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Govt. Finances: Need more control

Feb 27, 2003

On the face of it, the economic survey, which was tabled in the Parliament today, seems better than last year. It seems that up till now, the government has been able to keep the fiscal deficit under control. The budget estimates for 2002-03 put our fiscal deficit at 5.5% of GDP, which has come down from the provisional government figure of 5.9% of GDP for 2001-02. However, the government has once again missed its budgeted target of 5.3% for FY03. Moreover, the fiscal deficit situation is still not within desirable levels. Various factors that have contributed to the huge deficits are factors like increase in expenditure on administration, subsidies and interest payments.

Revenues: Better Off…
  April-December % change % of budgeted
for FY03
Rs bn 2001-02 2002-03    
Total Revenue Receipts 1,327 1,505 13.4% 61.4
- Tax Revenues 850 1,038 22.2% 60.0
- Non Tax Revenues 477 466 -2.2% 64.7
Total Capital Receipts 1,010 1,050 3.9% 63.6
- Recovery of loans 117 156 33.1% 88.3
- Disinvestment receipts 3 31 1,015.0% 26.0
- Others 890 863 -3.1% 63.7
Total Receipts 2,337 2,555 9.3% 62.3
Source: Economic Survey 2003

However, it seems that the government is moving in the right direction. The efforts of the government at improving the tax to GDP ratio have finally paid off to some extent. The tax to GDP ratio has gone up from 8.1% in FY02 (provisional) to 9.6% in FY03 (budget estimates). The contribution of direct taxes has gone up from 3% to 3.7% of GDP YoY. Indirect taxes grew from 5.1% in FY02 to 5.8% in FY03. As can be seen in the table above, tax revenues have showed a robust increase of 22% in the nine-months ending December 2002 as compared to the same period last year. This growth helped improve the tax to GDP ratio.

However, the total revenues receipts for the period April – December 2002 are only 61.4% of the targeted Rs 2,451 bn for FY03. So the government has a lot of catching up to do. Apart from revenue receipts, the government has also missed out on its other targets, such as income from disinvestment. Out of the targeted Rs 120 bn for FY03, the government realised a measly Rs 31 bn (or just 25%) in the first nine months of FY03.

The Economic Survey notes that the services industry is still largely out of the tax net. The services industry forms almost 50% of India's GDP. With the proposed extension of service tax, the tax to GDP ratio is likely to improve going forward.

Expenditure: Expensive affair…
  April-December % change % of budgeted
for FY03
Rs bn 2001-02 2002-03    
Non-Plan Expenditure 1,718 1,910 11.2% 64.4
- Revenue Account 1,611 1,805 12.0% 66.8
- Capital Account 106 106 -0.9% 39.6
Plan Expenditure 619 645 4.1% 56.8
- Revenue Account 381 380 -0.2% 54.1
- Capital Account 238 264 11.0% 61.2
Total Expenditure 2,337 2,555 9.3% 62.3
Source: Economic Survey 2003

The government’s performance on the expenditure front is not exactly what a developing nation like India would desire. It can be seen from the table above that the non-plan expenditure increased 11% YoY, vis-à-vis’ a 4% rise in the plan expenditure. The situation should ideally be reverse, with higher spending on plan expenditure. However, credit must be given to the government that within the plan expenditure, spending was higher on the capital account, which implies expenses incurred on creating infrastructure rather than just maintaining the current infrastructure.

Non-Plan Revenue Expenditure: Needs some planning…
  April-December % change % of budgeted
for FY03
Rs bn 2001-02 2002-03    
Non-Plan Revenue Expenditure 1,611 1,805 12.0% 66.8
- Interest payments 720 735 2.1% 62.6
- Major subsidies 160 294 84.1% 75.5
- Pensions 94 96 3.1% 64.2
Source: Economic Survey 2003

Non-plan revenue expenditure saw a 12% growth in April-December 2002. Subsidies played truant (up 84% YoY) during the period. The dismantling of the administered price mechanism (APM) for petroleum products post March 2002 was largely responsible for this spurt in subsidies. Budget 2002-03 had made an explicit provision of Rs 65 bn towards payment of subsidies for domestic LPG and also for kerosene supplied through public distribution system coupled with freight subsidy for remote areas. The interest component continues to remain high due to the fact that high fiscal deficits force the government to borrow more from the market to meet the deficits.

To summarise, on one hand, while the government is most likely to miss the target of curtailing the fiscal deficit, on the other, faint signs of improvement in managing the economic affairs are visible. Rise in contribution of taxes to the government revenues and a control on the expenditure front is likely to augur well for the government going forward. Moreover, with the likelihood of services coming under the tax net and government’s intentions of increasing capital spends on infrastructure should help improve the economic situation.

One just hopes that the government doesn’t go overboard with populism when it presents Budget 2003-04 tomorrow. If it does, then whatever slow progress we seem to have made till now will be sacrificed on the altar of politics.

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