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  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  JULY 7, 2004

    Pub. Finances: Good. But what's ahead?
    MYSTOCKS | FREE NEWSLETTER

    The economic survey presented today indicates an improved picture of the government's finances, than was witnessed in the previous year. As a matter of fact, while the budget estimates for fiscal deficit was 5.6% of the GDP for 2003-04, the provisional figure tells a different story, and an improved one - the fiscal deficit for 2003-04 stands at a lower 4.6% of the GDP. This is much lower when compared to the 5.3% level of 2002-03. The reason for this lower fiscal deficit in the latest completed fiscal can be attributed to the good performance of the government both on revenue and to some extent on the expenditure side. The following table shows the receipts of the government.

    On the revenue front...
    Rs bn 2002-03 2003-04P 2003-04BE % change % of budgeted or FY04
    Total Revenue Receipts 2,317 2,630 2,539    
    - Tax Revenues 1594 1,869 1,842 17.27% 102%
    - Non Tax Revenues 723.23 760.68 697.66 5.18% 109%
    Total Capital Receipts 1,686 2,089 1,849 23.89% 113%
    - Recovery of loans 341.91 669.28 180.23 95.75% 371%
    - Disinvestment receipts 31.51 160.48 132 409.30% 122%
    - Borrowings 1313.06 1259.6 1536.67 -4.07% 82%
    Total Receipts 4,004 4,719 4,388 17.87% 108%

    As indicated by the table above, on the revenue front the government has done better than expected. The tax revenue of the government swell by 17% while the non-tax revenue grew only by 5%, both beating the budgeted target. The basic jump in tax revenues came from the direct taxes and more so from the corporate taxes which grew by 37% on back of better performance of India Inc. Since the manufacturing and finance sectors contribute to a major portion to the Indian economic growth, a year of improved performance for these two sectors made this growth in corporate taxes possible. On the other hand, personal income tax revenues grew by 13% while the overall direct tax collection grew by 26%. The contribution of the direct taxes in the total tax revenue also increased to 41.5%, from 38.5% in 2002-03. The tax to GDP ratio stood at 9.1%, which was a little improvement over the last year when it was 8.6%, However, it is still lower than what it was in the fiscal 1990-91.

    Now, while growth in direct taxes over-performed the budgeted estimates, growth in indirect taxes did not follow suit. While a growth of 17% in the indirect tax revenue was projected in the budget, the growth as seen from the provisional figure turns out to be only 12%. However, as a part of these indirect taxes, receipts from services tax grew by 90% and was very close to the budgeted target. This is a good sign for the economy since services contribute to about 58% of the total GDP of the country. Another important thing to note here is that excise duty to GDP and custom duty to GDP has come down due to the lowering of excise duty and customs duty over a period of time.

    Now, as part of its non-tax receipts, the government did extremely well on the disinvestment front and proceeds from the same grew by 409% to Rs 160 bn, beating the budgeted target of Rs 130 bn. However, with the new government in the place, and gauging from the comments that they have made in the past couple of months, these disinvestment receipts may slow down in the next year.

    And, on the expenditure front...
    Rs bn 2002-03 2003-04P 2003-04BE % change % of budgeted for FY04
    Non-Plan Expenditure 2,890 3,498 3,179 21.04% 110%
    a) Revenue Account 2,681 2,828 2,894 5.47% 98%
    - Interest Payment 1178 1,243 1232 5.48% 101%
    - Major Subsidies 404 436 486 7.80% 90%
    -Pensions 145 157 155 8.61% 102%
    - Others 954 992 1021 3.98% 97%
    b) Capital Account 209 670 284 221.14% 236%
    Plan Expenditure 1115 1221 1210 9.59% 101%
    a) Revenue Account 716 785 768 9.76% 102%
    b) Capital Account 399 436 441 9.30% 99%
    Total Expenditure 4,004 4,719 4,388 17.86% 108%

    One of the largest items of expenditure of the government is interest payment. In fiscal 2003-04 these increased by 5.5% which was almost in line with the budgeted estimates. The net liabilities of the government increased by 12% while the net cost of the government debt stood at 9.4%, higher by 60 basis point compared to the last fiscal. If we exclude the debt buyback from this, the average cost of debt would by lower by 27basis point. Another important expenditure of the government was subsidies and the pensions, which saw growth of 7.8% and 8.6% respectively. Growth in capital expenditure stood at 220%, which was basically due to the refinancing of the state debts.

    Plan expenditure grew by 9.6%, which was slightly more than the budgeted estimate. The major expenditure went towards strengthening public enterprises and energy, transport and rural development. Another sector, which witnessed a major capital expenditure, was agriculture, which saw a growth of 20% in planned expenditure.

    Lowering the deficits: A key priority
    Although, the fiscal deficit for the fiscal year 2003-04 was 4.6% of the GDP, lower by 70 basis points compared to the last fiscal, it must be noted that a major portion of the deficit was financed by the disinvestment proceeds, which are not a steady source of revenue for the government. If we exclude the disinvestment proceed from the revenues, the fiscal deficit will be much higher at 5.2%. However, revenue deficit, which is the excess of revenue expenditure over revenue receipt, fell by about 80 basis point due to lower revenue expenditure by the government and higher revenue income. Primary deficit was at 0.1%, which shows a better employment of resources by the government rather than in paying interest on its debt.

    On the capital formation front, the government incurred a capital expenditure of Rs 87 bn, which was about 3.2% of the GDP and accounted for about 20% of the government's total expenditure. However, a lower participation of the government in capital formation and its higher deficits are matters of concern regarding the future prospects of the economy.

    Outlook

    It can be said that the performance of the government in year 2003-04, as far as its finances are concerned, was much better than the previous years. However, while the higher share of direct taxes and lower cost of fund by the government are some of the positives, on the capital formation front, the government has failed once again. The control of non-plan revenue expenditure holds the key for a higher economic growth. Also, focusing more on services for taxes is likely to lead to higher revenue growth for the government in future. To really fuel a higher and sustainable growth of the Indian economy, the government would have to take some hard measures going forward, and some of these might have to be beyond political compulsions.

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