Imagine this - ABC is a listed company, which is a fast growing company being tracked by analysts globally. At the start of the year, the company's management gives its full year revenue targets, capital expenditure plans, debt repayment plans, cost control measures, amongst others - which, while very much required for the improvement in health of the organisation - seem a bit overambitious. This would tend to make the analysts covering the stock take a cautious approach towards the company. And what would happen, if it turns out that the company's target goes way off - even worse than what the analysts had estimated? Well, we all know the answer to that...
Now, let's say ABC is India. And the management presentation is the Union Budget speech of the Finance Minister - the country's CFO.
It was not very long ago when the media had raised alarms over the country's fiscal deficit, especially given that there were no signs of improvement in the year so far. And thus comparisons were being made to the situation to that of FY12 when the actual deficit crossed the budgeted deficit level by a substantial margin. It was reported that the government had already spent its available kitty (for the full year) on subsidies. That too by the month of July 2012! On the other side, revenues had not really flown in as planned given the process of delayed disinvestments, tax revenues lagging in the first three months, amongst others. In short, all signs pointed towards crossing the budgeted deficit target of FY13.
Enter the Vijay Kelkar panel...
The panel set up (for fiscal consolidation) by current Finance Minister P. Chidambaram has disclosed some alarming numbers. As per the panel, the revenues through tax receipts have been overstated by Rs 600 bn or by about 8%. Coming to the expense side, the panel believes that the budget estimate of subsidies for the full year FY13 is underestimated by Rs 700 bn or a whopping 37%.
Further, as per the budget estimate the fiscal deficit target is 5.1%. However, as per the panel, the deficit could easily cross the 6% mark, only if, the recently announced reforms are now carried out as planned. The panel has also emphasized the importance of meeting the divestment targets as the same would help towards curbing the deficit. In addition to divestments, the panel has also asked the government to take actions to shore up the tax-GDP ratio, which has remained below 8% since FY09 as against 8.81% in the pre-crisis period of FY08.
Will the ministry continue to be in denial mood?
It was earlier this month (September 2012), when the media reported that finance ministry officials expect the fiscal deficit to remain higher than budgeted, but closer to the 5.1% target. Going by the panel's report, this is obviously not the case. In fact, other economists stated that they expect deficit levels to rise above FY12's deficit of 5.76%.
How and what would be the finance ministry's response to these suggestions will be interesting to see.