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Monday, 11 February 2013 00:00
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Unless capex picks up, FY14 will be a lot tougher


Given the sharp expenditure compression—the budget in December actually had a fiscal surplus of R8,230 crore—it’s very likely the finance minister will be able to meet his new fiscal deficit target of 5.3% of GDP. Apart from the sharp cuts in Plan expenditure, the finance minister is likely to defer payments to oil and fertiliser firms—payments to oil PSUs are already late by two quarters and Citi estimates a R70,000 crore deferral in terms of oil/fertiliser payments, an amount that equals around 0.7% of FY13 GDP. This, of course, will create its own set of problems in terms of an expenditure overhang as we go into FY14 where the finance minister is expected to announce a fiscal deficit target of 4.8% of GDP—this year’s deferral itself works out to 0.6% of FY14’s likely GDP. For FY15, the target announced by the government is even more ambitious at 4.2%.

The joker in the pack, as always, will be the Food Security Bill and it depends on whether it will be implemented in full or in a staggered manner with 25-50 districts included in the FY14 budget. Other important unknowns include the question of whether the finance minister will extend the use of Aadhaar cash transfers to cut wastages in LPG/kerosene/food subsidies—the latter, of course, looks unlikely given that you can’t have a Food Security Bill promising to give a certain quantity of grain to 75% of all households in the country while Aadhaar cash transfers are replacing the current food subsidy. Even so, meeting FY14 targets is going to be a tough call, and we’re not even talking of the likely pressure on the finance minister to raise pre-election spending. A lot obviously depends on how tax collections fare—as compared to FY13’s budget estimates of gross tax-to-GDP ratios of 10.6%, the actual are expected to be around 10.3%, down in a big way from the 11.9% of FY08. Try as the government may, getting back to even 11% levels requires a really big step-up in growth of the sort that’s simply not happening till the investment cycle gets back on track—from 14% in FY11, fixed investment growth fell to 4.4% in FY12 and is reckoned to have grown at 2.5% in FY13.

Linked to this is the question of how overall savings can go up unless government deficits go down dramatically. In any case, not all the rise in the deficit can be linked to the fall in tax growth—between FY08 and FY13, CLSA projects tax revenues as falling from 11.9% of GDP to 10.3%, while the fiscal deficit rose by a greater amount, from 2.5% of GDP to 5.3% of GDP. Since expenditure remained stable at around 14.5% of GDP during this period, the fall in non-tax and divestment revenues (2.9% of GDP in FY08 to 1.6% in FY13) is another big factor. So, not only will the FM need to revive these revenues—that means a major rethink in telecom policies, for instance—he’ll have to cut expenditure even more closely. Plan expenditures have already taken a beating while most items of non-Plan—like interest rates and defence spending—are pretty much committed anyway. Subsidies offer the only way out, but there’s the Food Security Bill that’s expected to bump this up. While CACP chief Ashok Gulati has talked about the wastage of 1% of GDP due to extra stocks held by the FCI, FE columnist Surjit Bhalla talks of education subsidies being 0.8% of GDP. No reason why the burden of fiscal consolidation should lie only on the finance minister’s shoulders.


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