How realistic are Chidambaram's fiscal projections?

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Arvind Padmanabhan | 19 Feb, 2014
One would have expected Finance Minister P. Chidambaram to go a little easy on the fiscal deficit front, given that he presented an interim budget in an election year. But far from it, he has promised to keep the fiscal deficit -- the difference between total projected expenditure and revenues from sources like taxes, loan recoveries and other receipts - on a tight leash. Are the numbers realistic?

The target for fiscal deficit for the next year has been kept at 4.1 percent of the country's gross domestic product (GDP), as opposed to the revised estimates of 4.6 percent for the current fiscal. It is equally noteworthy that the finance minister feels the deficit for this fiscal will be at least 20 basis points lower than his budget estimates.

But the above calculations are based on several assumptions. Among them he expects the nominal gross domestic product -- the final monetary value of all goods and services produced within a country -- to grow at 13.4 percent in 2014-15, against the official estimate of 11.9 percent for this fiscal.

Here, if the inflation rises beyond expectations, it will certainly boost the nominal GDP, but the real GDP growth, which is what is looked at, will suffer.

That's the reason why he has managed to keep the actual fiscal deficit in monetary terms higher at Rs. 528,631 crore, against the revised estimate of Rs. 524,539 crore for the current fiscal.

Another projection is on tax revenue. He has assumed an increase of 18 percent in the tax revenues next fiscal, against the projected 12.9 percent growth in the current fiscal -- even though there has been a shortfall between the revised estimated for 2013-14 and what he himself had projected in the budget presented last year.

Tax revenues being one of the key components in determining the fiscal deficit, a shortfall can send the projections haywire. One cannot ignore the fact that there is a direct correlation between GDP growth and tax collections, if other factors remain the same.

Compared with the budget estimates, there has been a shortfall in the revised numbers for this fiscal on account of all sources of taxes -- collections of corporate tax, income tax, customs, excise and service tax have all been lower.

Accordingly, one isn't sure how this sharp increase in tax revenues as projected can be achieved. More so when the economy has still not picked up much and the bulk of the growth so far has been contributed by the agriculture sector which remains a non-tax entity in India.

On the revenue-generation side, another area where there has been a substantial increase in projection is under the head miscellaneous receipt, which primarily includes sale of equity in state-run and non-government companies. This year, against a projection of Rs. 54,000 crore under these two heads, the realisation has been only Rs.19,000 crore -- a shortfall of Rs. 35,000 crore. Yet, the projection for next fiscal is Rs. 51,000 crore.

One may argue that money raised from divestment goes into the special National Investment Fund. But the proceeds can be used towards capital addition for state-run commercial banks and capital expenditure of the railways. Despite that, there has only been a marginal increase in the budgetary support for the railways, while Rs. 11,200 crore is being provided for the railways Subsidy is another area where the finance minister appears to have played with numbers. He has cut the petroleum subsidy from Rs. 85,500 crore to Rs. 63,500 crore. At the same time, while absorbing the rollover of fuel subsidy worth Rs. 45,000 crore of last fiscal in the current year, he has only factored in a roll-over of Rs. 35,000 crore from this year to the next.

Fuel subsidy, like the doles on food and fertilisers, remains a sensitive issue. Remember, the government had to roll back even that small measure of limiting the release of subsidised cooking gas. In that event, it is anybody's guess how this massive, real cut of Rs. 32,000 crore in fuel subsidy will be achieved.

In conclusion, one has to concede that Chidambaram presented the interim budget with one hand tied -- he had little room for manoeuvrability as far as the receipts side of this exercise was concerned. But it is he who has made the projections -- tall, modest or understated as one may deem them.

In any case, it is the next government that will present the final budget after general elections. All these projections are more likely to change, even if Chidambaram comes back to the North Block as finance minister.

Consequently, when a comparison is made between the projections for the next fiscal with the revised estimates, it will be on the basis of the final budget. What Chidambaram presented Monday will remain, at best, an academic exercise with little meaning or purpose.