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While conducive global conditions helped by softening crude and prices of other commodities signal a lower subsidy burden for the government this year, finance minister Arun Jaitley might still find it tough to contain the fiscal deficit at 4.1 per cent of the gross domestic product (GDP).
If revenues don't show an upside in the coming months, Jaitley might be forced to follow in the footsteps of his predecessor P Chidambaram by going for expenditure cuts, which, in turn, could hurt growth.
Unlike previous years when non-Plan expenditure spiralled due to a higher-than-projected subsidy burden, this time the expenditure is well under control and austerity measures would help the government rein in it further. Oil prices have fallen by about 25 per cent since June. Last week, the finance ministry ordered bureaucrats to cut non-Plan expenditure by 10 per cent and reduce other discretionary spending by ending the practice of flying first-class and holding meetings in five-star hotels.
However, a muted growth on revenue side could may disturb Jaitley's maths. Six months of the financial year have passed, but indirect tax revenue is not showing any signs of a pick-up. The finance ministry blames it on tax refunds, a good part of which have been rolled over from the previous years. As much as Rs 1.20 lakh crore of refunds have been given on both direct and indirect taxes.
"There was a huge backlog of refunds. Much of it was left by the previous government. We are clearing it. We hope the direct tax collection target would be met, although indirect tax target remains a challenge," said a finance ministry official who did not wish to be identified. Non-tax revenue is also not coming due to the delay in rolling out disinvestment programme targeting the highest-ever sale of government stocks at Rs 58,425 crore.
Against the government's projection of the fiscal deficit at a seven-year low of 4.1 per cent in 2014-15, the National Council of Applied Economic Research (NCAER), a think tank, has made a forecast of 4.3 per cent. According to ICRA, a sharp slippage is unlikely. Citigroup, however, says the target is challenging but achievable.
"While the FY15 targets are challenging, recent steps on fuel reforms, coupled with austerity measures, could enable the government to meet its 4.1 per cent fiscal deficit estimate," it said in a research report.
The Budget had estimated fiscal deficit to be Rs 5.31 lakh crore. However, it stood at Rs 4.39 lakh crore in the April-September period. Fiscal deficit has touched 83 per cent of the GDP In the first half of this financial year, against 76 per cent in the same period a year ago. Although the situation was only a bit different last year, Chidambaram had managed to contain the deficit at 4.5 per cent in 2013-14 - much lower than 4.8 per cent pegged in the Budget Estimate (BE) and even 4.6 per cent projected in the Revised Estimate.
However, this was primarily achieved after cutting Plan expenditure by almost 18 per cent or Rs 1 lakh crore. This might not be advisable in the current scheme of things as economic growth would get affected for the third year in a row. So the finance minister might be forced to let the fiscal deficit swell. However, if he does so, credit rating agencies may threaten a downgrade leading to flight of foreign capital.
In April-September 2014, total receipts stood at Rs 4.23 lakh crore, constituting 33.1 per cent of the BE of Rs 12.64 lakh crore. This is lower than the last year figure of 35.4 per cent. Tax receipts stood at around Rs 3.23 lakh crore, accounting for 33.1 per cent of BE, against 34.8 per cent a year ago. On the other hand, expenditure was contained at Rs 8.62 lakh crore, which is 48 per cent of the BE of Rs 17.95 lakh crore. Expenditure stood at 48.6 per cent of BE in the corresponding period last year.
