P Chidambaram claim on front-loading expenses hides tax collection woes

On September 30, the Controller General of Accounts (CGA) announced the fiscal deficit for the first five months of the financial year (April to August 2013).

Fiscal deficit is the difference between what a government earns and what it spends.

The fiscal deficit during April-August 2013 stood at Rs 404,651 crore. The annual target for the fiscal deficit is Rs 542,499 crore, or 4.8% of the gross domestic product (GDP). This means that the government has already reached 74.6% of the annual fiscal deficit target during April-August 2013.

This is something to be worried about as chances of the government not meeting its fiscal deficit target and hence, India facing a sovereign downgrade to “junk” status, are very high. But finance minister P Chidambaram dismissed any worries on Wednesday, saying, “The 74.6% number is irrelevant. We deliberately front-loaded our planned expenditure.”

However, the CGA numbers tell a completely different story.

Let’s look at planned expenditure, which is money that goes towards creation of productive assets through schemes and programmes sponsored by the central government.

The total planned expenditure for the first five months stood at Rs 183,091 crore or around 33% of the Rs 5,55,322 crore to be spent during the course of the year.

If the government divides the annual targeted expenditure to be spent equally every month, then it is likely to spend 8.33% (100/12) of the total annual target every month. Over five months this would mean spending 41.65% (8.33x5) of the total annual expenditure.

In comparison the government has spent only 33% of the total targeted planned expenditure during the first five months. So how is this expenditure front-loaded? For the expenditure to have been front-loaded, it should have been greater than 41.65% of the total targeted expenditure. But that is clearly not the case.

Now, let’s look at non-plan expenditure and see if that has been front-loaded.
The total non-planned expenditure for the first five months stood at Rs 479,845 crore, or around 43.2% of the Rs 1,109,975 crore to be spent during the course of the year. Hence, the non-planned expenditure is a little higher than the cut off 41.65% arrived at earlier. But the difference is not so significant to call it front-loaded.

So what is happening here?

What Chidambaram forgot to tell us is that the government has not been able to collect enough taxes till date. The total tax collected in the first five months was Rs 183,686 crore, nearly 20.8% of the annual target.

What is worrying is that the tax collection has grown by only 4.9% during April-August in comparison with the same period last year.

As Sonal Varma of Nomura points out in a note dated September 30, “Fiscal year to date (FYTD), net tax revenue growth was muted at 4.9% year on year (versus the budget target of 19.3% year on year) due to weak indirect tax collections, while government expenditure rose 17.3% year on year FYTD, within the budget target of 18.2% year on year.”

Indirect tax collections have slowed down primarily on account of growth slowdown. In fact, when one looks at past data, the fiscal deficit number should have Chidambaram very worried.

Since 1998-1999, the average fiscal deficit for April-August stands at 54.2% of the annual target. In the period the UPA government has been in power(since 2004-2005), the average fiscal deficit for April-August has been 60.4% of the annual target. Last year it was 65.7%.

Hence, 74.6% is not a small number, despite the spin. Now the government will have to start cutting its expenditure big time if it has to get near the targeted fiscal deficit of 4.8% of the GDP. In short, there is trouble ahead.

Vivek Kaul is the author of the soon-to-be-published Easy Money