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  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  MARCH 1, 2007

    Expenditure management: It's only words!
    MYSTOCKS | FREE NEWSLETTER

    The finance minister spent more than half his speech-time yesterday enumerating the various schemes for the upliftment of rural areas, insurance covers, better health and educational initiatives - all of which accounted for Rs 1,649 bn or barely 24% of the total expenditure!

    Even within this, the feel good factor does not have much chance to survive the harsh reality of figures as only Rs 188 bn or 3% of the total expenditure is being actually spent on building of new infrastructure like new schools, health care centres, roads and houses, while Rs 1,461 bn (21% of total expenditure) is to spent on administration of existing schemes - including payment of salaries to the 'ashas' and 'aanganwadi' teachers.

    If the capital expenditure on buying 8% of the State Bank of India equity is kept aside, the total capital expenditure - both plan and non-plan - has actually reduced. Despite Indians paying more in taxes (Rs 257 bn more than the budgeted estimate), the capex spending for the year up to March 2007, has actually been lesser - 12.9% of total expenditure than the estimated 13.4%, mainly due to lower defence spending. For the next year, he has further reduced it to 12.1%.

    Paltry disinvestment with no transparency
    Probably worried of the ruckus the Leftist allies of the government might create, Mr. Chidambaram did not mention anything about disinvestment yesterday but actually spoke about a capital infusion of Rs 223 bn into Central Public Sector Undertakings. In the budget documents however, he has taken credit for Rs 16.5 bn on account of disinvestment of small portion of equity in Rural Electrification Corporation (REC), Power Grid Corporation Limited (PGCIL) and National Hydroelectric Power Corporation (NHPC).

    This amount is to be transferred over to the National Investment Fund that will be managed by 'professional public sector mutual funds' for better returns. And what will happen to the monies later? Will the dividend be ploughed back for the government to spend? No answers.

    No control over expenditure
    If the taxpayers had not paid more taxes last year, servicing of internal debt (repayment of debt plus interest payments) would have taken up 99% of the income the government generates through taxes, duties and assets (or revenue receipts). Interest payments and subsidies took up three-quarters of the increased revenue expenditure over the budgeted estimate. Maneuverability will be very limited till the government decides to reduce internal debt.

    How the cookie crumbles...
    (% to total expenditure) FY07BE FY07RE FY08BE
    Plan revenue expenditure 25.5 24.9 25.6
    Interest payments 24.8 25.1 23.4
    Defence, Police 18.2 17.2 16.2
    Subsidies 8.2 9.2 8.0
    Assistance to States, Union Territories 6.8 6.9 6.0
    SBI equity - - 5.9
    Capital expenditure excl defence 6.5 6.7 5.9
    Economic and Social services 4.2 4.4 4.0
    Pensions 3.8 3.8 3.5
    Postal deficits, grants to foreign govt., etc 2.0 1.9 1.6
    Source: Union Budget, 2007-08

    Stupendous increase in internal debt
    The central government has borrowed Rs 3,355 bn more than it budgeted for in FY07, i.e., a good 26% more than what it estimated it would need to spend. Most of this has come through in the last two months as seen in the fiscal deficit (total resource gap) numbers that were Rs 948 bn till December 2006 but jumped to Rs 1,523 bn in the revised estimates released yesterday. As most of the borrowing has been done in the two months with much higher interest rates, the task of keeping to the FY08 budgeted estimates for interest payments would seem slightly herculean.

    What has this budget achieved?
    Plain bad balance sheets aside, by taxing dividends, increasing the education cess, adding rented premises for commercial use to the service tax (affects retail very badly), including ESOPs under fringe benefit tax (a tax whose legitimacy itself has been under query), the message that comes across loud and clear, is, firstly, the government has no intention to curb its excess spending, but will tax the hardworking classes more, and spend it yet again on keeping up its own 'behemothian' stature intact!

    Will this not negatively impact the investment atmosphere? Will this be worth the Rs 30 bn the finance minister gets from these tax changes? Just as charity, even equity begins at home, Mr. Chidambaram, it does not make sense to milk the cash cow dry for political exigencies.

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