FINANCES: Fiscal consolidation should be anchored in a framework that addresses risks like crude oil price rises
The Economic Survey has said the Centre’s fiscal deficit could overshoot Budget Estimates in the current financial year, with a slippage of over three per cent in revenue receipts and expenditure. However, it added states might provide cushion to the consolidated fiscal position. It also cautioned fiscal consolidation might happen over a longer time horizon than estimated.
“While there may be some slippage in the current year, the medium-term stance of fiscal consolidation could be salvaged, though the timelines may have to be redrawn….With states performing better in overall terms, the combined deficit of the Centre and the states appears to be on a firmer footing,” said the survey.
In the Budget Estimates (BE) for 2011-12, the government had estimated fiscal deficit of states to decline to 2.2 per cent. The Centre’s fiscal deficit was projected at 4.6 per cent. Thus, the gross fiscal deficit of the government was budgeted to decline to 6.9 per cent of gross domestic product in 2011-12.
The reduction in the fiscal deficit is expected to come through 16 per cent growth in tax revenue, disinvestment receipts of Rs 40,000 crore and moderation in growth in expenditure at 4.9 per cent. However, unfavorable economic developments disturbed the government’s calculations.
The survey warned going forward, fiscal consolidation would need to be anchored in a framework that addressed risks like crude price rises. Global crude oil prices averaged $110 a barrel in the first nine months, higher than that estimated when the Budget was formulated.
The survey also said the new fiscal responsibility budget management framework was likely to factor in developments in the current year and indicate the correct fiscal consolidation path for the medium term.
It hinted at a significantly higher subsidy burden this year. Major subsidies grew appreciably in 2010-11, standing at Rs 131,212 crore. While BE 2011-12 placed these at Rs 134,411 crore, given the build-up in crude prices so far, these are likely to be much higher this year.
“Together with the fact that headline inflation has been high, even with limited pass-through of fuel prices, these have implications for a higher level of subsidies. While efforts are afoot to rein in expenditure overruns, it is likely deficit calculations may have to factor in additional expenditure,” it said.
The survey added higher tax refunds in the current financial year imply the growth in the previous year was overstated. In the first nine months, gross tax revenue grew 12.2 per cent, against the BE target of 17.3 per cent. Growth in corporation taxes at six per cent, against the BE of 20.2 per cent, and excise duties at eight per cent, compared with BE of 18.2 per cent, are key concerns.
Against the BE growth target of 4.9 per cent for the entire year, growth in total expenditure in the first nine months of 2011-12 was 13.9 per cent, which comprised 15.4 per cent growth in non-Plan expenditure and 10.8 per cent growth in Plan expenditure.
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