Revised fiscal deficit target tough to meet

Analysts says this figure 'ambitious' given slowing growth impacting economic activity, resulting in slowing tax and non-tax revenue

Though the finance ministry has revised the fiscal deficit target to 5.3 per cent of  GDP for this financial year from the 5.1 per cent estimated in the Union budget, it will not get much leeway in the remaining months to meet the reduced figure.

This is despite the latest deficit figures giving it a bit of a breather. According to the figures released on October 31, the deficit till September had inched down to 65.6 per cent of the budget estimate (BE) for 2012-13, compared with 65.7 per cent till August. Even then, some economists pegged the deficit at 5.8 per cent of GDP for 2012-13, roughly the same as last year.

The fiscal deficit figure would be revised from Rs 5.13 lakh crore to Rs 5.38 lakh crore for 2012-13 for the target of 5.3 per cent of the GDP, assuming nominal economic growth stands at 14 per cent as estimated in the budget. Given that real GDP growth is much below expectations (7.6 per cent of budget estimate by the ministry of finance), and inflation is 7.5 per cent, nominal GDP will be marginally lower than what was estimated in the budget at Rs 101 lakh crore.  The lower figure will make the deficit look higher as a proportion of GDP at any given level of the government’s excess expenditure.

The Kelkar panel pegged nominal GDP growth 50 basis points lower than the BE at 13.5 per cent. In that case, the absolute nominal GDP number will see a dip of Rs 44,561 crore.

Economists say even the 5.3 per cent target for the deficit is an ‘ambitious one’ , given slowing growth, which will impact economic activity, resulting in slowing tax and non-tax revenue.

C Rangarajan, chairman, Prime Ministers’ Economic Advisory Council, says the new deficit target is achievable, as “the nominal income will still be in the same level represented during the budget at 13.5-14 per cent", given the high inflation rate.

Madan Sabnavis, chief economist, CARE Ratings, however, said despite the nominal growth being maintained at 13.5 or 14 per cent on the back of increased inflation, tax revenue will be hit. “Tax revenue is dependent on economic growth," he said.

Revenue issues
In the first six months, tax revenue, net of devolution of the share to states, rose to Rs 2.93 lakh crore or 38.1 per cent of the BE pegged at Rs 7.71 lakh crore. Till August, tax collections totalled just Rs 1.75 lakh crore or 22.7 per cent of the BE. There is no surprise in the huge jump in September collections, as the second quarterly advance taxes come in. Last year, tax collections rose from Rs 1.44 lakh crore (21.8 per cent of BE) till August to Rs 2.54 lakh crore (38.3 per cent of BE) till September.

So, even if the tax collections were higher as a percentage of BE till September-end last year than this one, actual collections fell short by Rs 32,000 crore of the BE for the entire year.

Also, with just five months remaining in the financial year, the government has not raised even a single pie from disinvestment and spectrum sale, pegged at Rs 30,000 crore and Rs 40,000 crore, respectively, in the budget. Sabnavis said this target of raising Rs 70,000 crore doesn’t seem realistic. He projected the fiscal deficit to widen to 5.8 per cent of GDP against 5.76 per cent in 2011-12.

Rangarajan noted the finance minister had said the expenditure will be contained and the disinvestment target could be achieved as planned. However, Sabnavis said while Chidambaram spoke about curbing wasteful expenditure, he did not define the term. “What is listed in the budget is not wasteful, I suppose. Then, where can the expenditure be curbed? ” he questioned.

It is the expenditure side, which has given a ray of hope to the minister, particularly the errant non-plan expenditure side. Last year, non-plan expenditure till September had accounted for 51.6 per cent of BE against 41.7 till August. It was higher this year till August as compared to 2011-12. But it was less till September in 2012-13 than the corresponding period of 2011-12.

Plan expenditure more or less kept the same pace. It rose to Rs 2.02 lakh crore comprising 38.9 per cent of BE till September, against Rs 1.47 lakh crore till August, constituting 28.4 per cent of BE. The corresponding figures in 2011-12 as per cent of BE stood at 40.3 per cent and 28.4 per cent.

Prime Minister Manmohan Singh had already stated the fiscal deficit was too high at present when he chaired a meeting of his council of ministers yesterday.

Addressing a consultative committee of MPs attached to his ministry on Tuesday, Chidambaram had admitted containing the fiscal deficit at 5.3 per cent of GDP for the current year was a challenging task but he also exuded confidence that it was doable.

He had said the best effort would be made to contain the fiscal deficit at 5.3 per cent of GDP, even as he recognised that the Kelkar panel had, last month, warned that this could widen to 6.1 per cent, if the government did not act on fiscal consolidation. However, the committee said, if the government did act on reforms, the excess of government expenditure over revenue could be reined in at 5.2 per cent of GDP.