Latest trends in government finances on both the revenue and the expenditure front are encouraging with revenues in line with estimates and expenditures below budgeted rates, thereby resulting in a marginal fiscal surplus in December. While, admittedly, there is some seasonality in the December tax numbers, the key factor responsible for the improvement in government finances is a larger-than-expected compression in expenditure. A continuation of trends since September now makes the government’s 5.3% deficit target seem more achievable. This is in contrast to trends a few months ago when expectations were of a deficit close to 5.9% levels. Key to watch in the next few weeks are (1) divestments—the new norms and pricing are making a difference, (2) telecom re-auction, (3) further expenditure compression, and (4) extent of subsidy deferral.
Upon a closer look at the numbers, one finds that government expenditure remained in check for the fourth consecutive month with spending in December down by 9% yoy. Cumulatively, during April-December, total expenditure was R9,911 billion, up 10.6% yoy and 67% of budget estimates. While the run-rate on expenses is below the budgeted rate of 13.1%, key points to note are: (1) the subsidy estimates in the budget have little provision for fuel subsidy for FY13, and (2) expenditure compression is largely due to plan expenditure, which is up 6.9% versus a targeted rate of 22.1%.
On the expenditure front, as non-Plan expenditure is largely ‘committed’ expenditure—i.e. spending on interest, wages, subsidies and defence, there is little room for manoeuvrability. Additionally, the current run rate of 12.2% is higher than the budgeted growth rate of 8.7%. Thus, apart from a bit of ‘tweaking’ on the non-Plan side, one could see a further compression of Plan expenditure to help enable the government meet its estimates. Key to note is that the finance ministry has directed ministries to cap spending in the January-March quarter to 33% of total funds allocated.
Moving on to subsidies, the government had pegged the total subsidy outlay at R1,900 billion. However, as is now well known, the FY13 outlay of R436 billion on fuel subsidies has been utilised to the tune of R385 billion as payment of FY12 dues. Given current oil prices, losses being made by oil companies are estimated at R1,670 billion. Similar to past trends, our base case assumes the governments share at 60% (i.e R1,000 billion) and a 50% deferral to FY14 (R500 billion). The deficit could be lower if the government changes the subsidy-sharing mechanism and/or defers a higher amount for FY14.
As regards revenues, while tax collections have picked up in the last quarter, on a cumulative basis, collections are well below budget estimates. We have factored in a slippage of R300 billion on tax collections as the budget estimates are based on real GDP growth of 7.6% whereas latest government data pegs growth at 5%. While tax collections are likely to come in below budget estimates, market-based revenue items, i.e. non-tax revenues as well as divestment proceeds, could come close to targets.
On divestments, including the recent success of OIL and NTPC, the government has raised about R230 billion of its R300 billion divestment target. The over-subscription of both PSUs was attributed to the modified ‘investor friendly’ divestment norms (i.e. 0% margin, indicative pricing throughout the day, and attractive terms). Continuation of this could enable the success of the other upcoming issuances, which will thus help the government to meet its targets.
As regards non-tax revenues, 2G spectrum telecom revenues raised so far are R94 billion versus an anticipated amount of R400 billion. The government has now lowered the price and scheduled the re-auction for March 11, 2013. If it is successful, the government could raise R100 billion and an additional R100 billion from excess spectrum charges. Another possibility on the non-tax revenue front is higher dividend pay-outs by PSUs.
Bottom line: The recent fuel price reforms, coupled with steps to contain expenses, bode well for the government’s commitment towards fiscal consolidation. However, key to note is that deficit ratios, which are calculated as a percentage of nominal GDP, could be impacted given the CSO’s advance GDP estimates of 5% for FY13. This puts the government’s 5.3% fiscal deficit target at risk but to a lesser extent than previously expected.
The author is chief economist at Citi India