The miracle of March 2014 has occurred. The Union government's provisional accounts for 2013-14, published on Friday, establish that beyond doubt.
In the first 11 months of the last financial year, the fiscal deficit was estimated at Rs 5.99 lakh crore, substantially higher than the projection of Rs 5.25 lakh crore made in the revised estimates for the full year of 2013-14 in the interim Budget presented in February. And now, the full year's provisional accounts show the fiscal deficit at Rs 5.08 lakh crore or about 4.5 per cent of gross domestic product (GDP).
This essentially means that in March 2014, the government notched up a surplus of, believe it or not, Rs 91,150 crore. This appears to be an outstanding achievement, when compared with the average monthly deficit of Rs 54,482 crore seen in the first eleven months of 2013-14.
This is also a record of sorts since never in the last decade and half has the fiscal deficit number for the first 11 months of a year been more than its revised estimate for the full year. And yet the performance in the twelfth month, i.e. in March, was so impressive, with the surplus being so high, that it not only met the shortfall but even reduced the fiscal deficit number shown in the revised estimate. How did this remarkable recovery take place in just one month?
Here is a detailed analysis of what could have really happened. Let us start with the revenue side, where the problems were a little more intractable and challenging. Tax revenues at Rs 1.89 lakh crore in March showed a sharp rise, compared to the monthly average revenue collection of about Rs 57,000 crore in the first eleven months of 2013-14.
The robustness of the tax mobilisation in March 2014 becomes obvious when you note that the tax for March 2013 was Rs 1.68 lakh crore (compared to a monthly average of Rs 52,000 crore in the first 11 months of 2012-13). Similarly, the tax collection in March 2012 was estimated at Rs 1.36 lakh crore, compared to a monthly average of Rs 45,000 crore seen in the first 11 months of 2011-12. What methods were used to bump up the March 2014 collections will, of course, be a matter of closer scrutiny, which would show how sustainable that collection effort was and whether that would be subsequently neutralised by refunds in the following months.
It is also important to note here that even the sharp increase in tax collections in March 2014 was not enough to meet the targets set in the revised estimates for 2013-14 and the shortfall was as much as Rs 20,000 crore. Half of this amount was made good by higher collections of non-tax revenue and non-debt capital receipts (largely disinvestment proceeds). The remaining half had to rely on an expenditure squeeze.
In the final analysis, as the provisional accounts show, the government did much better on the expenditure front. It succeeded in squeezing expenditure - both on the Plan and non-Plan side - by about Rs 27,000 crore in March. This too was a record of sorts, even though questions will continue to be asked about the manner in which some expenditure may have been cut or simply deferred to achieve a better number. The fact, however, is that the exercise gave a net gain of about Rs 16,000 crore over the revised estimates produced at the time of presenting the interim Budget. Thus, the fiscal deficit for 2013-14 came down to 4.5 per cent, compared to 4.6 per cent as indicated in the revised estimates.
While the quality and sustainability of tax collection efforts and expenditure cuts should be a matter of further debate within the government and among public finance experts, what the new government could do now is to take note of the sharp spike in tax collections and expenditure in the last month of the year, and explore steps to ensure a more orderly sequencing of both revenue inflows and financial disbursements. Given the nature of tax payment schedules, it is difficult to ensure a more staggered and orderly inflow of revenues.
But even in respect of tax collections, the revenue department can devise a better system to reduce the spike at the end of the year. Tax collection targets can be made more flexible in keeping with the broad trends in the economy. This way, there would be less pressure on the revenue department to collect revenues to meet a certain target fixed at the start of the year. This will help reduce harassment to taxpayers.
On the expenditure side, the year-end bunching up has been an old problem and has been partly tackled by ensuring that only a per cent of total annual expenditure can be used up in the last quarter. Given the huge bunching up of expenditure that still takes place in March every year, it is perhaps time to revisit that provision and make it more stringent. In short, miracles of the kind witnessed in March 2014 have no place in a modern economy. They reflect fundamental weaknesses that need to be addressed.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
