Column: The cash balance cushion

Written by Soumya Kanti Ghosh | Updated: Jul 2 2014, 06:08am hrs
Fiscal consolidation is perhaps the most discussed agenda in India today. If one searches the phrase fiscal consolidation in India on Google, she/he will get 12.5 lakh results in 0.28 seconds! Given the enormity of the discussion on this, my column examines two questions: (1) on the scope, if any, to go beyond the 4.1% deficit target set in the interim budget through pump priming capital expenditure, and (2) if this could be achieved in a non-inflationary manner, i.e., financed through higher/lower borrowings.

The starting point of our exercise is the use of fiscal multipliers to optimise the level of subsidy payments and capital expenditure (Bose and Bhanumurthy, NIPFP, September 2013). As Bose and Bhanumurthy estimate, capital expenditure has a high multiplier effect, of 2.45, meaning that a R1 increase in capital expenditure will translate to a R2.45-increase in GDP. Additionally, transfer payments and other revenue expenditures multipliers are estimated at 0.98 and 0.99, respectively. It means that a R1-increase in transfer payments and revenue expenditure will lead to an increase of a little less than R1 in the GDP. If such fiscal multipliers hold true, then our arithmetic for FY15 shows that non-plan expenditure will rise by upwards of R10,000 crore/0.1% of the GDP (vis--vis FY14 estimates). Capital expenditure will rise by 28% over the FY14 estimates. Furthermore, these assumptions are consistent with a 12.5% growth in nominal GDP (5.5% GDP and 7% inflation) in FY15, a perfectly reasonable assumption.

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On the revenue side, going with a tax buoyancy of 1.12-1.15, we are factoring in a tax revenue growth of around 16.4%. However, the game changer in revenue mobilisation could be the disinvestment. Currently, 50 central Public Sector Enterprises (CPSEs) are listed on the stock exchanges and contribute about 16% of the total market capitalisation. Even a minor 5% disinvestment in the 10 CPSEs would net R54,000 crore for the exchequer. With the recent rally in equities, the valuation of government stake in PSUs listed for disinvestment has jumped by R12,000-15,000 crore. Thus, we can safely assume that government can mobilise close to R70,000 crore through this route this fiscal. But to be on the conservative side, we have factored in R60,000 crore. As far as non-tax revenue is concerned, we are factoring in a flat trend, as we believe there may not be a significant scope for revenue mobilisation in this fiscal.

Based on these revenue and expenditure trends, the fiscal deficit estimate for FY15 is projected at 4.42% of the GDP, an increase of around 0.32%or R35,869 croreover the interim budget estimates.

Now, to consider the second pointwhether this is sustainable. As per government estimates, the Centre is carrying forward a sizeable cash balance (R1,03,986 crore, or 0.8% of the GDP) into the next fiscal, a part of which may be used to enable the huge redemption of government papers without taking recourse in increased borrowings. This trend was evident in FY13 also, when the government carried forward a cash balance to the tune of 0.3% of the GDP. Thus, we can have a higher deficit number without disturbing the borrowing estimates, pegged at less than R6 lakh crore in the budget!

Let me end with a solitary wish for the forthcoming budget. As evident from our discussion here, The government can effectively use 0.8% of its cash balance to finance the possibility of a bulge of 0.3% (as per our estimates) in the fiscal deficit as well as some tax concessions for the middle class. Effectively, one of this may imply doubling the limit on 80C from the current R1 lakh, which is exactly equivalent to 0.2%. This will boost financial savings, for sure. The good thing is that even after such concessions and increased expenditure, the government may still have a sizeable carry-forward of cash balance into FY16. A nice fiscal maths, isnt it

Sumit Jain contributed to this article

The author is chief economic advisor, State Bank of India.Views are personal