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Financial Scene: Hope beckons in public finance
October, 13th 2014

The latest figures on government finances, released by the Controller General of Accounts, are not particularly encouraging. In the first five months (April-August 2014) of 2014-15, the fiscal deficit — excess of expenditure over revenue — has touched almost 75 per cent of the whole year’s target. As everyone knows, while presenting the first budget of the new NDA government in July, Finance Minister Arun Jaitley chose to leave the ambitious annual target set in the UPA’s interim budget unchanged. Achieving that target — 4.1 per cent of the GDP or Rs.5.31 lakh crore by March 2015-- seems almost impossible. A cursory glance at the recent official statistics, covering the first five months of this year, will evoke a similar response.

There is another point of similarity between the state of public finance last year and the current year. In both periods, the track record of the government has not been encouraging at the half way stage. In 2013-14, the deficit had touched 74.6 per cent by August, 2013. The full year’s estimate was Rs.5.24 lakh crore (4.6 per cent of the GDP). One expects the government to schedule its expenditure in line with revenue inflows. In which case, the deficit at the end of six months should be 50 per cent of the year’s budgeted deficit. But no Finance Minister has had the wherewithal to ensure such a textbook pattern of public expenditure and revenue. In almost every year, expenditure has run ahead of revenue. This has been so despite the efforts of the finance ministers to stagger expenditure in line with the pace of inflows. Thus, the fact that the deficit was around 100 per cent in January, 2014, was not so alarming, as the figures would suggest. The deficit settled down to more manageable levels by March, 2014.

But by far the bigger news was the then Finance Minister, P. Chidambaram, achieving the seemingly impossible feat of not only containing but improving upon the budgeted levels of fiscal deficit for 2013-14.

There has been a lot of scepticism as to how the UPA government managed that feat. To an extent there has been some window dressing — pushing expenditure items to 2014-15 and taking credit for revenues that strictly should have accrued next year. Cash-rich PSUs were asked to cough up large sums by way of dividends, well ahead of their due dates. This made government finance look better but will hardly help the public sector company. However, the new NDA government, while being aware of the sharp accounting practices, chose to stick to the previous government’s fiscal deficit target of 4.1 per cent for the whole year. But the big question is whether Mr. Jaitley will get a handle on public finance and achieve the ambitious target but eschewing controversial practices.

The imbalance

Do the trends in the said first five-month period give a clue? The imbalance between revenue and expenditure continues. Revenue growth has been slightly below last year’s figure during the same period. But the shortfall has been made good by a relative slowdown in the expenditure, especially in the non-Plan category. Total government expenditure has been estimated in the Union budget at Rs. 17.95 lakh crore, of which the non-Plan component comes to nearly two-thirds.

Besides, in the five-month period, Plan expenditure grew by a little over 4 per cent. Extrapolating this for the whole year and making a comparison may not be apt. The budget has projected a higher 9.4 per cent growth in the same category for the whole of 2014-15. More significant is the point that non-Plan expenditure has been trailing Plan expenditure in the five-month period.The task before Mr. Jaitley, and indeed for any Finance Minister, is to rein in subsidies, especially in fertilizer, food and petroleum products. These account for roughly a fifth of the total non-Plan expenditure (Rs.2.51 lakh crore out of a total non-Plan expenditure of Rs. 12.2 lakh crore). Fortunately for the NDA government, a combination of circumstances — both external and internal — have helped in controlling subsidies and, therefore, non-Plan expenditure. High up in the list is the fall in global petroleum prices. Benchmark oil indices are now in the range of $91-92 , far lower than the budget’s estimate of $105-110. This has given unexpected bonanza to the government. Retail diesel prices are, for the first time in recent years, ruling above their international prices. This gives the government a window of opportunity to decontrol diesel prices and reduce the entitlements in LPG and kerosene.

Food subsidies are down by Rs. 60,000 crore in the five-month period. The fact that that the food security programme has not yet been rolled out across the country has helped. Also, the government’s decision not to lift foodgrains from States, which have paid a bonus to their farmers over and above the procurement prices, is a step forward in rationalising subsidies.

All these have helped in bringing down the subsidies bill in the first five months — from Rs.1.64 lakh crore last year to Rs.1.38 lakh crore. It may be too early to speculate whether the Finance Minister will meet the ambitious fiscal deficit target of 4.1 per cent for 2014-15. But a snapshot of the public expenditure patterns at almost near the half-way mark gives room for optimism.

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