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    Public Finances: Riding on taxes!

    Buoyant tax collections have led to the improvement in the quality of the fiscal deficit, which is measured by the share of revenue deficit in the fiscal deficit (the lower the better). While there has been a reduction between FY02 and FY05, sustaining the same is the key going forward and the trick lies in the implementation of the FRBM Act. It should be noted that for the fiscal 2005-06, the second year of operation of the FRBM Act, the Finance minister announced a 'pause' for the reduction in the revenue deficit, which resulted in the same accounting for 2.7% of GDP (2.5% in FY05). Having said that, the pause was temporary and the process was resumed thereafter. Consequently, in the current fiscal (2006-07), revenue deficit (as % of GDP) reduced by 60 basis points to 2.1%. Looking at the nine-month actual performance, the revenue deficit stood at 70% of the fiscal deficit (74% in FY06).

    While the 9mFY07 revenue receipts have grown by 30%, the same (as a percentage of the budgeted estimates FY07) also stand at a much higher 69.6% (61.7% in 9mFY06). The capital receipts for the same period are, however, lower by 11%. Gross tax revenues have grown by 33%, surpassing the estimated growth of 19.5% in tax receipts in 2006-07 (BE). The gross-tax to GDP ratio, which had stagnated at 8%-10% range, increased to 10.3% in FY06 and is expected to further improve to 10.8% in 2006-07 (BE). As a result, overall revenues for the 9mFY07 (as a percentage of the budgeted estimates for FY07) are higher at 68% (64.6% in 9mFY06).

    Revenue sources…
    Rs bn 2006-07BE 9mFY06 9mFY07 % change % of budgeted for 2007
    Total Revenue Receipts 4,035 2,167 2,809 29.6% 69.6%
    - Tax Revenues 3,272 1,688 2,322 37.6% 71.0%
    - Non Tax Revenues 763 480 487 1.5% 63.9%
    Total Capital Receipts 1,605 1,158 1,028 -11.2% 64.0%
    - Recovery of loans 80 74 80 7.3% 99.4%
    - Other receipts 38 0 - 0.0%
    - Borrowings 1,487 1,083 949 -12.4% 63.8%
    Total receipts 5,640 3,325 3,837 15.4% 68.0%

    On the expenditure front, while the non-plan revenue expenditure has risen by 14% YoY, the non-plan capital expenditure has increased by 13%, which is an encouraging sign. Having said that, if one were to consider the total revenue expenditure (both plan and non-plan), then the same has grown by 17%. In contrast, the total capital expenditure (actual investment in asset creation) has actually declined by 0.1%. In our view, capital expenditure has to be increased substantially in the long-term interest of the Indian economy. To summarise, the revenue deficit for the 9mFY07 has decreased by 12% YoY and its share in the fiscal deficit stood at 70%.

    Expenditure breakup…
    Rs bn 2006-07BE 9mFY06 9mFY07 % change % of budgeted for 2007
    Non Plan Expenditure 3,913 2,379 2,722 14.4% 69.6%
    a) Revenue account 3,444 2,216 2,538 14.6% 73.7%
    - Interest Payment 1,398 810 926 14.4% 66.3%
    - Major Subsidies 445 332 402 21.1% 90.3%
    - Pensions 195 146 151 2.9% 77.0%
    - Others 1,405 927 1,059 14.2% 75.3%
    b) Capital Account 468 164 184 12.6% 39.3%
    Plan Expenditure 1,727 946 1,115 17.9% 64.6%
    a) Revenue expenditure 1,438 749 939 25.4% 65.3%
    b) Capital Account 290 197 176 -10.7% 60.8%
    Total Expenditure 5,640 3,325 3,837 15.4% 68.0%

    The process of realizing the full growth potential of the economy through appropriate fiscal adjustments is a long-term process. While the reduction in the fiscal deficit has been a result of the buoyancy in tax revenues, what the government needs to focus on is the curtailment of expenditure (especially on the revenue front), a fact which has not been witnessed this fiscal and in the previous fiscals as well. Though there exists headroom for further increase in tax revenues by improving the tax administration and the tax to GDP ratio, the critical factor is to reduce the expenditure by improving productivity and efficiency. And the government needs to do this, not by curbing capital expenditure, but by reducing the cost that it incurs in running the government machinery.

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