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Public Finances: Read between the lines

Feb 27, 2006

While the government clearly emphasizing on duty rationalisations to comply with WTO norms and tightening of expenses, there has been an improvement in the quality of the fiscal deficit. This is measured by the share of revenue deficit in the fiscal deficit (the lower the better). While there has been a reduction in the last three years, sustaining the same is the key going forward and the trick lies in the implementation of the FRMB Act. It should be noted that for the current fiscal (2005-06), the second year of operation of the FRMB Act, the Finance minister has announced a ‘pause’ for the reduction in the revenue deficit, although continuing the stated reduction in the fiscal deficit. The impact of this ‘pause’ is evident from the fact that a revenue deficit, as a percentage of fiscal deficit, is likely to increase by 90 basis points. The nine-month actual performance gives a more sordid picture, as the revenue deficit is 74% of the fiscal deficit.

* Provisional ** Estimates

While 9mFY06 revenue receipts (as a percentage of the budgeted estimates FY06) are higher by 80 basis points, the capital receipts for the same period are lower by 11%. Similarly, the gross tax collections of excise, corporate income tax and personal income tax were lower by 9%, 22% and 15% respectively. As a result, overall revenues for the 9mFY06 (as a percentage of the budgeted estimates for FY06) are lower by 380 basis points when compared to 9mFY05.

Revenue sources…
Rs bn2005-06BE9mFY059mFY06% change% of budgeted for 2006
Total Revenue Receipts 3,512 1,884 2,167 15.0%61.7%
-Tax Revenues 2,735 1,412 1,687 19.5%61.7%
-Non Tax Revenues 777 472 480 1.8%61.8%
Total Capital Receipts 1,631 1,383 1,158 -16.3%71.0%
-Recovery of loans 120 452 74 -83.6%61.7%
-Other receipts - 29 0 -99.6% 
-Borrowings 1,511 902 1,083 20.1%71.7%
Total Receipts 5,143 3,267 3,325 1.8%64.6%

On the expenditure front, though the non-plan expenditure has shown a decline on YoY basis, it has come largely on account of a significant reduction in the capital expenditure. While the government may draw comfort from the same, in our view, capital expenditure has to be increased substantially in the long-term interest of the Indian economy. Taking a very short-term view on government expenses can be fatal over the long-term. Though the government has done a commendable job in restricting the interest and subsidy liability, a sudden spurt in other revenue expenditure (break up not available) overshadowed the entire efforts. To summarise, the revenue deficit for the 9mFY06 has increased by 27% YoY and its share in the fiscal deficit stood at 74% as against the budget estimated of 63%, which is indeed a cause of concern.

Expenditure breakup…
Rs bn2005-06BE9mFY059mFY06% change% of budgeted for 2006
Non Plan Expenditure 3,708 2,456 2,379 -3.1%64.2%
a) Revenue Account 3,305 1,982 2,216 11.8%67.0%
-Interest Payment 1,339 799 810 1.3%60.5%
-Major Subsidies 461 323 332 2.9%72.1%
-Pensions 195 125 146 17.2%74.8%
-Others 1,309 735 927 26.1%70.8%
b) Capital Account 403 474 164 -65.5%40.6%
Plan Expenditure 1,435 812 946 16.5%65.9%
a) Revenue Account 1,160 532 749 40.7%64.6%
b) Capital Account 275 280 197 -29.6%71.7%
Total Expenditure 5,143 3,268 3,325 1.8%64.6%

Outlook
The process of realizing the full growth potential of the economy through appropriate fiscal adjustments is a long-term process. What concerns us is the fact that the successful fiscal adjustment achieved in last two years is largely a result of increase in revenues (on account of sound economy) as compared to expenditure curtailment in many other countries across the globe. Though there exists headroom for further improvement in revenues by widening the tax base, simplifying tax administration and improving the tax to GDP ratios from the current level of 10.5% to 13.5% by 2008-09, the need of the hour is reducing the expenditure by improving the efficiency and productivity. Before looking outwards, the government needs to get its own house in proper shape. And certainly, curtailing capital expenditure is not the right way.

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