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  • : Public finances: Recovery round the corner?

    Public finances: Recovery round the corner?

    Mirroring the trend witnessed last year, buoyant tax collections once again 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 FY07, 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 FY07, the third year of operation of the FRBM Act, the revenue deficit considerably reduced to 1.9% of GDP (2.6% in FY06). Looking at the nine-month actual performance, the revenue deficit stood at 50% of the fiscal deficit (70% in FY07).

    While the 9mFY08 revenue receipts have grown by 27%, the same (as a percentage of the budgeted estimates FY08) also stand at a much higher 73.1% (69.6% in 9mFY07). The capital receipts for the same period have also grown by a healthy 15% YoY after the dismal show during the corresponding period last year (capital receipts were lower by 11% YoY). Gross tax revenues have grown by 28%, surpassing the estimated growth of 23.4% in tax receipts in 2007-08 (BE). The gross-tax to GDP ratio, which had stagnated at 8%-10% range for more than a decade, increased to 11.4% in FY07 and is expected to further improve to 11.8% in 2007-08 (BE). As a result, overall revenues for 9mFY08 (as a percentage of the budgeted estimates for FY08) are higher at 69.7% (68% in 9mFY07).

    Revenue sources…
    Rs bn2007-08BE9mFY079mFY08% change% of budgeted for 2008
    Total Revenue Receipts 4,864 2,809 3,556 26.6%73.1%
    - Tax Revenues 4,039 2,322 2,960 27.5%73.3%
    - Non Tax Revenues826 487 597 22.4%72.3%
    Total Capital Receipts 1,941 1,028 1,186 15.4%61.1%
    - Recovery of loans 15 80 33 -58.5%220.3%
    - Other receipts417 0 377 90.6%
    - Borrowings 1,509 949 776 -18.2%51.4%
    Total receipts 6,805 3,837 4,743 23.6%69.7%

    On the expenditure front, while the non-plan revenue expenditure has risen by 24% YoY, the non-plan capital expenditure has surged by 210%, which is an encouraging sign. Also, if one were to consider the total revenue expenditure (both plan and non-plan), then the same has grown by 14%. As against this, the total capital expenditure (actual investment in asset creation) has surpassed the growth in revenue expenditure by a wide margin (up 120% YoY). 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 9mFY08 has nearly halved (lower by 41% YoY) and its share in the fiscal deficit stood at 50%.

    Expenditure breakup…
    Rs bn2007-08BE9mFY079mFY08% change% of budgeted for 2008
    Non Plan Expenditure 4,754 2,722 3,371 23.8%70.9%
    a) Revenue account 3,835 2,538 2,801 10.3%73.0%
    - Interest Payment 1,590 926 1,118 20.7%70.3%
    - Major Subsidies510 402 493 22.5%96.6%
    - Pensions235 151 166 10.0%70.5%
    - Others 1,501 1,059 1,025 -3.2%68.3%
    b) Capital Account919 184 570 209.8%62.1%
    Plan Expenditure 2,051 1,115 1,372 23.0%66.9%
    a) Revenue expenditure 1,744 939 1,148 22.3%65.8%
    b) Capital Account307 176 224 26.9%72.7%
    Total Expenditure 6,805 3,837 4,743 23.6%69.7%

    As has been highlighted in the economic survey for 2007-08, the existence of revenue deficit indicates that a part of the borrowings by the Government is not being used for financing public investment. When the focus is only on reducing the fiscal deficit, the brunt of fiscal correction is often borne by the reduction in capital expenditure. Hence, the change in revenue deficit on the path of fiscal adjustment indicates the quality of fiscal correction, which is as important as the level of fiscal correction itself.

    The process of realising the full growth potential of the economy through appropriate fiscal adjustments is a long-term process. While the extent of the reduction in the fiscal deficit in 9mFY08 is commendable, what needs to be highlighted is the fact that this improvement has come about due to the robust growth in tax revenues. What the government needs to focus on is the curtailment of expenditure (especially on the revenue front), a fact that 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 by reducing the cost that it incurs in running the government machinery.

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