P. Chidambaram: Cut in spending, higher dividends save the day

Written by fe Bureau | Updated: Feb 18 2014, 19:09pm hrs
Helped by savings of Rs 75,000 crore (5%) in expenditure and Rs 21,000 crore (12%) additional non-tax revenue flows, finance minister P. Chidambaram managed to reduce the fiscal deficit to 4.6% of the GDP for FY14.

The deficit was reduced to a level below the targeted 4.8% despite a shortfall of Rs 48,000 crore in the Centre's tax revenue and a 45% shortfall in non-debt capital receipts at Rs 36,643 crore.

Although the revenue deficit target of 3.3% of the GDP is met, the effective revenue deficit, difference between revenue deficit and grants for creation of capital assets, has widened to 2.2% as against the budgeted 1.8%.

Assuming a 13.4% nominal GDP growth for FY15, Chidambaram projected the fiscal deficit for the year at 4.1%, better than 4.2% envisaged in a fiscal consolidation road map.

His tax projections 18% growth despite a slippage of Rs 48,000 crore this year clearly looked ambitious. Unless the next government manages to realise the huge tax demands on MNCs like Vodafone, the tax collection target would be difficult to meet. The tax department 's increased efficiency in boosting collections could help revenue, but it is unlikely to be enough to meet collection targets.

The interim budget targets 18% growth in the Centre's net tax receipts to R9.86 lakh crore and expenditure growth of 10.9% to Rs 17.63 lakh crore.

Non-tax revenues, that includes dividend and profits from PSUs and spectrum proceeds, are estimated to fall by 6.5% to Rs 1.8 lakh crore in 2014-15. Even though the disinvestment target for this year has been missed by a wide margin, Chidambaram expects a 120% rise in the receipts from PSU stake sales at Rs 56,925 crore for next year, compared to the revised estimate of Rs 25,841 crore for this year. To achieve this, the government would need to weather a political storm and start disinvesting PSUs in which its stake is already 51%. Non-debt capital receipts can be boosted through monetisation of huge land assets with the defence department, railways and port trusts.

A worrying factor is the relentless increase in interest payments. Chidambaram admitted that bulk of the fiscal deficit is due to interest payments which have gone up significantly due to rising market borrowing and rise in interest rates. Interest payments is estimated to rise by 12.35% to Rs 4.27 lakh crore in FY15 from this year's revised estimate of Rs 3.8 lakh crore (budget estimate Rs 3.7 lakh crore).

As percentage of total expenditure, interest payments have risen from 19.5% in FY11 to the budgeted 24.2% in FY15. The revenue loss due to excise cuts for automobiles, consumer durables and capital goods, Chidambaram said, won't be much if these tax reductions lead to increase in consumption and sales volumes.

On the expenditure front, capital expenditure for FY14 has seen a 16% reduction as against the budgeted Rs 2.29 lakh crore. This doesn't augur well for the economy. In the last three years, the budgeted capital spending numbers of the government have seen significant downward revisions. The revenue expenditure, which is much bigger in size, has also witnessed some savings with the revised estimate for this year being Rs 13.99 lakh crore as against R14.36 lakh crore budgeted.

It seems the likely savings on the fuel subsidy front, if the new government sticks to the current pricing reform, could be nullified by the additional outgo on account of food subsidies.

The government estimates the food subsidy bill at Rs 1.15 lakh crore for FY15, compared to a revised estimate of R92,000 crore for this year while fuel subsidy would be R65,000 crore (Rs 85,480 crore) and fertiliser subsidy Rs 67,970 crore (R67,971 crore). A significant amount of fuel and fertiliser subsidy claims for FY14 would be rolled over to next fiscal.

With a target to lower fiscal deficit to 4.1% in 2014-15 from a revised estimate of 4.6% of 2013-14, the government has set the net borrowing target lower at Rs 4.07 lakh crore next year compared to Rs 4.23 lakh crore this year. That's hardly a relief for the bond market as the gross borrowing is estimated to rise to Rs 5.97 lakh crore next year from Rs 5.64 lakh crore this year, considering heavy redemption bonds that matures next fiscal year.