No escape from spending squeeze as fiscal deficit stands at 99% of full year target

Govt might go for divestment, telecom spectrum sales and public sector companies' dividends to garner revenue

In the first eight months of this financial year (April-December), the central government’s fiscal deficit totalled 98.9 per cent of the Budget Estimate (BE) for all of 2014-15, despite an easing subsidy burden due to a plunge in crude oil prices.

Official data, issued on Wednesday, showed the deficit stood at Rs 5.25 lakh-crore, against a full-year’s BE of Rs 5.3 lakh-crore. For the corresponding period last year, the deficit was 93.9 per cent of the full-year BE.

In other words, it is inevitable that Finance Minister Arun Jaitley will in the year’s final quarter (January-March) have to enforce massive spending cuts.

“Some expenditure prioritisation would be required. Achieving the target of restricting the fiscal deficit to 4.1 per cent of the gross domestic product will also hinge on the extent of inflow garnered through disinvestment,” said Aditi Nayar, chief economist, Icra.

While higher excise on petrol and diesel would provide some buoyancy in the rest of the financial year, substantial shortfalls in tax collections relative to the BE are inevitable, she added.

Faced with a potential shortfall of Rs 1.05 lakh-crore in the tax revenue, Jaitley will hope for disinvestment, telecom spectrum sales and public sector companies’ dividends to garner revenue. As reported earlier, he might lean on  state-owned companies, sitting on a Rs 2 lakh-crore cash pile, to pay higher dividends. Additionally, with only one divestment completed, that of Steel Authority of India for Rs 1,700 crore, the next two months are crucial for the disinvestment department. It is supposed to divest stake in Coal India, NHPC, Oil and Natural Gas Corp and in a host of smaller companies such as Container Corporation, Rural Electrification Corporation and Power Finance Corporation.

A a planned Rs 15,000 crore residual stake sale in Hindustan Zinc and Bharat Aluminium, and a Rs 6,500 crore stake sale in SUUTI companies are already off the table for this financial year.

Jaitley's ministry has already instructed other central departments to effect a 10 per cent cut in non-plan spending, excluding interest payment, repayment of debt, capital spending for defence, salaries, pensions and grants to states. It is likely there will be substantial cuts on plan spending as well, which will affect centrally-sponsored schemes.

For the first eight months of 2014-15,  tax revenue of the Centre has been Rs 4.13 lakh-crore, about 42.3 per cent of the full-year BE of Rs 9.77 lakh-crore. For April-November last year, it was 45 per cent of the full-year target. Non-tax revenue was Rs 1.28 lakh-crore, about 60.4 per cent of the full-year target of Rs 2.13 lakh-crore, compared to 61.8 per cent for the corresponding period last year. Total revenue, including capital receipts (excluding market borrowing), was Rs 5.49 lakh-crore. This is 43.4 per cent of the full-year BE of Rs 12.64 lakh-crore, compared with 45.6 per cent for April-November 2013.

Expenditure has been on similar lines to last year.

Non-plan spending was Rs 7.81 lakh crore, about 64 per cent of the full-year target of Rs 12.2 lakh crore, compared with 65.8 per cent for the first eight months last year. Softening of global crude oil prices and resultant impact on subsidies helped cap spending.

Plan spending for April-November was Rs 2.94 lakh crore, about 51 per cent of the full-year target of Rs 5.75 lakh crore, compared with 52.4 per cent for April-November last year.