Govt's budget math’s going awry

It is no longer a question of whether there would be fiscal slippages this year but of how much the actual would diverge from the original projections.

Data show expenditure-revenue mismatch has worsened during the first three months. This, alongside a realistic assessment of what is in prospect,

suggests that the budgetary imbalance is set to deteriorate even further. So much so, a revenue deficit of 5% of GDP and fiscal deficit of 6.5% by March 2012 is possible — even probable.

Take first, the empirical evidence. By the end of the first quarter of 2011-12, the Centre has notched up a revenue deficit of Rs134,621 crore which worked out to 43.8% of the budget estimate of Rs307,270 crore; the fiscal deficit stood at Rs162,653 crore, or at 39.4% of the budgeted Rs412,817 crore.

As of now, there has been no over-shooting of expenditure in overall terms — the total thus far being a shade lower at 20.8% of the budgetary forecast than 21.8% in the same period of the last financial year — though there appears to be a compression in plan spending.

The deterioration in Union finances has therefore emanated from the revenue side, with tax receipts down to 11.8% of the budgeted figure (15.7% a year ago) and non-tax revenue plummeting to 9.7% (78.2%), with the cushion provided by spectrum auction proceeds a year ago  being absent now.

Secondly, the budget for 2011-12 has been framed on the basis of some assumptions which do not seem to be well-founded, and emerging trends only serve to confirm this. It was hoped that the economy would grow at the rate of 9% and that this growth would, in turn lead to buoyant tax revenues.

So much so, in the budget, tax receipts were envisaged to spurt 18%, which after factoring in a decline from other receipts, would lead to  fractionally higher revenue receipts.

This expectation has misfired; the real GDP growth is pegged at 8% while the tax mop-up may not conform to budget estimates.

Indeed, there may be a severe mauling on the revenue front as the year progresses. The disinvestment target of Rs40,000 crore may prove to be overtly ambitious; till June, only an amount of Rs1,146 crore has been realised under this head.

Along with the revision in petroleum product prices in late June, the Centre had also announced a 5% customs duty reduction in crude and key petro goods as well as a cut in excise duty on diesel.

On this account, the exchequer is expected to take a hit of Rs49,000 crore. In addition, the trend of slack yield from direct taxes, evident in the first quarter, is slated to persist.

Juxtaposed to this less-than-encouraging outlook on the revenue side of the budget is the gross under-estimation of expenditure during the current year.

In its latest macro economic review, the RBI has pointed out that a sharp rise in petroleum and fertiliser subsidies may thwart Centre’s efforts to improve the fiscal health. It says as much as 1% of GDP would be incurred on account of petroleum subsidy alone. This figure is based on current trends and may go up if the crude basket stays bullish. In regard to fertiliser subsidy, the government had hoped to trim it by about Rs5,000 crore during this year, but with the basic reforms still elusive, the bill may shoot up. Similarly, food subsidy burden may be more onerous than what was envisaged in the budget (Rs60,755 crore).

A hike in the minimum support prices of kharif crops has been effected; the government is holding stocks of over 65 million tonnes as of June 1 and this may augmented by the new wheat crop procurement. The cost of maintaining these inventories is bound to be high and if the issue price stays frozen, there is no way the food subsidy would be contained to the budgeted sum.

The pincer effect of slack revenues and soaring expenditure would be burgeoning revenue and fiscal deficits. These were pegged at 3.4% and 4.6% of the GDP respectively for 2011-12.

But, as the RBI has warned, a sharp rise in fuel and fertiliser subsidies may thwart Centre’s efforts at improving the fiscal health. With food subsidy too likely to overshoot the projection - and if we include other areas of spending where the budgetary applecart may be upset - the revenue deficit may be around 5% of the GDP and the fiscal deficit at 6.5%, on a very conservative reckoning.

It is clear that the expenditure-driven fiscal correction plan for 2011-12 is going haywire. As the RBI had observed in its latest macro economic review, the low fiscal deficit (GFD) - GDP ratio budgeted for the current year is challenging on account of “sizeable upside risks to subsidies and downward risks to revenues from moderation in growth”.