Get More Info

  • Views Search

    Portfolio Tracker
  • : Public Finances: Where is the money?

    Public Finances: Where is the money?

    The reforms over the past ten months - be it notification for the FRBM Act, approval for VAT, widening of tax base or phased withdrawal of tax exemptions - were all indicative of the government's initiative to curb deficits (revenue and fiscal). However, the economic survey released today contradicts this notion. Despite projections of a 6.9% growth in GDP for 2005-06, the economic survey 2004-05 fails to substantiate as how and when the government will garner resources to meet the requisite expenditure budgets.

    As against 9mFY04 (April-December 2003), when the revenues garnered were 108% of the budgeted figures, in 9mFY05 they have fallen short to the extent of 22%. While the budgeted estimates for revenue deficit (as a % of fiscal deficit) have drastically fallen to 55% as against 78% (FY04-Provisional) the same does not seem to be feasible in the current scenario.

    However, the fiscal deficit figures are expected to continue the declining (improving) trend and account for 4.4% of GDP as against 4.6% last year.

    Revenue came from...

    Lower receipts...
    Rs bn 2004-05BE 9mFY04 9mFY05 % change % of budgeted for 2005
    Total Revenue Receipts 3,093 1,705 1,884 10.5% 60.9%
    -Tax Revenues 2339 1,188 1,412 18.9% 60.4%
    -Non Tax Revenues 754 517 472 -8.7% 62.6%
    Total Capital Receipts 1,685 1,458 1,383 -5.1% 82.1%
    -Recovery of loans 271 519 452 -12.9% 166.8%
    -Other receipts 40 15 29 93.3% 72.5%
    -Borrowings 1374 924 902 -2.4% 65.6%
    Total Receipts 4,778 3,163 3,267 3.3% 68.4%

    Rising interest payments, expenditure on subsidies, pay and allowances, and pensions coupled with a near stagnant tax-GDP ratio (30% at present) have mainly contributed to the worsening of the revenue deficit. While the revenue receipts swelled by 11%, the capital receipts witnessed a decline of 5% over the previous year. But what is heartening is to note that the non-debt receipts are higher than the FRBM benchmark of 40% of the budgeted estimates. Revenue realised from corporate income tax, excise and service tax during 9mFY05 as a % of what was budgeted, was lower as compared to the realisations in the corresponding period last year despite strong 9 month results posted by India Inc. Non tax revenue during the same period declined by 8.7% mainly reflecting lower interest and dividend receipts.

    Revenue spent on...

    And lower outlay...
    Rs bn 2004-05BE 9mFY04 9mFY05 % change % of budgeted for 2005
    Non Plan Expenditure 3,322 2,396 2,456 2.5% 73.9%
    a) Revenue Account 2,937 1,945 1,982 1.9% 67.5%
    -Interest Payment 1,295 785 799 1.8% 61.7%
    -Major Subsidies 420 375 323 -13.9% 76.9%
    -Pensions 159 106 125 17.9% 78.6%
    -Others 1,063 679 735 8.2% 69.1%
    b) Capital Account 385 451 474 5.1% 123.1%
    Plan Expenditure 1,455 766 812 6.0% 55.8%
    a) Revenue Account 918 490 532 8.6% 58.0%
    b) Capital Account 537 276 280 1.4% 52.1%
    Total Expenditure 4,777 3,162 3,268 3.4% 68.4%

    A welcome change on the expenditure side is the low escalation in non-plan expenditure as to that of the previous years. This can be attributed to the lowering of subsidies, which fell by 14% and lower interest cost due to the falling interest rate regime witnessed during the first 9 months of FY05. The lower growth in non-plan expenditure on capital account was due to lower redemption of securities issued to NSSF and the proceeds being used for the prepayment of high cost debt by states under the debt swap scheme. On the other hand, lower growth in plan expenditure, both revenue and capital, was on account of the delay in the allocation of additional outlay of Rs 100 bn, due to the presentation of budget in July 2004 as against February 2004.

    Targeting FRBM requirements...
    While the focus remains on curbing the fiscal deficit, which should be eliminated by FY08, as per the FRBM Act, the means for doing the same do not seem to be sustainable. Although the budgeted estimates for fiscal deficit (as a % of GDP) have reduced by 20 basis points to 4.4% from 4.6%, the deficit financing has been mainly through the recovery of loans (on the capital side) and non tax revenues (on the revenue side), both of which hold no certainty in future.

    The government's inability to meet the budgeted targets for garnering revenues accentuates the fact that besides extending the tax base and tapping potential taxpayers, the government should also focus on timely ‘collection' of the same so that the budgeted outlays are not delayed. This is not only necessary for achieving our GDP targets but also to offer tax sops to the requisite areas.

    Historical public sector outlay
    (Rs bn) Agriculture Rural devpmt Energy Industries Transport Education* Health #
    1985-86 18.2 26.7 96.8 49.1 40.7 8.7 5.8
    1992-93 42.1 63.7 20.2 64.4 106.6 28.8 12.1
    1998-99 76.9 121.6 355.7 79.7 203.4 96.8 155.7
    2001-02 85.4 146.7 433.2 95.7 416.9 131.4 162.5
    2002-03 37.3 64.2 363.1 79.9 320.4 69.1 84.1
    Source: RBI
    * includes sports, art and culture
    # includes water supply and sanitation

    The historical figures for public sector outlays outline the fact that the government has shifted focus to education and health expenditure over the last few years. A timely collection and dispensation of the revenues in the said areas will definitely augur well for the country's economic targets.

    Its about selecting the right stock... the right price!

    Equitymaster follows the value-investing approach to selecting stocks for investment. Subscribe to our premium research today!

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...


    © Equitymaster Agora Research Private Limited |
    Why Personalfn? | Why Equitymaster? | Terms of Use | Contact Us | About Us