Budget 2011: Is the fiscal deficit realistic?
The bottom line in the Budget is the fiscal deficit. It reflects to what extent the Finance Minister will draw on private savings to fund current and capital expenditures.
The part that is used to fund revenue deficit is the erosion of savings and increase in government consumption. In any case, the higher the deficit, the more the crowding out of the bond market, less funds for the corporates and higher consequently inflation and interest rates.
Against all odds, the Finance Minister has managed to bring down the fiscal deficit by a whopping 0.5%. Partly it is because he expects tax revenues to rise faster and partly because he expects the expenditures to rise slowly.
Surely, more money will come in because of the high buoyancy in tax revenues. In the current year they will be up 29% against the budget provision of 19%. This additional revenue came in not because of under-estimation of GDP growth but because of underestimation of inflation.
If the projected buoyancy in revenues is to continue, both growth and inflation have to be higher. The budget expects GDP in 2011-12 to be up 9%, and inflation to be at 5%.
Even that would not bring the deficit down to 4.6%. It would also require that the buoyancy in tax revenues must increase with the ratio of tax revenues to GDP going up from 10% to 10.4%. If that ratio remains the same fiscal deficit will climb to 5%.
There are reasons why buoyancy may not rise. Nearly 35% of the gross tax revenue comes from the corporate sector. Lately, the earnings of companies have been shrinking which is why the market got a severe knock. If the performance of the corporate sector does not improve, tax buoyancy will not rise.
The other half of the story is even greater suspect. The budget provides for an increase in expenditure by a mere 3.3%.In the current year expenditures have been up 18.7%.
The whole of the increase in expenditure in FY12 is on Plan account. Non-Plan expenditure is actually expected to shrink.
Of the non-Plan expenditure, provision for subsidies next year has been slashed by Rs. 20,583 crores partly because of the decline in petroleum subsidy following deregulation of petroleum prices.
There is no food subsidy is spite of the recommendations of National Advisory Council. Subsidies are only one part of the expenditure cuts. There are even bigger cuts on economic (agriculture, industry, power etc) and social (education, health etc) services by Rs. 27,873 crores.
The expected increase in buoyancy and the expected cuts in expenditure enabled the Finance Minister to bring down the fiscal deficit to an unbelievable 4.6%. If the increase in buoyancy does not come through the fiscal deficit will jump to 5% and if the cuts in expenditure do not materialize the fiscal deficit will jump further to 5.5%.
There are risks.
In the current year 3G auctions came to the rescue. Next year there may not be any unexpected bounties.