When Finance Minister P Chidambaram said he would contain the fiscal deficit at 5.3 per cent of the gross domestic product (GDP) this year and would not borrow more from the markets, few analysts and economists bought the argument — not least because the plan looks short on details. Leave aside independent experts, even the Reserve Bank of India (RBI) takes it with a pinch of salt. It became evident when the central bank left the policy rate unchanged in its October 30 credit policy review that came just a day after the finance minister announced the fiscal consolidation road map and urged “everyone” to take note of it — and did the same in its December 18 policy review.
What instills this confidence in Chidambaram, who is barely five-month old in the finance ministry, is not known to the world. In fact, the source of his optimism is a mystery to many of his officials, one of whom said the fiscal deficit could best be kept at 5.6 per cent of GDP. Some analysts are pegging it even higher at 5.8 per cent of GDP, against the Budget Estimate of 5.1 per cent. The Mid-Year Economic Analysis, authored by Chidambaram’s Chief Economic Adviser Raghuram Rajan, also finds it challenging to keep the government’s revenue and expenditure within the budgeted limits.
“It’s a trade-off between how much we want to be fixated about keeping the fiscal deficit at 5.3 per cent of GDP and growth. If we spend more and keep taxes lower, it will be good for growth — but the fiscal deficit will widen. The fiscal deficit can be 5.1 to 5.6 per cent of GDP, or any number in between, but that is not significant. What is important is that our debt-to-GDP ratio has been coming down,” said a finance ministry official.
The finance minister may have kept his cards close to his chest but anyone frequenting his officers in North Block may get a sense of his game plan. He said the government didn’t plan to go for extra borrowing, despite a revision in the fiscal deficit target from 5.1 per cent to 5.3 per cent and an additional spending of Rs 32,120 crore approved as part of the first supplementary demand for grants. A higher fiscal deficit normally requires higher borrowing to finance it. Officials, however, said it might not be required in this case because the government had a cash surplus of over Rs 26,000 crore and an investment surplus of Rs 50,000 crore at the beginning of the year.
“We are not going for any short-term borrowing through cash management bills, and that should explain how comfortable the government’s cash position is at the moment,” said one official.
The finance ministry is closely monitoring spends by every government department, and has refused to give fresh funds unless ministries certify that the money given in the past has been used. Even at the expense of hurting growth, the expenditure of some ministries has been cut in the Revised Estimates and some of the last-quarter liabilities are likely to be passed on to the next financial year. Government-owned companies sitting on cash surplus may have to give a special dividend on a “use it or lose it” principle.
“Expenditure will be less than budgeted. A lot of expenditure does not lead to capital-formation or is less socially productive. We will cut expenditure where it does not affect growth,” said another official. Officials admit expenditure control measures are in full swing and considerable savings, possibly around Rs 40,000 crore, are expected from social sector schemes.
All these measures, however, may prove a drop in the ocean unless the government goes for a substantial reduction in its subsidy expenditure — what it is unlikely to do in a year before the general elections.
Though the finance ministry is said to be considering cuts in fuel and fertiliser subsidies, there is a big question mark on whether the government has the political will to do so. The revenue losses of oil marketing companies on account of selling petroleum products below the market price is estimated at Rs 1,67,000 lakh crore this year. The finance ministry has provided only about Rs 70,000 crore so far. The food subsidy Bill is also estimated at Rs 1,10,000 crore but the government has provided for only Rs 75,000 crore, and the indications are that the remaining demand might be rolled over to the next year.
On the revenue side, Chidambaram is monitoring tax collections almost on a regular basis and any dip in the monthly mop-up warrants an explanation from the revenue department. Heads of both the Central Board of Direct Taxes and the Central Board of Excise and Customs don’t fail to percolate their boss’ wish to field-officers and hold regular meetings on the issue. An increase in tax rates and roll-back of some exemptions and deductions in the next Budget is also not ruled out.
“We can make incremental changes, do things that are fundamentally better and improve sustainability of growth process… There is a need to raise taxes for public good and to address inequality,” the official said.
On the non-tax revenue side, which primarily includes proceeds from disinvestment and auction of telecom spectrum, there is little the finance minister can do. The kind of response both disinvestment and spectrum auction got recently was probably nothing less than a nightmare for the government but Chidambaram still did not budge from his monolithic statement that all targets would be met.
The government has budgeted Rs 30,000 crore from disinvestment (see chart). Hindustan Copper, the first to hit the markets in 2012-13, was largely bought by state-run financial institutions and could raise only Rs 808 crore. Though the NMDC Ltd issue this month was over-subscribed and added another Rs 6,000 crore to government coffers, meeting the target would still be difficult since some of the administrative ministries have developed cold feet and don’t want to sell the stocks cheap.
The first round of 2G spectrum auctions fetched the government Rs 1,706 crore against the target of Rs 40,000 crore. It is expecting Rs 20,000 crore in the second round of auction but the telecom companies need to pay only 33 per cent of the bid amount in the current year. Even that would keep the total collections this year around Rs 10,000 crore, unless telecom companies decide to pay upfront.
Analysts say both disinvestment and spectrum proceed targets are overestimated but the government insists it will meet the targets. Chidambaram’s predecessor had also promised a lot but could not deliver as expected. Hopes from the current finance minister are higher but he is yet to pass the test. There is too little time and so much to do.
