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Revenue, fiscal deficits decline but stay well above FRBM Act norms

The finances of the government of India during the first half of 2007-08 depict a mixed trend. Tax revenues have generally remained buoyant on a year-on-year basis but, in relation to the projections for the current fiscal, no improvement is discernible.

The step-up in plan expenditure remains one bright spot during the April-September 2007 period but there has been no let-up in non-plan spending both in absolute terms and as a proportion of the budgetary allocation for the year - Rs 2,31,134 crore as compared to Rs 1,83,065 crore a year ago or 48.6% as against 46.8%.

Revenue and fiscal deficits during the first six months of the on-going fiscal have been lower than their respective levels as at the end of September 2006. Here too, when juxtaposed to the budget estimates for 2007-08, revenue deficit is up at 85.5% from 81.8%, 12 months ago while the fiscal deficit is down to 53.8% from 58.2%.

However, since the framing of the Union budgets are subject to the Fiscal Responsibility and Budget Management Act, it would appear that there has been serious infractions of this Act during the first half in so far as revenue and fiscal deficits are concerned.

As per the FRBM Act, at the end of the second quarter, both revenue deficit and fiscal deficit should not exceed 45% of the budgetary projection for the entire year while non-debt receipts should not be below 40% of the budget estimate.

AtSeptember 2007 end, the revenue deficit is much higher at 85.5% and the fiscal deficit is also way off the FRBM stipulation at 53.8%.

Let us focus on the big picture first. Centre’s tax receipts rose 23% to Rs 1,60,500 crore during the first half of the current fiscal year over what they were during the same half of the preceding year. Mop-up from corporation tax was higher by 39%, income tax by 35% and customs by 16%.

The laggardwas Union excise where collections were up by a mere 3%. In the case of non-debt capital receipts, recovery of loans and advances was of the order of Rs 2,030 crore during this period, thus exceeding the budgeted sum for the year - Rs1,500 crore - by a handsome margin. Likewise, disinvestments of equity of PSUs - yielded Rs 2,397 crore while the projected figure was only Rs 1,651 crore.

The substantial sum of Rs 34,308 crore shown as miscellaneous capital receipts is largely offset by a similar sum earmarked by the Centre for acquiring the RBI stake in the State Bank of India, so that the entire exercise is budget-neutral. The steep rise in capital expenditure during the first half of 2007-08 merely reflects this transaction to a considerable extent.

Total expenditure constituted 46.7% of the budget forecast for the current fiscal year during the April-September period, modestly up from the year-ago level of 44.7%. Though non-plan spending maintained a brisk pace, plan expenditure too showed an acceleration and at 42.3% of the annual budget, was higher than the preceding year’s 39.9%.

Though both the current account and the overall budgetary position was mired in the red during H1 of FY08, there was a welcome decline in them when compared to the situation that obtained a year ago - revenue deficit fell to Rs 61,124 crore from Rs 69,277 crore and the fiscal deficit to Rs 81,200 crore from Rs 86,461 crore. Still, they remain worrisomely large. As noted above, they are also well above those mandated under the FRBM Act, as at the end of the half-year.

In terms of this Act, whenever there is a shortfall in revenue or excess of expenditure over the pre-specified levels, the Centre must take appropriate measures for raising revenue or for reducing expenditure.The Finance minister is required to inform parliament that is convened immediately after the second quarter, detailing the corrective measures taken by him and dwell on the prospects for that financial year.

It further says that no deviation is permissible without the approval of the parliament. There is no doubt that the trend in Union finances in H1 reveals a breach of the FRBM stipulations but will the follow-up measures, mandated by this Act, be taken?

These norms may be draconian and the prevailing political milieu may make it impossible to take remedial steps. The budgetary trend during H1 also contains some interesting elements that show how rampant is the practice of diverting borrowed funds for revenue expenditure and how interest payments - the result of heavy accumulation of debt burden - have an onerous burden on the exchequer.

Revenue deficit accounted for more than 75% of the fiscal deficit as of September 2007 while the interest outgo siphoned away more than one-fourths of the revenue expenditure and pre-empted more than one-thirds of the revenue receipts.