Budget 2014: Slowdown cramps Centre, states show the way

Written by Raj Kumar Ray | Updated: Feb 18 2014, 19:11pm hrs
FMAs the Centre struggled to put its house in order, the states showed better fiscal prudence and lowered fiscal deficit.
While finance minister P. Chidambaram stuck to his red line and lowered the Centre's fiscal deficit to 4.6% of GDP for FY14 from 4.9% last year, it's still much higher than the pre-Lehman levels when the deficit was reined in at 2.5% of GDP in FY08.

While the Centre struggled to put its house in order, the states showed better fiscal prudence and lowered their combined fiscal deficit from 2.9% of GDP in 2009-10 to 2.3% in 2012-13. They have budgeted a further cut to 2.2% in 2013-14. With 22 out of 28 states budgeted going to be revenue-surplus this year, their combined surplus would rise to 0.4% of GDP in 2013-14 from a deficit of 0.48% in 2009-10. Tax reforms will be crucial for the new government to shore up revenues and consolidate fiscal strength in the coming years.

The Centre's fiscal consolidation process was disrupted during the global economic crisis when it had to roll out stimulus that increased expenditure from 14.3% of GDP in 2007-08 to 15.7% in the crisis year of 2008-09 and further to 15.8% in 2009-10.

While the government was able to control expenditure to 14.2% of GDP in 2010-11, it has risen gradually in the past few years and touched 14.6% in 2013-14, mainly due to higher outgo for subsidies and interest payments.

On the other side, revenue growth slowed due to collapse of industrial growth and imports and a prolonged consumption stagnancy. The total receipts as a percentage of GDP fell from 10.1% in 2010-11 to 8.7% in 2012-13 with tax revenues falling from 7.7% to 7.2% and non-tax revenues sliding from 2.8% to 1.3%.

The Centre failed to shore up capital receipts, mainly disinvestment, to make up for the slowdown in revenue receipts. Only a radical policy change would boost capital receipts through PSU disinvestment and land monetisation.

After Chidambaram returned to the finance ministry in 2012, the government drew a road map aiming to bring down the deficit to 3% by 2016-17. However, much of the fiscal compression came by the way of curtailing non-plan capital expenditure. This along with policy paralysis and delays in project clearances took a heavy toll on the economy and growth plunged to 6.2% in 2011-12 from 9.3% in 2010-11.

Although government raised capital expenditure by 6% to R1.67 lakh crore in 2002-13 (despite a big compression in the last few months), the damage to the economy could not be repaired as growth fell to decade's low of 4.5% in 2012-13 and continues to be at that level. The capital expenditure was budgeted at R2.29 lakh crore for 2013-14, 37% higher than last year but that has been curtailed in the interim budget sharply to R1.9 lakh crore. Subsidy reform has been partial and produced only moderate results.