Provisional accounts for 2001-02 show further slippage in tax revenues, and thus on the fiscal front. To recap, the shortfall in gross tax revenues between the budget estimates (BE) for the year and the revised ones (RE) was Rs 29,956 crore. After allocation to states, the centre?s share was short by Rs 20,683 crore or 12.7 per cent. The provisional accounts indicate that the centre?s net tax revenue collections were Rs 9,063 crore less than the RE figures ? a total shortfall of Rs 29,746 crore or a whopping 18.2 per cent from BE.
In fact, tax collections in 2001-02 were lower in absolute terms compared to 2000-01. Despite some shuffling on the expenditure front and considerable savings in interest outgo, the fiscal deficit as a percentage of GDP has jumped from 4.7 (BE) to 5.3 (RE) and now to over 5.9 in the provisional accounts. In 2000-01, final accounts showed further slippage and the audited fiscal deficit was Rs 4,447 crore more than provisional. Thus there is an even chance that the actual fiscal deficit of the central government for 2001-02 was as high as 6.1 per cent of GDP.
But this is hardly a surprise with the kind of tax revenue shortfalls that we have had. The budgeting exercise both, at the centre and in the states, is always coloured by the experience of the past. In the eighties with high inflation, an undervalued currency and murderous import tariffs, tax growth averaged 16 per cent per annum, powered by customs duties, which grew by 21 per cent annually. In the nineties, as inflation dropped, so did nominal GDP growth and the growth rate of tax collections fell to 13 per cent.
The elasticity of tax collection with respect to nominal GDP, for the eighties, was 1.12, with indirect taxes at 1.15 and direct taxes at 0.99. In the nineties, overall tax elasticity fell to 0.88, while that for direct taxes improved significantly to 1.19, and for indirect taxes fell to 0.75. With lower import tariffs, this was only to be expected, but the fact is that the worsening elasticity is true for union excise duties as well.
One can say that the present fiscal difficulties of the centre have been due to the mandarins being unable to adjust establishment expenses in line with the trend in tax revenues. But, in fact, despite the excesses of the 5th Pay Commission and the general inflexibility of establishment expenses, non-interest revenue expenditures have actually trended down. The elasticity (again with respect to nominal GDP) of non-interest revenue expenditure in the eighties was as high as 1.24; this dropped to 0.89 in the nineties. With a mounting volume of debt, and market pricing of this debt, higher interest outgoes have made for overall revenue expenditure elasticity being 0.95.
We know that things are possibly worse in the states. The combined fiscal deficit of the centre and the states is close to 11 per cent of GDP. Then there are the cash losses of the state electricity boards, funded from all kinds of sources. In the past few years an attempt has been made to introduce fiscal discipline at all levels, towards which in December 2001, the government moved a Budget Management and Fiscal Responsibility Bill. The hiatus in tax revenue collections in the last two years has made the task of adjustment that much more difficult. Without serious re-structuring of the outstanding stock of government debt through deeper privatisation, and in its pattern of expenditure, little progress can be made in climbing out of this hole.
It should become clear that revenue buoyancy will not, and cannot, wash away the fiscal problems, no matter how many beauty parlours pay service tax. The possibility of war has filled the atmosphere with palpable tension. Business conditions were showing some signs of improvement in January and February this year. The war tension and the killings in Gujarat have nipped that revival in the bud. If conditions do not improve, which they won?t as long as war hangs heavy in the air, tax collections are unlikely to pick up, while expenditures surely will, and the fiscal front will be the first to give.
(Saumitra Chaudhuri is economic advisor to ICRA (Investment Information and Credit Rating Agency) and editor of Money and Finance, the ICRA bulletin)