Make primary deficit the primary concern

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: The finance minister P Chidam-baram is not given to bashfulness. So what explains his ‘guarded’ growth projection of 7% for the year, at a time when the economy has clocked 8.1% for the first half and, to all outward appearances, things couldn’t be better?

For answers, turn to the chapter on the Centre’s fin-ances in the Mid-Year Review of the economy presented by his ministry last Friday. More precisely to the admission that the government has fallen short of all the mid-year targets prescribed under the Fiscal Responsibility and Budget Management (FRBM) rules. Gross fiscal deficit (GFD) of Rs 83,843 crore at the end of the first half-year was higher, both in absolute as well as percentage terms, relative to the budget estimate (BE) compared to the previous year.

Far more damning, the primary deficit at Rs 29,903 crore for the first half-year is well in excess of the amount projected for the year as whole (Rs 17,199 crore). The report, however, is silent on this, though there is a long and rather convoluted paragraph on the bunching of expenditure and revenue flows, suggesting in an oblique way that the slippage in mid-year targets does not mean the position will not improve by year-end.

It is certainly true government expenditure and revenue flows do not have a linear trajectory over the fiscal year. But what is no less deniable is that the primary deficit, which is the fiscal deficit less interest payments (that may be regarded as a baggage of the past), is the true reflection of any government’s fiscal performance. And the fact that it has actually turned from a surplus of Rs 2,164 crore in 2004-05 to a deficit of Rs 29,903 crore in 2005-06 can hardly be edifying for an FM who sets so much store by fiscal prudence.

Inevitably, the government has failed all three tests stipulated under the FRBM. Thus, non-debt receipts are only 35% of BE as against the minimum of 40% stipulated under the Act, while the fiscal deficit and revenue deficit are higher at 55.5% and 68.3% of BE, respectively, as against the 45% laid down for both.