Over the past five years, the central government?s finances have deteriorated markedly. Were it not for the slashing of capital expenditure by 18% over the budgeted amount, the fiscal deficit this year would have been 5.6% of GDP rather than the 5.2% that the FM has delivered for 2012-13.
It is indeed rare that deficit targets are met in a year when growth slips sharply. The year 2012-13 is an outlier since the fiscal deficit target of 5.1% of GDP was almost achieved despite GDP growth slipping to 5% against a Budget assumption of 7.6%. This was achieved through a tight rein on expenditure, especially capital expenditure. We must give credit to the FM for initiating bold steps like fuel subsidy cuts, which will not only structurally bring down expenditure, but will also help rationalise its usage. However, to achieve the deficit target, the government?s productive expenditure too was cut sharply.
There is a broad consensus that fiscal consolidation is critical for high and sustainable growth. Recent developments also suggest that a determined policy can indeed turn around the fiscal situation. Can this Budget deliver what it promises?to bring down the fiscal deficit further to below 5% of GDP for the first time in six years?
To lower the fiscal deficit, the finance minister is betting on revenue growth of 23.4% along with expenditure growth of 16.4% compared to the revised estimates for the current year. Our calculations show a fiscal deficit at 5% of GDP against the Budget target of 4.8% for 2013-14.
This marginal fiscal slippage arises largely because we believe the disinvestment and spectrum auction targets are too ambitious. In addition, it will be a challenge for the government to prevent a slippage in the budgeted estimate of expenditure.
Up to 2007-08, fiscal consolidation was aided by strong revenue growth backed by high GDP growth. In four of the past five years, including the current fiscal year, however, the central government?s revenue collection has been lower than the budgeted revenue. Unless the government raises more revenue on a sustained basis by improving the tax base, and not merely by imposing a surcharge on direct tax payments by the rich for a year as proposed in the Budget, its ability to fund and sustain capital expenditure over the coming years will be hampered.
If India is to experience sustainable growth and achieve the fiscal deficit target of 3% of GDP by 2016-17, fiscal policy will have to focus on three R?s?restrain spending, re-orient expenditure, and raise revenues. The ratio of capital expenditure to revenue expenditure fell to 13.3% in 2012-13 from 20% in 2007-08. This year?s Budget makes an attempt to focus on capital expenditure with the ratio of capital to revenue expenditure rising to 16%. In addition, the Budget has also tried to create a favourable environment for private investment and infrastructure by constituting a Cabinet Committee on Investment and announcing a 15% tax deduction on investment allowance. Further, the Budget also provides a subsidies roadmap and spells out the target of lowering subsidies as a share of GDP to 1.6% in 2014-15 from 2.6% in 2012-13.
India?s fiscal consolidation efforts require a commitment to effective fiscal management?for restraining government spending, re-orienting it towards productivity purposes, and improving revenue generation. And doing so will boost India?s medium-term growth prospects.