistic. He was sanguine that he would be able to collect the targeted increase.

Now, with three months left to go in the financial year, it seems the critics were right.

The revenue deficit at the end of November 2004 was almost Rs 74,000 crore, as against the target of Rs 76,171 crore for the full financial year.

The explanation given to Parliament is that the "cumulative impact of post-Budget duty concessions and additional expenditure commitments" such as higher devolution to the states has resulted in the slippage.

Perhaps so, but some of the post-Budget concessions were the result of a problematic structure to Budget proposals (like the turnover tax). Also, that would explain only a part of the shortfall. For, there has been a revenue shortfall even when all things remain unchanged.

Given that the Left has limited the government moves on disinvestment, the drop in non-tax revenue was to be expected. On the tax side, the general economic tempo cannot be a reason for the shortfall.

So there may be a larger problem on indirect taxes, in that they are not showing the kind of buoyancy that they should, either because of structural problems or on account of leakages.

The countervailing fact is that the fiscal deficit itself may be reduced more or less according to plan. However, to the extent that this is done by cutting back on capital expenditure, it is no great achievement""especially since the government is supposed to be accelerating investment in infrastructure.

If there is to be fiscal reform of the kind that is needed, the government will have to find ways of raising the tax-GDP ratio and cutting back the burgeoning subsidies bill.

In the Mid-Year Review presented towards the end of the last Parliament session, the finance ministry maintained that the Centre would meet the minimum 0.5 percentage point annual reduction prescribed under the Fiscal Responsibility and Budget Management (FRBM) Rules.

That seems unlikely now, and it will take a superhuman effort to eliminate the revenue deficit by March 31, 2009, as required by the amended FRBM.

Indeed, the coming year will see the implementation of the latest Finance Commission report""the impact of which is as yet unknown.

Also, given the new spending promises that are being made in order to guarantee a minimum level of employment in the rural areas, the finance minister has to build a cushion in the Budget before the spending starts.

In other words, there is a lot of work to be done in order to even prevent the situation from getting worse than it is today.

The Kelkar reports laid out one kind of roadmap, which would (or so it was promised) lead to a fairly dramatic increase in the tax-GDP ratio.

Mr Chidambaram had said at the time of the last Budget that the Kelkar task force's work would form the basis for his reform measures in the next Budget; it is not clear whether that position remains today, or whether alternative roadmaps are being written out. Whatever the case, the fiscal challenge remains as daunting as ever.