Chidambaram has got a Rs 2,22,000 cr problem

P-CHIDAMBARAMVivek Kaul 

The finance minister P Chidambaram has got a Rs 2,22,000 crore problem.
And he needs to tackle it before the current financial year ends on March 31, 2014.
In fact, the truth be told, by now he should have already started battling it, that is, if he hopes to successfully tackle it, as he has claimed on numerous previous occasions. 
The Controller General of Accounts, a part of the finance ministry, declares fiscal deficit data every month. Fiscal deficit is the difference between what a government earns and what it spends. 
Between April and November 2013, the first eight months of the financial year, the fiscal deficit stood at Rs 5,09,557 crore. This works out to be at 93.9% of the annual target. The fiscal deficit target set at the beginning of the year was Rs 5,42,499 crore. 
If this target has to be met then the government cannot run a fiscal deficit of greater than Rs 32,942 crore( Rs 5,42, 499 crore minus Rs 5,09,557 crore) between December 2013 and March 31, 2014. This means the government can run an average fiscal deficit of around Rs 8,235 crore per month (Rs 32,942 crore/4) during that period.
And this is where the problem starts. Between April and November 2013, the government ran a fiscal deficit of Rs 5,09,557 crore or around Rs 63,695 crore (Rs 5,09,557 crore/8) on an average per month. If the fiscal deficit target has to be met the fiscal deficit of Rs 63,695 crore per month needs to be brought down to Rs 8,235 crore per month. 
This implies a gap of Rs 55,460 crore per month or Rs 2,21,840 crore (Rs 55,640 crore x 4) over a period of four months. And this is what I called Chidambaram’s Rs 2,22,000 crore. 
To put things in perspective the average fiscal deficit of Rs 63,695 crore that the government has run in the first eight months of the year is 7.7 times the fiscal deficit of Rs 8,235 crore that it needs to run over the period of December 2013 to March 2014, in order to meet the target. 
Chidambaram has asserted time and again that the fiscal deficit target is a ‘red line’ that will not be crossed. So how will he ensure that the government does not cross the red line? One way is to hope and pray that the government earns what it had targeted at the beginning of the year. 
The receipts(or what the government hopes to earn) targeted for the year are Rs 11,22,799 crore. Of this only Rs 5,11,638 crore has been earned during the first eight months of the year. Hence, the government hopes to earn Rs 6,11,161 crore between December 2013 and March 2014. 
The government earnings tend to be back-ended, that is, a lot of money comes into its coffers during the last few months of the year. But even after taking that factor into account the situation doesn’t look good.
Tax collections form nearly four fifths of the government’s earnings. And things clearly look slow on this front. During the period April to November 2013, the government has managed to collect around 44.8% of its annual target. During the same period last year the number was at 47.9% of the annual tax target.
The average tax collected for the first eight months of the financial year between 1997-1998 and 2012-2013, the data for which is available online, was at 48.92% of the annual target. This clearly tells us that the tax collections have been slow this year. 
Also, the only year since 1997-98, when the tax collections during the first eight months have been lower than the current year was 2001-2002. During that year, the number had stood at 40.8% of the annual target. 
A sluggish economy is the best explanation for lower than usual tax collections. In fact, a
 report in The Economic Times suggests that “indirect tax estimates may have to be revised downwards by at least Rs 30,000-35,000 crore from the budget estimate of Rs 5.65 lakh crore.” Given this, the government is most likely to miss its tax collection target. 
Hence, the only way the government can hope to meet its fiscal deficit target is by cutting expenditure. One way of doing this is by delaying payments. News reports suggest that around Rs 85,000 crore that needed to be paid to oil marketing companies and fertilizer companies to compensate them for oil and fertilizer subsidies, will be postponed to next year. 
The government also seems to be delaying tax refunds. “Exporters are unlikely to get any more duty refunds for the rest of the year as field officials look to maximise revenues in the remaining three months of FY14,” The Economic Times report referred to earlier points out. 
Another report published in The Economic Times points out “The government’s zealousness in squeezing expenditure to meet the fiscal deficit target, either by delaying payments or not awarding new contracts, may be hurting those most vulnerable to such tightening — small and micro enterprises, self-employed professionals and the retail trade.” 
Further, the government expenditure is categorised into two kinds—planned and non planned. On the expenditure side, the cut is more likely to be on the planned expenditure side than non -planned expenditure.
Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. Non-plan expenditure is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a planned expenditure. But the money that goes towards the maintenance of that highway is non-planned expenditure. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.
As is obvious a lot of non-plan expenditure is largely regular expenditure that cannot be done away with. The government can at best delay paying subsidies. 
Hence, when expenditure needs to be cut, it is the asset creating planned expenditure which typically faces the axe and that is not good for the overall economy. If one looks at the numbers that is the direction they point towards. Between April and November 2013, the non planned expenditure of the government stood at Rs 7,30,203 crore or 65.8% of the annual target. 
Common sense tells us that if the expenditure is spread across evenly all through the year, in eight months the government would have spent around two thirds (or around 67%) of the target. And this is what it has done. This is not surprising given that non-plan expenditure is largely regular expenditure. 
As far as planned expenditure goes, during the first eight months of the financial year only Rs 2,90,992 crore or 52.4% of the annual target of Rs 5,55,322 crore, has been spent. This means for the period December 2013 to March 2014, Rs 2,64,330 crore of planned expenditure still needs to be made. And this is where the expenditure cuts will come in, if the government wants to meet its fiscal deficit target.
Planned expenditure is of the asset creating variety and is good for economic growth. When planned expenditure is cut, it hurts economic growth. But the choice is between the devil and deep sea. If the fiscal deficit target is breached, then international rating agencies will downgrade India to junk status. And that will create its own share of problems.
 

The article originally appeared on www.firstpost.com on January 4, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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