PC’s macro slip is showing

The macro dimensions of the Union Budget for 2008-09 are worrisome. As expected, the target of zero revenue deficit by end-March 2009 has been postponed by one more year.

With finance minister P Chidambaram indicating that the road map to Fiscal Responsibility and Budget Management Act would be revisited —- there is uncertainty about the new deadline too.

Sifting through the figures in the fiscal policy statement, it is evident that this inability to abide by the FRBM Act lies not in lagging revenues but in poor expenditure management, though the speech contains another alibi —- heavily tilted allocations for education, health and social sectors as the main impediment.

In fact, in this Budget as in the previous ones, what should in fact be on the rise has shown a decline during the current fiscal and what should be on the decline is, in fact, relentlessly spiralling upwards.

In 2007-08, according to revised estimates, defence spending is down, capital spending is down, central plan outlay is down, Budgetary support to the plan is down, spending on health, education and social sectors is down. Subsidy, interest payments, revenue expenditure are on a rising trajectory.

This is despite buoyant revenues. According to the finance minister, the Centre was “on course to achieve the Budget estimate of indirect taxes and exceed the Budget estimate of indirect taxes”.

So much so, the tax-GDP ratio, which was 9.2% in 2003-04 is set to reach a level of 12.5% in 2007-08.

In absolute terms, the tax receipts during the current fiscal is set to surpass the Budgeted figure by a whopping Rs 27,901 crore and the total revenue receipts by almost Rs 39,000 crore.

But, looking at the expenditure profile, one gets the feeling that the nation is not so much running out of resources as mis-spending them.

The fall in revenue deficit should be more marked than what is shown in the Budget -Rs 63488 crore in relation to the Budget estimate of Rs 71,748 crore in 2007-08 and in the fiscal deficit —- to Rs 143,653 crore as against the Budgeted Rs 150,948 crore.

Interest outgo has ballooned from the projected Rs 150,272 crore to the revised Rs 171,971 crore; subsidy bill has surpassed the Budgeted Rs 54,330 crore by more than Rs 15,000 crore, with both food subsidy and fertilizer subsidy standing well above the initial estimates for 2007-08.

Worse still, the Budget has envisaged a spurt in the subsidy burden in the next fiscal year. And, in regard to interest payments, there is a provision for an increase of Rs 18,836 crore, taking the overall figure to Rs 190,807 crore.

In these cases, expenditure should be on a downward path; instead, it is moving up inexorably.

In contrast, there is a strong case for boosting defence expenditure. But, the reality is otherwise —- there was a shortfall in this respect, with the revised figure standing at Rs 92,500 crore, that is lower than the Budgeted Rs 96,000 crore.

The Budget speech glosses over this shortfall in defence spending. Instead, P Chidambaram avers that, “I propose to increase the allocation for defence by 10% from Rs 96,000 crore to Rs 105,600 crore”.

Should the need arise, he would provide more funds if the need arose. It should be noted that it is the capital spending in defence that has faced the axe.

Similarly, expenditure towards the creation of assets has been pruned in the current fiscal; capital expenditure is down to Rs 120,787 crore in stead of the Budgeted Rs 122,621 crore.

Surprisingly, even in 2008-09, the Budget has provided for a lower capital spending at Rs 92,765 crore.

The story is the same in respect of Budgetary support to the Central plan and in fact, even the original size of the Central plan for 2007-08 is down as per revised estimate in relation to the Budgeted sum.

During his Budget speech, while explaining the need to postpone by one year the target of nil revenue deficit by 2008-09, the Finance minister said that this was occasioned by the shift in expenditure in favour of  health, education and the social sector. This stance is not quite convincing.

In both health and education, even the allotted amounts were not fully utilised in the current year while the modest outlay in the social sector was fulfilled.

Taking these three sectors together, the revised expenditure was Rs 41,043 crore and the for the next fiscal, it is pegged at Rs 52,380 crore or an incremental growth of Rs 11,337 crore.

If the revenue deficit, on account of these additional outlays in these sectors, is projected in the vicinity of Rs 15,000 crore for the next year, it would be understandable. In stead, the anticipated revenue deficit is quite substantial at Rs 55,184 crore.

The culprit is, clearly, the inability to achieve economy in spending across the board or in strict prioritisation of government expenditure.