India's own fiscal cliff

The key now is expenditure control, but how much?

The government has finally kicked the disinvestment ball a little further towards the goal of achieving the target figure of Rs 30,000 crore this financial year. With luck it might get there, though the lacklustre state of the stock market is no help — as demonstrated by the response to the ONGC share auction, which was salvaged only by the Life Insurance Corporation (LIC) picking up the bulk of what was on offer. The latest relaxation of policy, allowing LIC to hold up to 30 per cent of a company’s stock, is clearly designed to provide for a repeat operation, should that become necessary.

Meanwhile, the other signs on the fiscal front continue to be discouraging. The latest tax collection figures show that indirect tax collection grew by only 17 per cent in the first seven months of the fiscal year, to October, against the full-year growth target of 27 per cent. Only service tax collections would seem to be on course; excise collections have disappointed yet again, for understandable reasons since industrial production has been flat, while customs collections too reflect the low import growth numbers so far this year. In these circumstances, indirect tax collections could show a sizeable shortfall. Direct tax collections have been even more disappointing, growing by only 5.9 per cent till September. The latest quarterly corporate results provide the backdrop as well as a partial explanation. The overall shortfall in tax collection could be as much as Rs 70,000 crore, on top of which there is the likely shortfall on revenue from spectrum sale (budgeted at Rs 40,000 crore). These numbers suggest revenue slippage in the ballpark region of Rs 1 lakh crore, or one per cent of GDP. Bear in mind that, midway through the year, the fiscal deficit had already reached two-thirds of the full year’s number of Rs 5.14 lakh crore.

Given the lack of general economic momentum, it is unreasonable to expect revenue collection to do much better. If the finance minister wants to avoid reporting a fiscal deficit of 6.1 per cent of GDP, as against the original projection of 5.1 per cent, he has to focus on expenditure control. However, no finance minister has so far managed expenditure cuts even remotely approaching the number that Mr Chidambaram will have to achieve, if he wants to keep the deficit down to his stated goal of 5.3 per cent of GDP. It does not help that the subsidy bill may get even more bloated. Not being one to give up easily, the finance minister might still make the effort to salvage what he can from the wreckage of the fiscal numbers. However, he is likely to get a strong push back from the spending ministries. If he is to have his way, he will need political support, which is not certain.