Budget in tatters, fiscal deficit set to soar past 6.5%

Back-of-the envelope calculations suggest the Centre’s fiscal deficit as a percentage of nominal gross domestic product may approximate to 6.6% for 2011-12 as against the budgeted 4.6%.

Blame this on economic slowdown or poor fiscal marksmanship, or a cavalier approach to fiscal policy, it is clear that Union finances are in a disarray. Instead of a gross fiscal deficit of Rs412,817 crore, the amount may be closer to Rs600,000 crore.

Based on the details in the second batch of supplementary demands for grants involving an extra cash outgo of Rs56,848 crore and the first one which had envisaged an additional spend to the tune of Rs9,016 crore, the Centre’s total expenditure is officially projected at Rs1,323,593 crore — an increase of 8.8% over the preceding year instead of the original figure of 3.4%.

But this is a gross under-estimate as at least two big-ticket items of spending are not fully reflected in the latest supplementary budget.

The under-recoveries in regard to essential petroleum goods are put at Rs132,000 crore for the current fiscal; this may easily go up as crude market is firm and the weakness of the rupee vis-a-vis the dollar may persist.

With only Rs30,000 crore provided for now, more may have to be provided for later in the year, depending on the subsidy-sharing formula; at the very least, the Centre may have to earmark an extra Rs30,000 crore.

It is equally certain the provision of Rs6,000 crore for the recapitalisation of banks is inadequate and at least another Rs14,000 crore may be needed in the current fiscal alone. And, as indicated in the latest supplementary demands for grants, both food and fertiliser subsidy may swell further and over and above the sum allocated now, conservatively Rs5,000 crore may be needed by way of further allocation.

Thus, other things being equal, the total expenditure during 2011-12 may be of the order of Rs1,372,593 crore.

The revenue front is not rosy either. In the first half, the tax mop-up was only 38.3% of the budget estimate and this sluggish trend may persist as inflation and a sluggish industrial growth may take their toll on corporate performance.

To compound the problem, the disinvestment drive has proved to be a non-starter thanks to poor market conditions and economic woes.

Here, the shortfall may be as high as Rs38,855 crore, the projected sum being Rs40,000 crore.    

In late June, the government also had cut the duties and taxes on petroleum products and the full year’s revenue loss was put at Rs49,000 crore.

The impact on the Central exchequer for 2011-12, after adjusting for states’ share may be in the vicinity of Rs25,000 crore.

Assuming no major changes in respect of yield from other taxes —- this too may be entirely valid, though the rate of incremental growth as compared to the previous year has been in the positive territory thus far —- the total revenue is expected to be down to Rs781,057 crore from the budgeted Rs844,912 crore.

Thus, the differential between the total expenditure, as worked out above —- namely Rs1,372,593 crore —- and non-debt creating receipts at Rs781,057 crore derived above —- is the gross fiscal deficit for 2011-12, estimated at Rs591,536 crore as against the budgeted Rs412,817 crore.

Consequently, the ratio of the gross fiscal deficit to GDP based on the assumption of a spurt of 14% in nominal GDP during 2011-12 may shoot up to 6.6% instead of the projected 4.6%.

Ironically, though the real growth of GDP is now put at around 8%, the nominal GDP may increase at a rate faster than 14%.

This may result in a lower GFD-GDP ratio than 6.6% —- though still much above the budget target —- but the absolute figure of the fiscal deficit is bound be significantly higher than anticipated in the budget for 2011-12. It may also be the highest since 2009-10.