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The 'other' side of budget - Views on News from Equitymaster
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  • Feb 28, 2003

    The 'other' side of budget

    Historically, the key focus of the Union Budget has been to maximise the revenue side of the government's P&L account, which is more often than not, uncertain and susceptible to external factors. Since such factors are beyond government control (like say monsoons and riots), there has always been a big gap what the Finance Minister has targeted and what he managed to achieve. However, stricter norms to control the ever-expanding expenditure side have been ignored, primarily due to political pressures.

    But the previous year's budget showed the first signs of atleast touching upon critical-cum-politically sensitive issues like labour reforms and introduction of the Fiscal Responsibility Bill. The Bill was aimed at listing out the ways and means to control expenditure in a planned manner over the long-term. It is a different matter that the bill has been diluted to a large extent now. But the 'intent' was seen in a small way. The current year's budget also has been on similar lines.

    A brief overview of the expenditure side of the government's P&L is of significance. Of the total expenditure of Rs 2.9 trillion, 40% was accounted by interest payment towards servicing high cost debts of the past. This would have been higher but for a significant decline in interest on government borrowing during the course of the year (the average cost of government debt has come down from 11% to 9.4%). Defence and subsidy (food, petroleum and fertiliser combined) accounted for 20.5% and 14.3% of total expenditure in 2002-03. Following the dismantling of the administered price mechanism (APM), petroleum subsidy has become a part of government's expenses last year, consequently adding to its woes.

    Having looked at the revised estimate of 2002-03, what is the Finance Minister expecting in the coming fiscal? Has there been a measure to address the concern of containing deficit partly by tightening the expenses side in this budget? The answer is not a surprising 'No'. Except for the marginal rise in fertiliser prices and introduction of cash management services in select ministries on a pilot basis, the Finance Minister has overall failed to slate out directives for tightening its own belt. Despite the hike in fertiliser prices in this budget, total subsidy in FY04 is expected to increase by Rs 17 bn. The government has attributed this rise to the payment of arrears under the previous pricing era.

    Despite the ongoing debate of whether the government needs to spend 20.5% of total outgo towards defence, the total defence bill in FY04 is expected to further rise by Rs 93 bn. The enhanced provision is towards additional expenses towards pay(!) and modernisation. The Finance Minister's woes have been further excaberated by the rise in crude prices in the international markets. Since a commensurate price increase could not be effected for LPG, petrol and kerosene in light of the forthcoming elections, the deficit is expected to widen. This is reflected in the graph below.

    The initial feedback from investors' on the budget 2003-04 has been a positive one. While the Finance Minister has to be commended on his infrastructure related moves, he has been found wanting in efforts to control fiscal deficit. The deficit is expected to touch a concerning level of 5.6% of GDP in FY04. In this context, it has to be remembered that maximising revenues is just one aspect in the process of budgeting. As is for corporates, the government first needs to address factors that are under internal control before projecting ambitious revenue estimates. Especially when there is significant global economic uncertainty on the external front, in light of the US-Iraq imbroglio. Till then, the 'other' side will continue to daunt investors.



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