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Govt. revenues: Riding on hope - Views on News from Equitymaster
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  • Feb 28, 2003

    Govt. revenues: Riding on hope

    The general consensus, post the Finance Minister’s speech, seems to suggest that the budget has gone down well with the masses. The budget could more appropriately be termed as ‘populist’, with the minister fulfilling his promise of putting more money into people’s pockets. With the elections around the corner, the minister has tried his best to keep all segments happy. Retaining tax exemptions and continuing with the housing sops have provided much relief to the middle class. Moreover, by announcing an ambitious Rs 600 bn infrastructure development project, the Finance Minister has tried to chart out a plan for future growth of the economy.

    However, what goes behind this ‘pleasing’ and ‘disappointment’ should be of concern to everybody. By this we mean, how the government actually manages to dole out/retain sops and plan for future cash management. The envisioned P&L account of the government for FY04 is given at the bottom of the page.

    To begin with, the Finance Minister has projected a fiscal deficit of 5.6% of the gross domestic product (GDP) for FY04. Though this figure may be lower than the current year’s revised fiscal deficit estimate of 5.9%, it also indicates the government’s failure at controlling the fiscal deficit, time and again. Infact, the actual figures for FY02 now show that the fiscal deficit was a good 6.1% of GDP. The government has projected a 0.1% fall in fiscal deficit during FY04 on the assumption that revenues would grow by 10.3% as compared to a lower growth of 8.6% on the expenditure front.

    Let us see how the revenues of the government appear. The tax revenues are expected to rise by over 12% in FY04. This increase will be supported by a rise in tax collections. With the government doing away with the surcharge on individual tax and reducing the surcharge on corporate tax from 5% to 2.5%, the fall in the collections from this front has been factored in. On the non-tax revenue front, the government has envisaged a fall of 4% for FY04. The dent here is caused by a fall in the dividends and profit receipts of the government. These dividends and profits include receipts from public sector enterprises, which are expected to fall, as the government has set a huge disinvestment target to be achieved by the end of next fiscal. Also interest receipts have been curtailed down keeping in mind the continuance of the soft interest rate regime and as such the government may restructure the state debts bearing higher interest rates.

    The bold step that the government has taken is projecting proceeds from disinvestment to go up from Rs 34 bn in FY03 to Rs 132 bn in FY04. This is almost 3 times the current proceeds. However, it must be pointed out that seeing the government’s track record in the past, on this front in particular, it remains to be seen whether the government will be able to achieve this target. However, if the government fails yet again, then one can expect the fiscal deficit situation to worsen.

    Suppose, the government can only garner Rs 50 bn from divestment in FY04, then the deficit will rise to 5.9%. Also, the government has kept defence allocation at 22.9% of the estimated FY04 revenues. However, defence expenditure stood at 23.4%, 24% and 25.7% in FY00, FY01 and FY02 respectively. This gives you an idea of what to expect when FY04 ends and the FM once again takes the dais to present yet another union finance bill.

    This was largely the revenue side of the story. However, it remains incomplete and inconclusive without analyzing the other side of the budget. One thing is for certain, government fiscal control has still a long way to go.

    (Rs bn) FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02(P) FY03RE FY04BE
    Revenue 754 911 1,101 1,263 1,339 1,496 1,815 1,926 2,014 2,369 2,539
    Net tax revenues 534 675 819 937 957 1,047 1,283 1,369 1,337 1,642 1,842
    Non tax revenues 220 236 282 326 382 449 532 557 678 728 698
    Non debt capital receipts 62 114 69 79 92 165 118 142 200 216 312
    Recovery of loans 62 63 65 75 83 106 101 120 164 183 180
    Disinvestment proceeds - 51 4 4 9 59 17 21 36 34 132
    Total 816 1,025 1,170 1,342 1,431 1,661 1,933 2,068 2,215 2,585 2,852
    Revenue expenditure 1,081 1,221 1,398 1,590 1,804 2,165 2,488 2,778 3,016 3,416 3,662
    Interest 367 441 500 595 657 779 902 993 1,075 1,160 1,232
    Defence 150 164 188 210 262 299 352 372 400 411 443
    Subsidies 127 129 134 164 195 236 245 268 312 446 499
    Administration 189 204 286 305 338 446 521 633 612 673 719
    Plan expenditure 248 283 290 316 352 405 468 511 617 727 768
    Capital Expenditure 337 386 373 421 517 629 490 477 608 624 726
    Defence 55 68 68 80 85 91 100 124 170 149 210
    Plan expenditure 188 191 174 219 239 263 294 316 395 414 441
    Others 94 127 131 122 193 275 96 38 43 60 75
    Total 1,418 1,607 1,771 2,011 2,321 2,794 2,978 3,255 3,625 4,040 4,388
    Revenue Deficit 327 310 297 327 465 669 673 851 1,002 1,047 1,123
    (% of GDP) 3.7 3.0 2.4 2.3 3.0 3.8 3.5 3.9 4.3 4.1 4.1
    Fiscal Deficit 602 582 601 669 890 1,133 1,045 1,187 1,410 1,455 1,536
    (% of GDP) 6.9 5.6 4.9 4.7 5.7 6.4 5.4 5.4 6.1 5.7 5.6
    Primary Deficit 235 141 101 74 233 354 143 194 335 295 304
    (% of GDP) 2.7 1.4 0.8 0.5 1.5 2.0 0.7 0.9 1.4 1.2 1.1
    (Rs bn) FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 (P) FY03 RE FY04 BE



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