There appears, by now, little doubt the finance minister will achieve his target of staying within his fiscal deficit red line of 4.8% of GDP and, most likely, will project a 4.2% FY15 target. Apart from the number being largely symbolic as today’s exercise is really just a vote-on-account, there is the larger question of the quality of the deficit. It is true, of course, that we would have been in a greater soup if the deficit target had been breached as this would have triggered a ratings downgrade, but a Rs 60,000-70,000 crore shortfall in tax collections reinforces the view that the budget was unduly aggressive since it was always clear FY14 economic growth was going to remain sluggish—the tax growth projected wasn’t much higher than FY13’s, but FY13 saw a 20 percentage point hike in service and excise duty rates. Obviously, despite the talk of the taxman being non-arbitrary, finance ministry calculations factored in netting in serious money from companies like Vodafone that were caught in the retrospective taxation net.
The problem, however, goes beyond the huge fall in tax collections and the consequent sharp slowing in expenditure. Indeed, had the IMF reform taken place and the government forced to shell out Rs 14,000 crore, matters could have been worse; on the positive side, the telecom auctions fetched a lot more than the government expected, though the impact on the country’s telcos is a different matter. The real problem lies in the fact that the government buckled under the pressure from Coal India’s unions completely—not only did it not realise the Rs 18,000 crore or so it was looking at getting from selling a 10% stake in the PSU, it didn’t even push the opening up of the coal sector, one of the budget promises that gave a sense of reforms still being on track. Despite the talk of more clarity on revenue-sharing in the petroleum sector, this remains mired in confusion with the Kelkar committee taking the opposite view the Rangarajan one did. And the next government inherits the burden of implementing the Food Security Act that the CACP estimates could alone cost around 1.5% of GDP. The deficit also looks smaller since expenditure worth around 1% of GDP has simply been rolled over. True fiscal consolidation will require genuine cutting of subsidies with proper usage of Aadhaar-based cash transfers.