Budget 2011: The big picture is worrying

Budget 2011-12 contains few surprises. With its mix of sops mainly in regard to direct taxes and a virtual status quo in the indirect tax regime,  coupled with a widening of the net for service tax, no real effort to mobilise resources was in evidence.

In the event, despite the promise of an amendment to the Fiscal Responsibility and Budget Management Act that would spell out the roadmap for the next four years, in the ensuing year, the fiscal deficit is projected higher at Rs412,817 crore than the revised estimate for the current year, which is pegged at Rs400,998 crore.

Worse still, the fiscal policy envisages a deterioration in the revenue account as well, with the revenue deficit set to increase to Rs307,270 crore from this year’s level of Rs269,844 crore.

The worsening of the fiscal health is sought to be glossed over by stressing the fact that, the fiscal deficit as a percentage of GDP would drop to 5.1% from the budgeted 5.5% this year and is slated to decline even further in 2011-12 to 4.6%.

In the case of the revenue deficit, the situation is expected to turn somewhat better as per revised estimates for the current year - both in absolute terms and in relation to GDP - due to the bonanza accruing from the spectrum auctions and the spurt in nominal GDP at market prices by as much as 20.3% in stead of the earlier projection of only 12.5%. In the coming year, revenue deficit will sharply rise to Rs307,270 crore, even though, as a ratio of GDP, it is slated to remain unchanged at this year’s level of 3.4%.

A government wedded to fiscal discipline would have striven for a lower revenue deficit in 2011-12. Instead, the budget makes no effort to mop up resources; and with the concessions in direct taxes estimated to lead to a revenue loss of Rs11,500 crore and tinkering with indirect tax rates, coupled with enlarging the scope of the service tax, fetching Rs11,300 crore, the exchequer stands to be poorer by Rs200 crore in net terms.

In his speech, the finance minister took pains to explain why the revenue deficit, as conventionally measured, is inflated. He went on to elaborate that, some of the funds that fall under this category, are in fact grants for creation of capital assets.

Adjusted for this, the effective revenue deficit, as he had put it, would be much lower.

Certainly, as the study by the Reserve Bank of India had pointed out, there is case of reclassification of some budgetary heads. 

But, this does not take away the fact, that the gap in the current account of the budget exists and is disquietingly high. Moreover, as per the rolling targets under FRBM, by 2013-14, the Centre must transit to a zero revenue deficit.

The budget does not take even modest steps in this direction and, it is well-nigh impossible to make the needed balance between revenue receipts and expenditure in the remaining two years, 2012-13 and the following one.

As the Reserve Bank of India has observed, in its analysis of the 2010-11 budget, “reducing the fiscal deficit through reduction in revenue deficit is the most desirable option, which would otherwise necessitate curtailing capital expenditure, howsoever defined. Ideally, the golden principle of government borrowing for investment needs to be followed”.

But what is the ugly truth? Both revenue and fiscal deficits are fixed elements of the Union budget and a large share of the current consumption spending is met via debt proceeds.

In 2011-12, the share of revenue deficit in fiscal deficit is projected at 74.4%, as against 67.3% in the current year.

In a sense, clearly a golden opportunity presented itself in 2010-11 to make a serious effort toward fiscal discipline. The spectrum auctions yielded three times the budgeted amount.

And disinvestment of stake in public sector undertakings netted over Rs20,000 crore, which though short of the target of Rs40,000 crore, was commendable, given the track record of this effort over nearly two decades.

No wonder then that, revised estimates of revenue receipts were nearly 15% higher than what was budgeted. In the case of market borrowings too, the mop-up was close to the target of Rs345,010 crore, if we include the short-term borrowings.

But, all this proved to be of no avail as expenditure overshot the projections- non-plan spending by nearly 12% and plan spending by 6%. The upshot was only a modest drop in the revenue deficit in relation to the budget estimate for 2010-11. 

As stated earlier, the fiscal deficit, that is debt receipts, were more than envisaged for the year.

Only the high real growth of GDP and an equally high rate of increase in GDP deflator were instrumental in lower ratios of revenue and fiscal deficits vis-&-vis GDP.

When it comes to the budget for 2011-12, the arithmetic seems rather shaky. Tax receipts are expected to be up by 17.9% but, overall, revenue receipts is set to rise by less than 1%.

Expenditure growth is set to decelerate to  3.4% from this year’s 9.7%. A worsening of the fiscal situation is anticipated as a result, even though the ratio of revenue deficit to GDP  is projected to remain steady and an improvement is forecast for this ratio in respect of the fiscal deficit.

Besides, there is an element of underestimation in at least one major source of spending — subsidies.

The budget hopes to trim the subsidy burden to Rs143,570 crore during 2011-12 from this year’s revised estimate of Rs164,153 crore, which turned out to be much higher than the budgeted Rs116,224 crore.

Is this expectation realistic when even baby steps towards concrete reforms - though the budget speech has promised movement on this score - are lacking.

In food subsidy, there is virtually no change over this year’s revised figure of Rs60,600 crore while in the case of fertilser subsidy, the bill is anticipated to be lighter at around Rs49,998 crore. In petroleum, where the revised estimate of Rs38,386 crore has overshot the original figure of Rs3,108 crore in the current year, the government hopes to bring it down to Rs23,640 crore.

In both fertiliser and petroleum subsidies, much depends on the movement in crude prices and the pace and thrust of reforms undertaken. And, in both, the record is far from inspiring.

The scale of borrowing is very high. At Rs343,000 crore in net terms and short-term borrowings pegged at Rs15,000 crore, the pressure on yield rates will remain and the danger of crowding out the private sector’s credit needs looms large.

Though the RBI may do its best to trim the interest rates, the high order of fiscal deficit next year too, complicates this task. In his speech, the finance minister noted that fiscal consolidation was needed to enlarge the resource space for private enterprises, but the actual proposals belie his words.

The Cental plan outlay was plagued by shortfalls in the current year. Though the budgetary support was higher at Rs298,612 crore, the internal and extra budgetary resources of public enterprises fell short of the projections. In the event, as against a planned outlay of Rs524,484 crore, the revised estimate is lower at Rs502,250 crore.

Seen in this light, though the outlay is projected at a steep Rs592,457 crore in 2011-12, is this feasible.

In a word, in its macro dimensions, the budget 2011-12 is not one designed to set the Ganges on fire.