Inflation gives govt fiscal deficit buffer

Written by Sunny Verma | New Delhi, Aug 26 | Updated: Aug 27 2008, 07:27am hrs
Even as industry captains voiced concerns over high interest rates and slackening consumer demand at a meeting with finance minister P Chidambaram on Tuesday, they were told by the minister to continue with their investment plans, as the India growth story is intact. Though inflation is running at a 16-year high and Indias fiscal outlook is under scrutiny by global rating agencies, there is good reason for Chidambarams confidence.

Devoid of the political rhetoric, high inflation is proving to be a blessing in disguise for the exchequer. Rising prices, which push up the nominal GDP, also result in higher tax collections. So, even as concerns mount over the impact of the farm loan waiver and civil servant salary hikes on the fiscal deficit, the government expects the higher revenue to give it sufficient headroom to keep the deficit within 2008-09 Budget estimates.

With rising inflation, collections from value-added tax (VAT) will be higher than estimated this fiscal, while direct tax revenues will also increase due to the higher nominal GDP, said a senior finance ministry official. The fiscal deficit for this fiscal is estimated at Rs 133,287 crore, or 2.5% of GDP. Under the Fiscal Responsibility & Budget Management Act, the government needs to pare the deficit to 3% of GDP by 2009.

What is also expected to help the Centre is non-tax revenue from the auction of 3G spectrum to telecom companies, as well as PSU divestment proceeds, both of which have not been budgeted for. At least Rs 40,000 crore is expected accrue from the spectrum auction, which is expected to take place soon after guidelines are finalised in September. With the exit of Left parties from the ruling alliance, the Centre is also likely to list PSUs whose stake sales have already been approved. This is expected to fetch Rs 10,165 crore.

Another source of enhanced revenue is the dividend payout by Reserve Bank of India (RBI). On August 14, RBIs central board approved the transfer of Rs 15,011 crore in surplus profit to the government for the year ended June 30, 2008, up over 30% from last years Rs 11,411.00 crore.

On the direct tax front, growth has been a robust 46.95% in April-July 2008, higher than the 28% growth seen last year. In June, the Central Board of Direct Taxes revised its collection target for 2008-09 to Rs 3.95 lakh crore from the original Budget estimate of Rs 3.65 lakh crore.

Although the government has been fighting a desperate battle to tame inflation, officials reckon that the price rise is one of the main contributors to robust tax collections. The ministry expects inflation, which hit 12.63% for the week ended August 9, to rise further until December, and then decline sharply by March.

VAT collections are expected to increase due to rising input and output prices. Since the price of manufactured goods has been rising faster than that of primary commodities, proceeds from VAT net of refunds are expected to rise.

A government functionary said expenses on account of the loan waiver and salary hike for 54 lakh government employees were anticipated unknowns, which would be met from the increased revenues. Headroom in the fiscal deficit target is enough to take care of the Sixth Pay Commission award, he said. The salary hikes will cost Rs 22,100 crore this fiscal, while the cost of the farm loans to be waived in three instalments is estimated at Rs 71,680 crore.

After the Union Cabinet approved the proposal to hike salaries on August 14, Chidambaram asserted: The deficit targets for 2008-09 will be adhered to.