Govt's spending outstrips its revenues by a mile
The fiscal year's barely four months old and the government has racked up nearly 40 percent of its yearly budgeted deficit. Reason: revenues are lagging seriously, thanks to the slowdown.
The economy's numbers are not looking too good. And Finance Minister Pranab Mukherjee is unlikely to meet his budget numbers, too.
That, in sum, is the bottomline of an assessment by the Prime Minister's Economic Advisory Council (PMEAC) on the country's economic prospects for 2011-12, though it hasn't said so in as many words. The council merely said that achieving fiscal consolidation - ie, meeting the budget's fiscal deficit targets - is a "formidable" challenge.
Despite its underlying pessimism, the council forecasts only a marginally higher deficit-to-GDP ratio of 4.7 percent from the budget's projection of 4.6 percent. Firstpost is inclined to agree with the "formidable challenge" part of the council's remarks as a truer indication of ground realities rather than its numerical projection.
The first quarter figures for government finances put the fiscal deficit - the gap between revenues and expenditure that needs to be bridged by borrowings - at over 39 percent of the budgeted estimates for the year. Last year, the figure was only 10.5 percent during the same period.
What's gone wrong this year? Mainly revenues, which are not holding up; in fact, they are sharply down.
This is worrisome not only because it is a reflection of slowing receipts but also implies that attempts to meet deficit targets to cut back expenditure, particularly capital expenditure, could be bad news for an investment-starved country like ours.
A look at the detail shows that collections have shrunk by over 50 percent from the corresponding period of the previous year (Rs 90,920 crore vs Rs 1,99,810 crore). Non-tax revenues, which comprise heads like fines and penalties, sale of goods and services, rent on government lands, incomes on investments, and donations, among other things, have seen the biggest slowdown.
Tax-revenues, which comprise about 80 percent of government receipts, look less worrisome by comparison. Till one looks at budget estimates, that is. Once we check these numbers, we see that tax collections have also been growing at their slowest rate in five years.
Added to this is an ambitious revenue target for the financial year, which in turn determines the deficit number. The government had forecast an estimated 24 percent increase in tax revenues, which is starkly higher than the 12 percent growth expected during the previous year.
Since tax revenues are linked directly with overall corporate and economic growth, a slowing down of the economy should naturally lead to a drop in tax collections. This impacts the fiscal deficit.
In fact, even though the PMEAC has revised it GDP growth target from 9 percent to 8.2 percent (the RBI says 8 percent), this is still substantially more optimistic compared to what private sector economists are forecasting - sub-eight-percent growth.
Moreover, the PMEAC expects inflation to remain at a high of 9 percent for the July-October period. This can further dent corporate profitability and hence the government's collections.
The danger is that in order to reach the deficit target, the government might cut back on expenditure. At a time when India is investment- starved, a drop in capital spends could spell bad news.
Investments remained almost flat in the fourth quarter of 2011-12 (January-March) compared to the corresponding period of the previous year, and foreign direct investment flows have only now begun to catch up after a significant slowing down last year. It is only a matter of time before we see a larger impact of rising interest rates on credit growth.
In this scenario, the centrepiece remains the slowing in growth. Receipts could likely disappoint as growth softens, and cutting back expenditure to meet deficit targets could further impact growth, potentially defeating the purpose of fiscal consolidation in the medium term.
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The RBI said the turnaround in export growth and decline in imports from July 2013 onwards led to a sharp improvement in the trade deficit to $83.8 billion in the first half of 2013-14.
There have been no revisions to the calendar versus original estimates made at start of the year. Thus the government will borrow Rs 2,00,000 crore via dated government bonds over this period
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