Expenditure under control, but not in relation to revenue, making govt’s budgetary management works at cross-purposes with RBI.
Just how expansionary is the central goverment’s fiscal policy? It has drawn flak for its Budget management, which is accused of making the Reserve Bank of India’s monetary tools less effective in containing surging inflation.
At the end of the first six months of this financial year, the government’s fiscal deficit has touched 68 per cent of what was pegged for all of 2011-12. However, expenditure at the moment seems under control. Total expenditure in these first six months was 47.6 per cent of the Budget target for the year. In this scenario, is it correct to say the fiscal policy is expansionary and fuelling demand, in contrast to what RBI is trying to do with its monetary tightening moves?
Economists say government expenditure could not be seen in isolation of revenue. Shankar Acharya of the Indian Council for Research on International Economic Relations said the fiscal policy was definitely not in tandem with the central bank’s monetary tightening.
“We can’t see expenditure in isolation. The fiscal policy of the government needs to be checked, since there are shortfalls on the revenue side,” he added.
Anis Chakravarty, director with Deloitte, Haskins & Sells, said expenditure would increase in the second half of 2011-12, due to rise in the subsidy burden. “H1 (the year’s first half) expenditure is somewhat in control but in the second half, the subsidy bill will go up further, increasing the expenditure. For inflation, anyway, pure monetary policy won’t work. Tax revenues are not being generated as planned.”
For instance, in the second half, the subsidies to oil marketing firms will rise. After the latest Rs 1.80 a lire rise in petrol prices fuelled political protests, the government may not find it easy to go for diesel and cooking gas price increases. It only earmarked Rs 20,000 crore of fuel subsidies for 2011-12 and this has already been accounted for by the under-recoveries in 2010-11. For the first six months of this financial year, the government has spent about Rs 5.99 lakh crore of the Rs 12.58 lakh crore pegged for the full year. Last year, when the government was able to rein in fiscal deficit at 4.7 per cent of GDP against the Budget target of 5.5 per cent, expenditure at this time was a bit higher, at 48.5 per cent of the total year's target.
The government has reached about 40.3 per cent of the full year's target under the plan expenditure head, against 45.5 per cent in the first six months of last year. However, non-plan expenditure, of which subsidies are a part, is the opposite story. This time, the government has spent 51.6 per cent of the total year's target, against 50.1 per cent at the time last year.
REVENUE THE ISSUE
The main problem is with revenue. With non-tax revenues in the form of telecom spectrum sale and non-capital debt receipts in the form of disinvestment not encouraging till September, total receipts were Rs 3.18 lakh crore, 37.7 per cent of the full year's target of Rs 8.45 lakh crore. Last year, after the first six months, the government had got 55.6 per cent of the total revenue targeted for the entire year.
Tax revenues have also fallen short, with the first six months fetching the government Rs 2.54 lakh crore, 38.3 per cent of the entire year's goal of Rs 6.64 lakh crore. Last year this time, it was 43.7 per cent. In the month of October as well (the seventh month of the year), gross direct tax collections fell 0.6 per cent year-on-year at Rs 27,039 crore. However, direct tax collections net of refunds and state allocations are more relevant and these grew 6.4 per cent to Rs 24,038 crore in October.
The government has targeted a fiscal deficit limit at 4.6 per cent of GDP in 2011-12, which many find a difficult target to achieve.
Despite RBI's 13th increase in policy rates since March 2010, inflation never came below nine per cent till September in the current calendar year, for which the latest data is available. Food inflation, on the other hand, rose to a nine-month high of 12.2 per cent for the week ended October 22.