Slowing GDP takes toll, cut in govt-spend will hurt
Given how finance minister P Chidambaram not just stuck to, but even bettered, the fiscal deficit target for FY13, it’s a good idea to believe him when he says the FY14’s 4.8% of GDP target is a red line which will not be crossed. Even so, the numbers coming for the year’s first quarter are a shocker. While Q1 GDP data is not yet out—leading indicators like commercial vehicles suggest it will be a poor one—fiscal data is worrying. Excise duty collections that account for 16% of total budgeted tax collections are down 18% yoy, customs duty collections that account for 15% of tax collections grew under 5%, corporate tax (34% of the budgeted amount for FY14) grew an anaemic sub-3% level and even service taxes grew just 16%, down from the 40% the previous quarter and 34% in the quarter before that. Much of this is par for the course given the slowing economy, though it has to be said the sharp fall in excise duty collections are inexplicable since industry has been stagnant, but has not contracted. As a result, worryingly for a government that has promised to stick to its ‘red line’, Q1 fiscal deficit has reached nearly half the target for the full year—in the same period last year, it was around 37%, or a full 11 percentage points lower than it was in Q1 FY14.
What has made the fiscal deficit grow so dramatically, however, is not just the collapse in tax growth. Compared to the last fiscal when the government was niggardly with expenditure, it has opened the taps this year. Total expenditure grew nearly 23% in Q1 as compared to a mere 2.5% the previous quarter and a contraction of 0.1% in the quarter before that. With Plan expenditure growing 33% yoy as compared to a contraction of 13% the previous quarter, this suggests the government has raised spending on new schemes. If you look at the data in terms of types of expenditure, capital expenses rose 36% in Q1 versus minus 5% in Q4 FY13; in the case of revenue expenses, they rose 21% in Q1 versus under 4% in Q4 FY13. In other words, had the government not changed gears on expenditure, chances are Q1 growth would be lower than what it might otherwise have been. In which case, as the year goes on, if revenues don’t start looking up, the government will have no option but to cut back on expenditure, acting as a further drag to growth. The other tricky item is non-tax receipts like telecom auctions and disinvestment—as compared to a planned R40,000 crore (a fourth was achieved) and R30,000 crore, respectively in FY13, the FY14 target is R22,000 crore and R55,814 crore or 5% of the total receipts for the year. So far, the disinvestment has been a bit of a dud and just R2,172 crore has been raised and Coal India’s trade unions are not allowing a 10% stake sale to go through which could potentially raise R20,000 crore. If, however, the government is able to raise more by selling SUUTI and Balco/HZL shares, it could make up the gap, even exceed it. With private investment yet to rise to the occasion and private consumption faltering, slowing government consumption is the last thing the economy needs.