Tough to get the math right in 2014/15 interim budget
(Any opinions expressed here are those of the author and not of Thomson Reuters)
Finance Minister P. Chidambaram went more by economic considerations than political ones in manoeuvring his pre-election budget, the focus being on fiscal consolidation with an eye on rating agencies.
The 2014/15 interim budget did not have any new populist measures. The minister may have been convinced that such gimmicks just before elections do not yield votes. Also, there was hardly any time to effectively roll out a new scheme.
The long-term policy target Chidambaram had set himself was to reduce the budget deficit to 3 percent of GDP. This is necessary to bring about price stability, reduce government borrowing, prevent overcrowding in the market and leave more financial resources with the private sector for investment. Although the budget engineering was on these lines, the way deficit has been restrained would not amount to fiscal consolidation.
For the current year, the deficit has been reduced to 4.6 percent from the budgeted 4.8 percent. This was possible in spite of an excess 49 billion rupees of non-Plan expenditure, which admittedly was not much in a 15.9 trillion rupee budget.
What unbalanced the budget was the fall in tax revenue by 760 billion rupees. Anticipating the fall, the finance minister persuaded PSUs to distribute higher dividends, but was unable to bridge the huge revenue gap. Hence, Chidambaram had to go slow on Plan expenditure, which dropped by 790 billion rupees.
Fiscal consolidation is not just balancing the numbers. The drop in Plan expenditure caused a deep 1.9 percent cut of GDP in national investment and pulled down growth. Chidambaram is aware of this shortcoming and reversed his strategy for 2014/15. Plan expenditure was increased by 798 billion rupees with no increase in non-Plan expenditure. That brought down the projected fiscal deficit further to 4.1 percent.
Excellent budgeting? Well, there are questions. Will the projected non-Plan expenditure be restrained? More importantly, will the projected revenues materialize?
The projected fiscal deficit of 4.1 percent stands on the premise that tax revenues will soar by 2.2 trillion rupees (19 percent). Since anticipated GDP growth is 6 percent and inflation is likely to ease to 5 percent, the additional tax revenue can at best be 1.3 trillion rupees.
The shortfall alone in tax revenue can push the deficit to over 5 percent. The math behind budget 2014/15 is apparently too presumptive.