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Government Finances: Fiscal deficit under control - Views on News from Equitymaster
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  • Feb 26, 2002

    Government Finances: Fiscal deficit under control

    Tbe scenario of the government finances as in the economic survery is not very encouraging. While the efforts of the government in improving the slagging tax to GDP ratio have gone for a toss, the slowdown has made things worse on the tax collection front. However, the government has somehow managed to contain its fiscal deficit more or less to its estimates.

    Total tax collections for the nine month period were Rs 850 bn just above 52% of the yearly target of Rs 1,630 bn. Revenues from personal and corporate tax have recorded a negative growth of 1.2% in the first nine months of the current year. Collections from excise and custom duties also posted a decline of 3.6%. Apart from revenue receipts, the government has also missed out on its other revenues targets, which consists mainly of divestmenmt income. Even after considering big ticket divestment receipts of VSNL, IBP and ITDC Hotels the government is expected to mop up Rs 60 bn at best, thus missing its aggressive divestment target of Rs 120 bn by a wide margin.

    Revenue Projections have gone haywire…
      April-December % Change % of Budgeted
    Rs. Bn 2000-01 2000-02   for FY02
    Tax Revenues 916 850 -7.2% 52.1%
    Non Tax Revenues 411 477 16.1% 69.4%
    Total Revenue Receipts 1327 1327 0.0% 57.3%
    Recovery of loans 73 117 61.5% 77.4%
    Divestments receipts 2 3 18.6% 2.2%

    Apart from slowdown in the economy, (particularly the industrial sector), indirect taxes have suffered on account of reduction in customs duties in line with WTO and rationalisation of excise duty structure. What could further explain the drop is a dramatic growth in services as a proporation of total GDP. However, taxes do not cover the sector comprehensively. Also, compliance levels is very low.

    Considering the slowdown in the industrial sector and already high personal tax rates, little seems to be in the hands of finance minister to improve his tax collections. As per the promise given by the finance minister, customs duty rates are only going to go down to 20% as against the current peak rate of 35%. The only area where the government can look to tap additional tax revenues is through service tax. Though an attempt has been made by the government to bring this sector under the tax net, it has yielded little by way of service tax collections in relation to their size. The government clearly needs to tap this sector if it were to improve its revenue streams.

    Government needs to tap Service tax for revenues….
    Rs. Bn. 1998-99 1999-2000 2000-01 2001-02BE
    Service Tax Revenues 20 21 26 36
    % of service sector GDP 0.3 0.3 0.3 0.4

    However, credit needs to be given to the government in containing the non plan expenditure to a large extent. While the subsidy bill has remained flat, administrative expenses have more or less been kept under control. Though borrowings are much in line with budget estimates, there seems to be a sharp drop in incremental interest expenses clearly reflecting the interest rate cuts in the last year. While incremental borrowings have gone up by 37%, interest expenses have shown a rise of only 10.7%. However, the average cost of government borrowing is still high compared to current interest rates and there is lot of scope for cutting rates.

    Non Plan Expenditure seems to be under control….
      April-December % Change % of Budgeted
    Rs. Bn 2000-01 2000-02   for FY02
    Interest Payments 633.85 720 13.6% 64.1%
    Major subsidies 159 160 0.2% 57.3%
    Pensions 88 94 6.7% 62.1%
    Non Plan Capital Expenditure 96 106 10.6% 43.0%

    However, the under utilisation of plan expenditures which in general indicates the level of government push on infrastructure is a cause of concern. The underutilisation of plan expenditure is particularly surprising considering the finance minister's proposal to gear up infrastructure spending even at the cost of higher fiscal deficit.

    Plan Expenditure- Underutilisation a cause of concern….
      April-December % Change % of Budgeted
    Rs. Bn 2000-01 2000-02   for FY02
    Revenue Account 291 381 31.1% 63.3
    Capital Account 217 238 9.9% 59.7*

    *- Incl additional provision

    To summarise, on the back of a sharp drop in tax collections, the government is likely to end the year with a wide slippage in revenue estimate targets. The government, by Dec '01, has already reached 85% of the revenue deficit target. The silver lining here however, is that the fiscal deficit is not likely to overshoot it estimates of 4.7% of GDP by a very wide margin. This is considering disinvestment receipts and the fact that the fiscal deficit was 76% of estimates till Dec'01. However, this is on the back of lower plan expenditure which is concerning.



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