Will govt compromise on capex for fiscal consolidation ahead of polls?

National Democratic Alliance governments have not compromised on capex for fiscal consolidation so far, at least in their concluding years

While it is expected that the Modi regime 0.2 would be able to rein in its fiscal deficit at Rs 17.87 trillion during its concluding year 2023-24, as pegged in the Budget, it is also likely that the government may find it a bit challenging to contain it at 5.9 per cent of gross domestic product (GDP) due to likely less than projected growth in the size of the economy.

Among the concluding years of the previous four governments, while the Vajpayee government bettered its Budget Estimates (BE) slightly despite the additional capital expenditure, the United Progressive Alliance (UPA) government, in its first stint, could not envisage the huge fiscal burden due to the global financial crisis. The result was that the Manmohan Singh government 0.1 saw its fiscal deficit in revised estimates (RE) thrice the projections in BE in the concluding year. The UPA government 2.0 bettered its BE for fiscal deficit despite higher capex, while the Modi government 0.1 slightly overshot the BE due to higher capex than projected.

Though economists predict a slightly higher than BE fiscal deficit in relation to GDP in the current financial year, the finance ministry always has the wherewithal to contain fiscal deficit in later parts of the year by slashing expenditure of those departments and works which do not have the absorptive capacity to incur those outlays. The axe usually falls on capital expenditure.

However, National Democratic Alliance (NDA) governments have not compromised on capex for fiscal consolidation so far, at least in their concluding years. Will the government resort to this way of narrowing the fiscal deficit, snapping its past tradition?

The economy is likely to perform better than expected during the current financial year, but nominal gross domestic product (GDP) growth would be 1.6 percentage points lower than pegged in the Budget.

The Budget had assumed the nominal GDP would grow by 10.5 per cent during 2023-24, but advance estimates have projected it to expand by just 8.9 per cent.

The result is that the size of the economy would be Rs 296.58 trillion against Rs 301.75 trillion assumed in the Budget for 2023-24.

This meant the GDP would be lower by Rs 5.17 trillion during 2023-24, as calculated by advance estimates against what was assumed in the BE for the year.

It implied that even if the Centre managed to retain its fiscal deficit at the targeted Rs 17.87 trillion, it would be 6.02 per cent against 5.92 per cent, projected in BE for 2023-24.

To contain it at 5.92 per cent of GDP, the fiscal deficit needs to be curtailed further by Rs 31,000 crore to Rs 17.56 trillion.

The government has managed to control its fiscal deficit to Rs 9.06 trillion till November this financial year, which was 50.7 per cent of BE. However, if the fiscal deficit is to be contained to Rs 17.56 trillion, the actual numbers till November constituted 51.63 per cent of the targeted fiscal deficit.

Though this would still be lower than 58.9 per cent till November of the previous year, it would make the task of the government to contain the fiscal deficit at 5.9 per cent of GDP a little more challenging.

While tax receipts and non-tax revenues were robust, barring excise duty mop-up till November, non-debt capital receipts were lower than projected. Both revenue and capital expenditures were slightly below last year's as per cent of BE till November. Going forward, revenue expenditure would increase due to the subsidy burden on food, etc.

Economists believe that while the Centre would be able to contain its fiscal deficit as targeted in absolute terms, it would slip the target by around 0.1 percentage point of GDP in the current financial year.

India Ratings chief economist Devendra Pant said the government is likely to achieve its FY24 fiscal deficit target in level terms. However, slower nominal GDP growth may push the fiscal deficit in ratio terms to six per cent of GDP, he adds.

Icra chief economist Aditi Nayar said she did not expect the fiscal deficit target of Rs 17.9 trillion for FY24 to be breached. "However, a lower nominal GDP than what the Union Budget had pencilled in, could result in the fiscal deficit printing at six per cent of GDP," she pointed out.

In the previous four governments, the first NDA government that lasted a full term was able to reduce its fiscal deficit, both in absolute terms and in proportion to GDP in its concluding year, despite increasing capital expenditure manifold. (see chart).

This was mainly due to disinvestment receipts, which are part of non-debt capital receipts, bolstering the government coffers. (see chart).

The next government of the United Progressive Alliance (UPA) adopted a common minimum programme, which says there will be no disinvestment in profit-making public sector units (PSUs). As such, disinvestment remained subdued even as the Manmohan Singh government tried to sell the idea by setting up the National Investment Fund, which would use 75 per cent of proceeds from selling government stakes in PSUs for social sector spending and 25 per cent for capitalisation of state-owned units. This could be gauged from the fact that while the concluding year of the Vajpayee government managed to get over Rs one trillion from disinvestment, the last year of the UPA government 0.1 could rake in just over Rs 12,000 crore, which was less than even a meagre budgeted amount of around Rs 14,500 crore.

This, along with cuts in taxes to face the global financial crisis and additional capital expenditure to get the economy running as private sector capex slowed down and higher revenue expenditure on account of farm debt waiver and for helping vulnerable sections of society, led to more than three times fiscal deficit to six per cent of GDP in revised estimates against 2.5 pegged at the time of presentation of the Budget in the concluding year, 2008-09 of the UPA government 0.1. The deficit also rose over two and a half times in absolute terms.

The UPA government 2.0 resorted to heavy cuts in capex -- by over 16 per cent -- to better fiscal consolidation in its concluding year -- 2013-14 -- than what was pegged in the Budget Estimates. This had to be resorted to as revenues, except for non-tax ones due to spectrum proceeds, fell drastically below the BE. Taxes and disinvestment proceeds each gave the Centre around 50,000 crore less than BE. (See chart).

The Modi government, in the concluding year of its first stint, allowed minor slippage in fiscal deficit even as revenues were more than budgeted. All the streams -- taxes, non-tax revenues and disinvestment-- gave the exchequer slightly more than what was pegged in the Budget. This helped the government to increase its capex, while slightly controlling revenue expenditure. (see chart).

It should be seen that the Centre's fiscal deficit projected this time was the highest among the five successive governments so far due to greater transparency and higher revenue and capex expenditures since the Covid-year of 2020-21. However, if the deficit slips one percentage point of GDP this year in RE, it would be around what was projected in the RE of the first UPA government.