Fitting an excess of ends into limited means Union Budget 2005 takes off from where the previous one had left off. The framework of reference is meticulously political, needed, as there is no point in a policy architecture that does not address the political reality. Only that reform is truly useful which is capable of convincing the citizen that her interests are being look-ed after and, therefore, wins elections. The only good economic policy is the one that also makes excellent politics.
This year, taxes have grown by 20%, but has still left the exchequer short of that envisaged in the July 2004 Budget. Aggregate revenue expenditures have been kept at budgeted levels, the benefits of lower interest outgoes being offset by increases in other items. Like last year, there?s a large entry under NSSF in capital expenditure, due to prepayment by states of loans taken against small savings. This year?s entry amounts to Rs 32,665 crore, about Rs 10,000 crore less than last year. Adjusting for this, direct capital spending has been about Rs. 5,000 crore more than budgeted, but this has been offset by a reduction in loans.
Overall for 2004-05, the revised estimates indicate the shortfall in net tax receipts was Rs 8,000 crore, the primary cause of a slippage of Rs. 9,000 crore in the budgeted revenue deficit. After adding capital expenditure and net lending, the increase in the Centre?s gross financing gap was limited to Rs 2,000 crore, as with the fiscal deficit.
In the Budget for 2005-06, the emphasis on expenditure has been on areas where public needs are perhaps the most acute — education, health and extension of income/job opportunities. The Budget speech says the only way to bring immediate relief to the aam admi is to launch a direct assault on poverty and unemployment, while stoutly sticking to sound economics. Namely, that growth, stability and equity are mutually reinforcing. Now, the areas, which merit additional resources are mostly of a revenue nature, be it food-for-work, education or healthcare. Further, the Twelfth Finance Commission (TFC) has provided for additional grants and other transfers to the states, which the Budget speech places at Rs 26,000 crore in 2005-06. As a result, non-interest revenue expenditure in 2005-06 is budgeted to increase at a scorching 20%. Following from the TFC?s recommendations, the Budget has also brought into effect some changes in how the loan component of state plans will be funded. This has provided the Centre with some fiscal space, but it has been mostly consumed in 2005-06 by the larger calls on revenue expenditure.
The speech reiterates the imperative of fiscal prudence, given the high indebtedness of government and the magnitude of our unmet demands. Given the impact of the TFC recommendations in 2005-06, the finance minister chose to press the pause button vis-a-vis the FRBM. The revenue deficit is budgeted at 2.7% of GDP in 2005-06 and the fiscal deficit at 4.3%. This compares with 2.7% and 4.5% in the revised estimates for 2004-05, respectively. That is, the revenue deficit has been kept unchanged (instead of being dropped by 0.5%) and the fiscal deficit reduced by 0.2% (instead of 0.3%). However, the front-loading of deficit reduction targets in 2004-05 has now paid off. Revenue deficit in 2005-06, though unchanged at 2.7% of GDP, is a full 1.1% less than what it was in 2003-04; in a sense, next year?s slated reduction as realised in the current year.
The gross financing gap (fiscal deficit before disinvestment) was 5.1% of GDP in 2003-04. This has come down to 4.6% and is budgeted to further decline to 4.3% in 2005-06. Which gives substance to the minister?s confidence on resuming fiscal correction, as in the FRBM, is coming years. Finally, as the speech says, outlays do not necessarily mean outcomes and promises a mechanism to measure development outcomes. Making the available buck make a bigger bang is even more important than forever scrounging for more bucks!
The writer is economic advisor, Icra