The deterioration of the fiscal position of states, as indicated by the reappearance of revenue deficits for the first time in 5 years in the RBI study on state budgets for 2009-10, and the doubling of states? fiscal deficit to 3.2% of the GDP over the last 3 years, has once again pushed the consolidated fiscal deficit of the Centre and states to new historical highs. Though the central budget estimates for 2009-10 put the fiscal deficit at 6.8% of GDP, real deficit would be much higher if one were to add off-budget borrowings like oil and fertiliser bonds and the burden on oil-producing companies, which would together cost around Rs 1,20,000 crore and market stabilisation bonds, where outstanding balance averaged around Rs 30,000 crore in the first 9 months of the year. This will push up total off-budget borrowings to Rs 1,50,000 crore or roughly 2.6% of GDP, taking the real consolidated deficit of the Centre and states to 12.6%, far higher than the previous peak of 9.9% registered at the start of the last decade.
Such high fiscal deficits have serious implications for the availability of credit so essential for bolstering growth. Figures for the fiscal until end-January 2010 show that net bank credit to the government was Rs 2,71,711 crore, which exceeded the Rs 2,68,101 crore of bank credit availed of by the entire commercial sector. This is in sharp contrast to the trends 2 years ago in the corresponding period of 2007-08, much before the recession, when net bank credit to government was about one-tenth of the credit availed of by the commercial sector.
Improving the flows of bank credit to meet the needs of the growing private sector in a fast-recovering economy requires a sharp cut in the central fiscal deficit and reduction of government borrowings. But this is a tough act given the UPA?s penchant for providing generous allocations to social sectors and the rural economy.
One relief for the FM is that the government has almost fully paid out all arrears relating to the pay commission award and also the debt relief on bank loans. The return to normal spending in these cases would help in arresting growth of spending and curbing deficits. Another major gain would accrue from the decision to raise fertiliser prices and shift to nutrient-based pricing for fertilisers. Food subsidies are unlikely to move in tandem, as the need for building up stocks and greater demand would only add to costs. The only possible option is to ensure proper targeting of subsidies and stop leakages. Bold measures on this front will help bring down fiscal deficit by at least 25 basis points.
But a curb on big-ticket spenders is only one side of the story, as there are also going to be additional demands from other ministries. For instance, improvement in the growth prospects and tardy implementation of the PPPs would require larger government spending in areas like energy and infrastructure. Demands made by the railway minister, who requires huge funds to meet the targets set in the Vision 2020 document, is one such example. The states would also have to be motivated to take up more reforms with larger financial incentives. The Centre would also be additionally burdened with programmes related to the right to education and food security to which it has already committed.
So, the overall impact of the rationalisation on the spending side is likely to be marginal. And the historical experience of the last two decades also shows that efforts for improved fiscal management have largely focused on boosting revenues rather than on expenditure cuts. Even the feeble efforts made on the spending side have largely attempted to cut down on capital spending rather than revenue allocations.
But mobilising additional resources is a distant dream with the recovery still in an incipient stage. And the tardy approach to the introduction of the goods and services tax rules out any immediate use of the only significant option for improving the tax mobilisation efforts. In fact, there is even a downside risk as any recommendation to increase the states? share of tax revenues by the 13th Finance Commission could dent the central revenues.
One option that the government has already committed to is raising resources by listing profitable central government enterprises, which can be even treble the Rs 20,000 crore that is expected to be raised in the current fiscal year. This, and a successful auction of the 3G licences, would help mop up around Rs 1,00,000 crore. A rollback of the tax cuts in stages, if not in one go, can also help boost revenue prospects.
But the best avenue for raising revenues in the short run is to reduce tax exemptions that distort resource allocations and cause inefficiencies. Most recent estimates show that total tax exemptions or revenues forgone amounted to Rs 4,18,095 crore in 2008-09, which is about two-thirds of the total tax collection in the year. The major part of this was from excise and customs duties and a radical pruning here would be helpful as the GST, which would replace these taxes, is unlikely to provide for any exemptions and a gradual reduction would be less hurting.
p.raghavan@expressindia.com