Big cut in capital spend a must to meet deficit target

Written by fe Bureau | New Delhi | Updated: Nov 19 2013, 10:45am hrs
In Budget FY14 presented last February, finance minister P Chidambaram proposed a 16% increase in the Centres budget size to R16.65 lakh crore and a fiscal deficit of 4.8% of GDP. Though the planned expansion was on the previous years flattish growth, it was pretty obvious to many even then that his revenue proceeds could fall short of target, thwarting that plan. Sharp revisions in the budget estimates are not new; yet this time around the arithmetic has unravelled even as the first-half figures are available. With not much scope to boost revenue in a sluggish economy, huge cuts on development spending and deferment of big payment obligations wherever there is room to do so are likely in deference to the deficit target, official sources confirm.

The finance ministry, which is close to finalising the revised budget estimates (REs), is looking at savings of R1.3-1.4 lakh crore (up to 25%) on Plan expenditure and R25,000-27,000 crore (22%) on non-Plan capital expenditure, according to official sources. It may also allow the REs on major subsidies to be much closer to the budget estimates (BEs) than normal, requiring rolling over of subsidy bills of R1.1-1.2 lakh crore, these sources added.

The tax collection scenario has been dismal (gross tax collection grew 7.8% annually in the first half of the fiscal as against the budget target of 19%). Some slippage on the non-tax revenue front cant be ruled out either, with the PSU disinvestment programme running behind schedule. Government managers are privately reconciled to a pick-up in the economy being pushed back to the next fiscal, early enough in which a new government will be sworn in.

If Plan expenditure saw an unprecedented near-20% cut (R1.07 lakh crore savings on the BE of R5.2 lakh crore) in FY13, a similar, if not sharper, pruning is on the cards this year. This would result in an odd situation flat growth (in absolute terms) in Plan spending for three years in a row. Obviously, in real terms, there is going to be a decline in Plan expenditure in the three years to end-FY14.

According to the sources, Plan spending (actuals) for FY13 is provisionally estimated at R4.14 lakh crore, similar to the R4.12 lakh crore in FY12.

With the revenue expenditure on defence, interest payments and pensions offering near-zero flexibility to deviate from BEs, higher savings are being planned on Plan spending with the aim that the RE for FY14 will be close to the actuals for the previous year. In other words, savings of Rs 1.2-1.3 lakh crore in relation to the BE.

This would necessitate tighter curbs on the release of funds for some of the UPA governments flagship schemes. However, a funding squeeze is unlikely for the rural employment guarantee scheme where utilisation of the amounts disbursed has been prompt thanks to the statutory nature of the scheme (around Rs 18,000 crore used up by October-end, against the budgeted Rs 33,000 crore).

In the case of some of the centrally sponsored schemes, the REs would roughly be 65% of the respective BEs, the sources said. The finance ministry, they added, would demand from the ministries presiding over these schemes data on how much of the released funds have been used up till the end of November and fix the allocations for the year. There seems scope for savings on the spending on flagship schemes, as not much funds have been employed in the case of some of the schemes. For instance, as on October 31, just Rs 897 crore has been released by the rural development ministry for the Pradhan Mantri Gram Sadak Yojana, against the budget allocation (BE) of Rs 21,700 crore.

The usual practice of re-allocation shifting funds from underutilised schemes to those for which demand is high would not be allowed this fiscal, the sources said.

That apart, a squeeze comparable to last years is likely on non-Plan capital expenditure. In FY13, some Rs 22,000 crore (21%) was saved on this front and a similar saving is targeted by the finance ministry on the BE of Rs 1.17 lakh crore for this year.

The REs would normally tend to be lower than the BEs due to the focus when the government focuses on fiscal tightening, with the notable exception of subsidies, which are always under-provided for in BEs. For instance, in FY13, the revised subsidy budget was Rs 67,639 crore (35%) higher than the BE at Rs 2.57 lakh crore. In April-August this year, Rs 1.38 lakh crore was disbursed for subsidies (most of which was for paying arrears), 12% higher than the amount released in the year-ago period. As funding subsidy demands from oil marketing companies, fertiliser units and Food Corporation of India beyond the budgeted levels could upset the fiscal maths, the RE for this year would be not higher than last years BE, which means payment deferment to the tune of Rs 1.1-1.2 lakh crore, an all-time high.

On a positive note for the finance ministry, the relative respite in crude oil prices, coupled with the ongoing pricing reform for petroleum products and a higher share of the subsidy burden on the upstream oil companies might have a moderating effect on the oil subsidy bill. To a limited extent, an aggressive tax collection drive may help.