Vivek Kaul
On September 30, the Controller General of Accounts (CGA), a part of the ministry of finance, announced the fiscal deficit for the first five months of the financial year (April to August 2013). Fiscal deficit is the difference between what a government earns and what it spends.
The fiscal deficit during April-August 2013 stood at Rs 404,651 crore. The annual target for the fiscal deficit is Rs 542,499 crore, or 4.8% of the gross domestic product (GDP). This means that the government has already reached 74.6% of the annual fiscal deficit target during April-August 2013.
This is clearly something to be worried about as chances of the government not meeting its fiscal deficit target and hence, India facing a sovereign downgrade to “junk” status, are very high. But finance minister P Chidambaram dismissed any worries. “The 74.6% number is irrelevant. We deliberately front-loaded our planned expenditure,” he told reporters on Tuesday evening.
Hence, what Chidambaram was saying was that the government is spending more in the first half of the year than the second half and this had bloated the fiscal deficit. The only trouble with this argument is that numbers released by CGA tell a completely different story.
Lets look at planned expenditure first. Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. Chidambaram wants us to believe that the government has front loaded the planned expenditure and hence, the fiscal deficit for the first five months is at 74.6% of the annual target.
The total planned expenditure for the first five months stood at Rs 1,83,091 crore or around 33% of the Rs 5,55,322 crore to be spent during the course of the year.
If the government divides the annual targeted expenditure to be spent equally every month, then it is likely to spend 8.33% (100/12) of the total annual target every month. Over five months this would mean spending 41.65% (8.33 x 5) of the total annual expenditure.
In comparison the government has spent only 33% of the total targeted planned expenditure during the first five months. So how is this expenditure front loaded? For the expenditure to have been front loaded, it should have been greater than 41.65% of the total targeted expenditure. But that is clearly not the case.
What this means is that Chidambaram was not telling us the truth. To give Chidambaram the benefit of doubt, lets also look at non-plan expenditure and see if that has been front loaded. Non- plan expenditure is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a planned expenditure. But the money that goes towards the maintenance of that highway is non-planned expenditure. Interest payments, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.
The total non-planned expenditure for the first five months stood at Rs 4,79,845 crore or around 43.2% of the Rs 1,109,975 crore to be spent during the course of the year. Hence, the non planned expenditure is a little higher than the cut off 41.65% arrived at earlier. But the difference is not so significant to call it front-loaded.
So what is happening here? What Chidambaram forgot to tell the reporters is that the government has not been able to collect enough taxes till date. The total tax collected by the government in the first five months was at Rs 1,83,686 crore. This is nearly 20.8% of the annual target. What is worrying is that taxes collected have grown by only 4.9% during the first five months in comparison to the same period last year. As Sonal Varma of Nomura points out in a note dated September 30, 2013, “Fiscal year to date (FYTD), net tax revenue growth was muted at 4.9% year on year (versus the budget target of 19.3% year on year) due to weak indirect tax collections (excise, services, customs), while government expenditure rose 17.3% year on year FYTD, within the budget target of 18.2% year on year.”
Indirect tax collections have slowed down primarily on account of a slowdown in economic growth. In fact, when one looks at past data, the fiscal deficit number should have Chidambaram very worried.
For a period of 16 years since 1998-1999 (for which the data is publicly available on the CGA website), the average fiscal deficit for the first five months of the financial year stands at 54.2% of the annual target. In the period the Congress led UPA government has been in power (i.e. since 2004-2005), the average fiscal deficit for the first five months of the financial year has been 60.4% of the annual target. Last year it was 65.7% of the annual target.
Hence, 74.6% is not a small number, despite the spin Chidambaram tried to give it. What this means is that the government will have to start cutting its expenditure big time if it has to get anywhere near the targeted fiscal deficit of 4.8% of the GDP. In short, there is trouble ahead.
A slightly different version of the article appeared in the Daily News and Analysis (DNA) dated October 4, 2013
(Vivek Kaul is the author of the soon to be published Easy Money. He tweets @kaul_vivek)