Rise in global commodity as well as crude prices, mounting subsidy burden, and the fear of a shortfall in disinvestment proceeds have made economists and experts unsure about the state of government’s finances. However, the finance ministry is hopeful of keeping its fiscal deficit under control. The optimism partly stems from the fact that the Rs 70,000-crore one-time expenditure it saw last year may not come this year.
The government made this one-time expenditure last year, including Rs 20,000 crore for bank recapitalisation, the last tranche of Rs 16,000 crore to banks for outgo on for farm debt waiver and Rs 10,000 crore short-term loan to the Food Corporation of India to meet its working capital requirements. Given its tight fiscal situation, the government is not planning any significant one-time expenditure this year.
The Revised Estimate (RE) for total expenditure in 2010-11 was Rs 12.17 lakh crore and the Budget Estimate (BE) for 2011-12 was three per cent higher at Rs 12.58 lakh crore. The actual expenditure, however, was restricted to about Rs 12 lakh crore in 2010-11 and if the one-time expense of Rs 70,000 crore is deducted it would come to Rs 11.30 lakh crore. This would translate into an 11.3 per cent increase in BE expenditure this year over the actual expenditure minus one-time expenses last year.
In other words, the government has relatively more spending power, but bulk of this increased expenditure would go towards development and planning. The finance ministry may be forced to allocate additional amount towards subsidies, especially fuel subsidies. It has the cushion to reorient about five per cent or Rs 60,000 crore of the total expenditure to partly meet the subsidy bill. As such, the finance ministry exuded confidence of reining in fiscal deficit at targeted 4.6 per cent of gross domestic product (GDP) against 4.7 per cent last financial year.
| TWO FACES |
| Government |
| * The finance ministry exuded confidence of reining in fiscal deficit at targeted 4.6 per cent of gross domestic product, against 4.7 per cent last financial year |
| * The government raised fuel prices and lowered duties to partly offset the loss incurred by oil companies |
| Experts |
| * Economists feel this gain will be a drop in the ocean because the government had one-time gains last year in the form of 3G spectrum money that may not happen this year |
| * Experts say whatever gain the government has made by increasing fuel prices will be offset by reduction in duties |
Economists, on the other hand, feel that this gain would be a drop in the ocean because the government also had one-time gains last year in the form of 3G spectrum money, which might not happen this year. They said the fiscal deficit target was likely to be missed, but the situation might not go out of control as the government might be able to keep it at 5-5.1 per cent of GDP.
Abheek Barua, chief economist at HDFC Bank, said the one-time expenditure last year was not discretionary and a large part of it had gone towards subsidies. “There was a lot of under-budgeting in those areas. But the government decided to pay up later as they had got funds last year,” he said. Barua said there had been a gross under budgeting of critical items this year as well and if the government chose to hold the expenses till next year it would not reflect well. D K Joshi, chief economist at ratings agency Crisil, said, “It is right that one-time expenditure may not be there, but some slippage is likely. Expenditure will possibly be higher. Our call is that they will miss the target of keeping fiscal deficit at 4.6 per cent of the GDP.”
The ministry had made provision of Rs 20,000 crore towards petroleum subsidy in the Budget for 2011-12. The amount has already been used in the fourth quarter of 2010-11, and considering huge under-recoveries by oil marketing companies due to the sale of petroleum products below market rates this is not enough.
By making such a provision in the BE itself, the government drifted away from the earlier practice of doing the provision in the RE. Last year, it had made provision of Rs 35,000 crore for compensation to oil companies. Of this, Rs 14,000 crore was for the previous year. With the finance ministry giving another Rs 20,000 in 2010-11, the total petroleum subsidy for the year stood at Rs 41,000 crore at an average crude price of $85 per barrel. This year, the Indian basket is averaging at $100-105 per barrel. Any further rise in global crude prices might take the situation out of the government’s control, forcing it to increase subsides, which may, in turn, result in higher fiscal deficit.
On Friday, the government raised fuel prices and lowered duties to partly offset the loss incurred by oil companies. Yet, state-run oil firms will still end the financial year with a revenue loss of Rs 121,700 crore on selling diesel, domestic LPG and kerosene at rates fixed by the government.
Deepali Bhargava, chief economist at ING Vysya Bank, said whatever gain the government had made by increasing fuel prices would be offset by reduction in duties. Joshi also said oil subsidy in 2011-12 would be higher than last year and the pressure would be on disinvestment to deliver much more.
The government has set a target of Rs 40,000 crore this year from selling its stake in public sector undertakings. The initial signs are not encouraging, as it has been able to raise only Rs 1,162 crore so far through selling its stake in Power Finance Corporation.
The ministry may not have to spend more towards fertiliser subsidy if a decision on Nutrient-Based Subsidy for urea is taken soon.
Every year, liabilities to the tune of Rs 8,000-10,000 crore are rolled over to the next year. But in the third supplementary demand for grants last year, the finance ministry had provided Rs 8,000 crore towards fertiliser subsidy. Since the government has not carried forward any liabilities this time, the provision of Rs 50,000 crore made in the Budget is for the current financial year itself.
