The Union finance ministry appears not particularly discommoded by the trajectory of its finances this year despite the near certainty of shortfalls in disinvestment. Key to this is the strong growth in tax collections this year. In the first half (April to September), collections net to the Centre (after devolution to states) were up 27 per cent. Will this sustain through the year?
Well, the highest year-on-year increase in net tax receipts of the Centre was 26 per cent in 1994-95, followed by 23 per cent in 1999-2000. The expansion this year comes on top of a small decline of 3 per cent last year, similar to 1994-95. Although growth in tax collections fell in October, the year is likely to end with net tax receipts not far short of the budgeted Rs 1,72,965 crore.
In the first half of this year, capex (capital expenditure plus net lending) rose by less than 4 per cent, compared to the 15 per cent increase envisaged in the budget (though it might pick up in the second half). However, revex (revenue expenditure) rose by 13.5 per cent, only marginally less than budgeted. And in continuation of a trend that has become established since 1999-2000, non-interest revex grew faster than total revex. Thus, first, the deterioration in the structure of expenditure continues apace. In the mid-nineties, capex was 29 per cent of non-interest revex; in the first half of this year this proportion had fallen to 14 per cent.
Second, the space created by lower interest rates, instead of helping to lower the revenue deficit, has been more than occupied by increase in non-interest revenue items. In consequence, in the first half of this year, the revenue deficit increased by 9 per cent as against a small budgeted reduction. Third, despite the compression of capex, the gross financing gap increased by Rs 13,000 crore over last year while the fiscal deficit (after disinvestment proceeds) has stayed on course.
That is the inevitable consequence when the unpleasant tasks attendant on positive expenditure restructuring are avoided. The most aggressive components of expenditure reside within the powerful establishment. The benefits of lower interest rates and privatisation proceeds tumble into a gap-filling role, as the aggressive items eat up all of the slack, and one ends up with negative expenditure restructuring.
Considerable hope is being placed on raising tax revenues. However, caution should temper such expectations. Only in the three-year period 1994-95 to 1996-97 when the economy grew by over 7 per cent, did tax collections show consistently high annual growth averaging 20 per cent. Since then, we had two bad years, followed by one good one (1999-2000), succeeded once again by two bad years, and then a good one this year. The odds are heavily tilted towards a repetition in the immediate future. While non-interest revex always marches ahead at double-digit growth.
The finance ministry seems to be unveiling a new initiative for fiscal consolidation. Simplification of the tax regime is always positive for it improves the environment for expansion of economic activities. However, if fiscal consolidation is to be achieved in the medium term, the widening imbalance in the structure and pace of expenditure expansion has to be frontally addressed. Subsidies are 16 per cent of non-interest revex, a proportion that has remained unchanged since the mid-1990s. That is surely one, albeit politically difficult, area to seek economy. But it would still leave the other 84 per cent intact and raring to go.
There is very much missing in India, in terms of what modern governments are expected to provide to citizens ? universal school education, broad public health coverage, a measure of social security for the aged, and of course physical infrastructure. All of which needs fiscal resources aplenty. Added to this is the financial stress on state government finances. The need to bring discipline and a longer-term outlook on establishment expenses, to free up resources and significantly moderate the consolidated fiscal deficit from 12 per cent of gross domestic product, grows ever more urgent. A far-sighted response to which will hopefully underpin the fiscal initiatives that are expected in the next month or so.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)