If even the optimistic Prime Minister’s Economic Advisory Council (PMEAC) hasn’t given a fiscal deficit target while giving one for almost every other thing, there is a good reason. It’s also the same reason why finance minister P Chidambaram has asked a panel headed by Vijay Kelkar to examine the facts on the ground and give him a sense of how bad the fiscal situation is, so he can present a reasonable picture of the deficit while outlining a medium-term fiscal target.
Based on the figures available till June, tax revenues were 13.6% of the budget target for the full year and the deficit 37.1%. When we had similar numbers last year, we ended the year with a deficit of 5.9% of GDP as compared to the budget estimate of 4.6%. We have had years with worse April-June performances when the full year’s deficit target hasn’t been breached so badly, but those were years of high growth. In 2008-09, the April-June performance was even worse (the deficit in this period was 64.6% of that for the full year), and given the collapse in growth that year (from 9.3% the previous year to 6.7%), the deficit was 6% of GDP as compared to the 2.5% target.
If the GDP growth estimate of 9% in the 2011-12 budget went awfully wrong as compared to the actual growth of 6.5%, things aren’t dramatically different this year. As against the budget target of 7.6%, most private forecasters like Crisil are looking at a 5.5% growth in case of a bad monsoon, and a bit higher if the monsoon is merely poor. Indeed, even the optimistic PMEAC is looking at a growth of 6.7%. There are no well-established tax-to-GDP elasticities as tax growth tends to be slow when GDP is slowing and fast when GDP is on an upswing. When growth picked up from 7% in 2004-05 to 9.5% in 2005-06 and 9.6% in 2006-07, tax growth picked up from 20% in 2004-05 and 2005-06 to 29% in 2006-07. When GDP growth fell from 8.4% in 2010-11 to 6.5% in 2011-12, tax growth fell from 27% to 13.7%.
Which is why Crisil has forecast a 6.2% fiscal deficit for this year and Citibank 5.9%. And while citing the budget’s deficit targets, the PMEAC has stressed this is predicated on cutting subsidies by 0.55% of GDP and raising the tax-to-GDP ratio by 0.5 percentage points … “at a time when the manufacturing sector growth is decelerating, achieving the growth rate of 29% in excise duties and 30.5% in service tax … as assumed in the budget is not easy to realize”, the PMEAC says.
It would be simplistic, however, to blame all of the likely slippage on the lower economic growth. The very day the budget was presented, it was obvious there were various things that were going to go wrong with it since the then finance minister made very aggressive assumptions, on both the expenditure as well as the revenue side.
In the case of petroleum subsidies, for instance, the then finance minister budgeted just R43,580 crore, a figure probably good enough to just meet the unpaid dues of oil companies for the previous year. Those who wanted to believe felt this suggested the government had made up its mind that petroleum prices would be deregulated. It’s been five months since but there has been no sign of this so far; even prices of the deregulated petrol are raised with a lag of several months. Between 2010-11 and 2011-12, expenditure on subsidies rose 24.7% and, if the budget numbers are to be believed, this will contract by 12.1% in 2012-13!
The R40,000 crore budgeted from the 2G auctions also looks a bit of a stretch given the finances of the telecom companies. The industry was slowing down even at the time of the budget, but what happened after that was pure disaster. Trai kept unusually high base prices for 2G auctions which sent industry’s shares tumbling, and its proposal of re-farming—taking away the better quality 900 MHz spectrum from companies and replacing it with 1800 MHz spectrum—made things worse. If this wasn’t bad enough, the Presidential Reference puts another 81 licences in a limbo!
Cutting diesel prices is an obvious starting point for containing subsidies, but the PMEAC has a lot more frightening numbers. Power sector losses, never taken into account in any discussion of the fiscal deficit, it says are 0.8% of the budget. Logically, these should figure in the deficit since state governments have to fund them. But since the states don’t, the debt of the state-owned utilities is a whopping 4.7% of GDP. The government has come out with a scheme to restructure part of this. While this won’t hit state government finances immediately as there is a three-year moratorium planned, it will play havoc with bank finances, unless RBI agrees to a fudge and says the power loans can continue to be classified as standard assets, as it did in the case of Air India. A better-than-expected monsoon could provide relief, as could some increased FII/FDI, but the budget has too many pressure points for the relief to be anything but temporary.
* GDP slows from 7.6% projected to likely 5.5%
* Will make tax growth of 19.5% look dicey—last time such a growth took place, GDP was growing at 8%
* Subsidies to be capped at 2% of GDP, but grew from 1.8% when NDA left in FY04 to 2.6% in FY12
* Oil subsidy budgeted at R43,580 crore, but current annual under-recovery is R1,48,000 crore without including the so-called deregulated petrol
* Rs.40,000 crore from 2G auction looks tough right now given shape of industry and economy
* Rs.30,000 crore from disinvestment also looks a long haul