Deficit miracles

The finance minister has achieved some impressive fiscal consolidation. Maybe he should raise the bar for next year

Last Friday was a day of contrasts. On a day the Central Statistics Office confirmed that the Indian economy grew at a ten-year low of only five per cent in 2012-13, the finance ministry released a fresh set of fiscal deficit figures that showed its performance on fiscal consolidation last year was much better than its own targets and, indeed, a major improvement over the actual fiscal deficit level of 2011-12.

How did Finance Minister P Chidambaram achieve what appears to be a near-miracle? In most years, finance ministers are stressed over meeting the fiscal deficit targets they announce while presenting the annual Budget. Meeting the Budget targets in a year of healthy economic growth is not that difficult, as the story of Budgets in the last two decades or so will testify. But achieving the deficit numbers in an economically bad year is tough, since the pressure to increase expenditure becomes intense even as revenue growth tends to falter.

Consider the various numbers that were rolled out starting from the day the Budget for 2012-13 was presented by the then finance minister, Pranab Mukherjee, in March 2012. The fiscal deficit was projected at 5.1 per cent of gross domestic product, or GDP, in 2012-13. This was much lower than the level of 5.7 per cent of GDP achieved eventually in 2011-12.

By August 2012, Chidambaram took over the reins of the ministry after Mukherjee went to Rashtrapati Bhavan as President. Chidambaram reviewed the depressing fiscal scenario and got Vjay L Kelkar (a former finance secretary and the chairman of the Thirteenth Finance Commission) to present a report on what needed to be done to fix the problems. It became clear that the fiscal deficit could balloon to over 5.6 per cent of GDP if no corrective action was taken, which would have meant a fiscal disaster.

A round of internal meetings within the ministry and consultation with top Congress leaders helped Chidambaram to zero in on a new target for the year - 5.3 per cent of GDP. That assumption was based on the premise that the government would take steps to cut expenditure, streamline tax administration to boost collections and revive growth that could contribute to higher revenues. While the problems afflicting the growth engine have hardly been fixed, as evident from the GDP numbers, there has been a measurable impact on fiscal consolidation.

While presenting the 2013-14 Budget, Chidambaram announced that the fiscal deficit had indeed been brought down to 5.2 per cent of GDP. He squeezed expenditure hugely by around Rs 60,000 crore, or four per cent, and tried to reduce the shortfall on revenue collections to only around seven per cent of the original Budget target. What he has done now is even more startling - cut the expenditure by another Rs 20,000 crore and reduced the shortfall in revenue collections by another percentage point.

In other words, Chidambaram has cut expenditure by over five per cent, or Rs 81,500 crore, over the figures that Pranab Mukherjee had presented in March 2012. On the revenue side also, the shortfall over the original Budget target has been reduced to about Rs 57,800 crore. The implications of such measures are likely to be debated within government for the next few months as various central ministries complain about the expenditure squeeze to which they have been subjected. The sustainability of the expenditure cuts will also be a matter of discussion. The reduced revenue shortfall means the government has managed to improve tax collections. To what extent these collections have been a result of sustainable tax mobilisation efforts or coercive measures is also likely be discussed and debated.

The final outcome of such an exercise is difficult to predict. But two immediate implications of what Chidambaram has achieved with his fiscal consolidation efforts are worth recounting here. One, even as the fiscal deficit has come down to 4.9 per cent of GDP, the performance on the revenue deficit front has not been too impressive. Against 3.9 per cent of GDP in the revised estimate, the revenue deficit has now come down to 3.6 per cent against the Budget estimate of 3.4 per cent. This is a comment on the quality of fiscal correction achieved and the ministry will have to focus more on this factor in the coming days.

Remember that Chidambaram has promised Parliament that the revenue deficit would be brought down to 1.5 per cent of GDP by 2016-17. The target for the fiscal deficit for the same year is three per cent. Going by the manner in which fiscal consolidation is being achieved, it is possible to reduce the fiscal deficit to three per cent in the next three years, but sticking to the revenue deficit target may be difficult.

The second, and the more important, message from the revised deficit numbers is that the minister should revisit the projections he had made for the current year. Given that last year had already seen a fiscal deficit of 4.9 per cent and a revenue deficit of 3.6 per cent of GDP, the ministry should review the Budget targets of 4.8 per cent of fiscal deficit and 3.3 per cent of revenue deficit and set lower numbers to reflect the government's commitment to a more robust fiscal consolidation plan.