Budget 2014: When it comes to the fiscal deficit, Jaitley has done a Chidambaram

 Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

Vivek Kaul

Alfred Hitchcock, the British director, who taught Hollywood how to make thrillers, once famously said: “The length of a film should be directly related to the endurance of the human bladder.” On a lighter note, this rule should apply to the speeches that politicians make, as well.
Arun Jaitley in his maiden budget speech as the finance minister of India, junked Hitchcock’s bladder test and went on and on and on. Early on in his budget speech Jaitley said : “My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1 per cent of the GDP in the current year. Considering that we had two years of low GDP growth, an almost static industrial growth, a moderate increase in indirect taxes, a large subsidy burden and not so encouraging tax buoyancy, the target of 4.1 per cent fiscal deficit is indeed daunting. Difficult, as it may appear, I have decided to accept this target as a challenge. One fails only when one stops trying.” Fiscal deficit is the difference between what a government earns and what it spends.
So, the question is how does Jaitley plan to meet the fiscal deficit target of Rs 5,31,177 crore or 4.1% of the GDP? Jaitley has assumed that tax receipts will go up by 16.9% to Rs 9,77,258 crore during the course of this financial year (April 2014 to March 2015). In the economic survey released yesterday, the economic growth for the current financial year has been projected to be at 5.4-5.9%. Governments projections typically tend out to be more optimistic than they actually turn out to be.
In this scenario how feasible is an assumption of 16.9% growth in tax receipts? Jaitley’s predecessor P Chidambaram had assumed a growth of 19.2% in tax receipts for the last financial year. The actual growth turned out to be much lower at 12.7%. In a scenario of low growth and high inflation an assumption of 16.9% growth in tax receipts is highly optimistic and is unlikely to be achieved.
Chidambaram had gone about achieving a fiscal deficit of 4.6% of the GDP for the last financial year(April 2013 to March 2014) by largely doing two things. Subsidies on petroleum, food and fertilizer which should have been paid up by the government during the course of the last financial year, were postponed to this financial year. Estimates suggest that this amount was greater than Rs 1,00,000 crore.
Jaitley doesn’t seem to have taken this into account while working out the numbers. The total cost of subsidies for this financial year has been budgeted to be at Rs 2,55,707.62 crore. This is more or less similar to the last year’s number. Hence, unless subsidies are brought down majorly, which remains a politically unpopular move and inflationary in the short-term, this amount is unlikely to be sufficient to meet the subsidy commitments of the government. And if subsidises are not brought down, Jaitley will either have to let the fiscal deficit go up or like Chidambaram push their accounting to the next financial year.
The second thing Chidambaram did in order to achieve a fiscal deficit of 4.6% of GDP was to cut down on plan expenditure. The government expenditure is categorised into two kinds—planned and non planned. 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 needs to keep paying salaries, pensions and interest on debt, on time. These expenses cannot be postponed. The only thing it can do is to postpone making the subsidy payments. 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 Jaitley has assumed that is the direction we seem to be headed.
The planned expenditure target of the government during the last financial year was at Rs 5,55,322 crore. The actual planned expenditure came in at Rs 4,75,532 crore, which was close to Rs 80,000 crore or 14.4% lower. This is how the fiscal deficit of 4.6% of GDP was achieved.
Jaitley has set the total planned expenditure for the year at Rs 5,75,000 crore. It is highly likely that during the last few months of this financial year (i.e. the period between January and March 2015) Jaitley might like Chidambaram have to put a freeze on this expenditure, if he hopes to achieve the fiscal deficit target that he has set. And this can’t possibly be good for the Indian economy.
Another area where Jaitley could have been aggressive is the money that can be raised through the disinvestment of public sector companies. During the course of this financial year the government hopes to earn Rs 58,425 crore through disinvestment. Chidambaram had set a target for Rs 54,000 crore but managed to earn only around Rs 19,000 crore. The advantage that Jaitley has is that the stock market has been rallying for a while. Given this, the government could have been aggressive and set a disinvestment target of close to Rs 1,00,000 crore.
What makes the fiscal deficit target of 4.1% of GDP further unrealistic is the legacy that the Congress led United Progressive Alliance has left for the Narendra Modi led National Democratic Alliance. The fiscal deficit number for the first two months of this financial year(April-May 2014) does not look good at all. Numbers released by the Controller General of Accounts suggest that for April-May 2014, the fiscal deficit of the government has already touched Rs 2.41 lakh crore.
This works out at around 45% of the fiscal deficit target of Rs 5,31,177 crore that Jaitley has set. Hence, he has only around Rs 2,90,000 crore to play around with between June 2014 to March 2015. This, of course is not Jaitley’s fault.
To conclude, this was Jaitley’s chance of presenting the true financial situation of the Indian government. He seems to have lost that chance by projecting a higher revenue than the government is likely to earn and a lower expenditure than the government is likely to spend.

The article also appeared on www.firstbiz.com on July 10, 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

2 Responses to Budget 2014: When it comes to the fiscal deficit, Jaitley has done a Chidambaram

  1. Ram says:

    A very nice and informative analysis. I always look forward for your opinion and analysis.

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