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The Union Budget and second generation reforms

Mar 1, 2000

The Union Budget for fiscal 2001 was presented in an environment in which the financial health of the central government (and the states) was in a precarious position. On the brighter side 'industrial recovery seems to be underway' said the Economic Survey a day earlier. There was much optimism in the air (even though most accepted that the fiscal situation was worrisome). Even the government had made the right noises as early as December when it pushed through the Insurance bill in Parliament. The finance minister (FM) started his speech by mentioning that his government was aggressively pushing forward second-generation reforms. It is now evident that he was referring to the government's desire and not its commitment. The Union Budget 2001 is likely to be remembered as……. Well come to think of it, the budget has not left any clear impression. What was the budget all about - new taxes, higher expenditure and talk about fiscal discipline.

The government, as it turns out, is more likely than not to fail in this attempt. Why the pessimism? A closer look at the expenditure side reveals all.

Expenditure
(Rs bn) FY99 FY00BE FY00RE FY01BE YoY growth
          (BE/RE)
Revenue expenditure 2,171 2,371 2,530 2,811 11%
    Interest
772 880 914 1,013 11%
    Defence
310 335 359 407 13%
    Subsidies
247 238 257 228 -11%
    Administration
437 452 519 640 23%
    Plan expenditure
405 466 481 523 9%
Capital Expenditure 393 468 507 574 13%
    Defence
102 122 126 179 42%
    Plan expenditure
263 303 313 358 14%
    Loans
28 43 68 37 -46%
    Others
- - -    
Total 2,564 2,839 3,037 3,385 11%

FY2000 is turning out to be a yet another wasteful year. The government had projected total expenditure to grow 11%, while the actual growth (as per revised estimates) is pegged at 18%. The main contributors to this excessive growth have been defence, subsidies, administration and loans to states. It must be mentioned that the government had to incur additional expenditure on account of the war at Kargil, general elections and the 'super' cyclone in Orissa. These were however not the key contributors to the sharp jump in total expenditure.

In FY2001 the government is projecting an expenditure growth of only 11%. This lower rate of growth has been achieved by targeting a reduction in subsidies and loans to states and others. Other heads of expenditure too are expected to grow at lower rates. Is this achievable? Well if the government were to dramatically reduce its size, prune debt levels, cut subsidies (as planned), and arrest the growth in defence expenditure then it may actually be possible (get the sarcasm!).

Revenues
(Rs bn) FY99 FY00BE FY00RE FY01BE YoY growth
          (BE/RE)
Revenue 1,495 1,829 1,795 2,037 13%
    Net tax revenues
1,047 1,324 1,265 1,462 16%
    Non tax revenues
449 505 530 575 8%
Non debt capital receipts 165 211 153 235 53%
    Recovery of loans
106 111 127 135 6%
    Privatisation (disinvestment)
59 100 26 100 285%
Total 1,660 2,040 1,948 2,272 17%

Turning to the revenue side the picture is quite similar. In FY2000 the government had projected growth of 23% in total revenues whereas the actual growth is likely to be only 17%. The root cause of this is the slower growth in tax revenues and the dismal collections from disinvestment proceeds.

In FY2001, the government has pruned its revenue growth target to 17%. It must be pointed out that this includes a credit of Rs 100 bn taken by the government as proceeds from disinvestment. Whether the government would be able to achieve this is debatable. However, the target looks achievable as the economy is gaining pace and tax collections are likely to pick up.

(Rs bn) FY99 FY00BE FY00RE FY01BE
Revenue Deficit 676 542 735 774
(% of GDP) 3.8 3.1 3.8 3.5
Fiscal Deficit 904 799 1,089 1,112
(% of GDP) 5.1 4.5 5.6 5.1
Fiscal Deficit (including small savings) 1,142 1,050 1,339 1,363
(% of GDP) 6.4 5.9 6.9 6.2
Primary Deficit 132 (81) 175 100
(% of GDP) 0.7 (0.5) 0.9 0.5

The government has pegged the fiscal deficit at 5.1% (of GDP) as compared to the budgeted target of 4.5% in FY00. However, in effect the government is proposing to reduce the deficit from 5.6% of GDP in FY00 (as per the revised estimates) to 5.1% in FY01. The implications? The government will continue to be a large borrower.

What were the initiatives taken to pursue the path of economic reforms? On the face of it there seems to be none. The boldest move as yet has been 'talk' of reducing subsidies on food and fertilisers. Whether this will be implemented is yet to be seen. Among the other initiatives is the decision to reduce the size of the government. A very necessary but an equally difficult proposal. The FM spoke of biting the bullet. Well he seems to have left that entirely to the private sector, while letting the public sector and the government scot-free.


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