Finance ministry officials continue to sound upbeat on the government’s ability to rein in its fiscal deficit for 2011-12 and meet the Budgeted figure of 4.6 per cent of gross domestic product (GDP). The surprise here is that the current ground reality on the revenue front is grim and has nothing much to justify that optimism.
The figures for the first quarter of 2011-12 are just out. They show that the government has already run up almost 40 per cent of the full year’s fiscal deficit. In the same period last year, it had a fiscal deficit level of about 10 per cent of the annual target for 2010-11. A fiscal deficit level that is four times higher than the figure in the same period a year ago would send alarm signals to everybody in the government.
Why it may not have done that already could be because the two periods are strictly not comparable. In April-June 2010, the government had benefited from the 3G licence auction fees, hugely boosting its revenues. In the same months of 2011, not only has the government not gained from a similar bonanza, but its tax refunds also saw a sharp increase to Rs 46,000 crore, compared to only Rs 15,000 crore in April-June 2010.
Government officials concede that the annual tax refunds this year may go up to Rs 100,000 crore, compared to Rs 76,000 crore last year. So, in the remaining nine months of the current financial year, the central exchequer will have to take a lower hit of only Rs 54,000 crore on account of tax refunds, while last year in these nine months, the government’s tax refunds blow was a little higher at Rs 61,000 crore.
This would be a relief, but perhaps not big enough to neutralise the adverse effects of a slowdown in revenue collections in the wake of the economy’s growth rate decelerating to around eight per cent. Remember that the government had assumed nine per cent GDP growth while fixing the fiscal deficit target at the start of the year. To be sure, Finance Minister Pranab Mukherjee has expressed his resolve to take every possible step to stick to the deficit target.
However, government officials privately admit that the fiscal deficit target will be difficult to meet also because of certain ambitious non-tax revenue assumptions. Revenue from disinvestment of equity in a clutch of public sector undertakings during 2011-12 is projected at Rs 40,000 crore. The target for disinvestment last year, when the stock market was more stable, remained unmet by almost Rs 17,000 crore or 40 per cent. The stock market situation this year, so far, has been far less stable and more volatile. The stock prices of several public sector undertakings in which disinvestment was proposed this year are depressed. Thus, there is a strong likelihood of a similar revenue shortfall from disinvestment this year, as was seen last year. So far, only about Rs 1,150 has been raised from disinvestment against an annual target of Rs 40,000 crore.
In addition, the government’s estimate of mobilising Rs 14,000 crore through a second round of auction of broadband wireless access licences may be an exaggeration. The finance ministry has asked the communications ministry to expedite the auctions, but the internal view in both the ministries is that given the resources crunch hitting the existing telecom players, the government may not mobilise much from this route.
On the tax revenue front also, the government’s collections will take a hit of at least Rs 27,000 crore in the remaining months of the year in view of its decision to reduce import and excise duties on petroleum products by the end of June. The combined adverse effect of an economic slowdown and revenue shortfall on the government’s overall receipt will be substantial — ranging from anywhere between half a per cent to one per cent of GDP.
Add to that the fresh burden the government may have to carry because of its failure so far to decontrol prices of diesel and liquefied petroleum gas. The small Budgetary provision made for oil subsidy (about Rs 23,700 crore) will not be enough to meet the oil marketing companies’ under-recovery on account of the widening gap between the controlled prices and the rising price of crude oil and other costs of refining and marketing.
If the finance minister is serious about his resolve to stick to the fiscal deficit target, he has no option other than enforcing a squeeze on expenditure. The finance ministry announced some measures to place curbs on travels and other such non-obligatory expenditure heads.
Clearly, these will not be enough. There will be need for some more steps to cut expenditure and these could be in the form of non-release of funds for many Plan programmes. The finance ministry will also rely on a few central ministries’ failure to spend their entire allocations during the year, so that the unspent funds go back to the exchequer and help in controlling the deficit.
If the finance ministry manages to meet the fiscal deficit target in spite of the shortfall in both tax and non-tax revenues, it will do so through such fortuitous expenditure savings. That, though, will not be a fiscally healthy sign with even more dangerous portents for the future.
