Column: The cash balance cushion

Jul 02 2014, 00:38 IST
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SummaryThe government can use its cash balance to finance a bulge in the fiscal deficit and boost savings

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-à-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

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