At the end of every month, the Controller General of Accounts (CGA), a part of the finance ministry puts out the fiscal deficit data. Fiscal deficit is the difference between what a government earns and what it spends.
The latest data put out by CGA on December 31, 2013, throws up some very interesting numbers. For the period April to November 2013, the government of India earned Rs 5,11,638 crore. During the same period it spent Rs 10,21,195 crore. This meant that it ran a fiscal deficit of Rs 5,09,557 crore.
Thus, the fiscal deficit for the first eight months of the financial year 2013-2014 (i.e. the period between April 1, 2013 and March 31, 2014) was nearly 99.6% (Rs 5,09,557 crore expressed as a % of Rs 5,11, 638 crore) of the total income of the government. In simple English, what this means is that the Congress led UPA government spent twice of what it earned, during the period.
As Franklin Roosevelt, the President of America between 1933 and 1945, put it, “Any government, like any family, can, for a year, spend a little more than it earns. But you know and I know that a continuation of that habit means the poorhouse.”
Of course, the Congress led UPA government clearly does not think so. The fiscal deficit target set at the beginning of the financial year was Rs 5,42,999 crore. During the period April to November 2013, the fiscal deficit, as mentioned earlier stood at Rs 5,09,557 crore. This works out to be at 93.9% of the annual target.
The average fiscal deficit for the first eight months of the financial year between 1997-1998 and 2012-2013, the data for which is available online, was at 72.37% of the annual target. This clearly tells us that the fiscal deficit number this year is an anomaly. It is much higher than it usually is. The fiscal deficit for the first eight months of 2012-2013 had stood at 80.4% of the annual target. The only year since 1997-98, when the fiscal deficit during the first eight months has been higher than the current year was 2008-2009. During that year, the number had stood at 132.4% of the annual target.
As we know 2008-2009 (or the period between April 1, 2008 and March 31, 2009) was the financial year before the Lok Sabha elections which happened during April-May 2009. The Congress led UPA government had gone a spending spree in order to woo the voters. This had reflected in the fiscal deficit, which came in at Rs 3,36,992 crore. This was much higher than the target of Rs 1,33,287 crore.
The finance minister P Chidambaram has said time and again that that the government won’t cross the red line on the fiscal deficit. “There can be no compromise … on the decision to walk on the path of fiscal prudence and contain the fiscal deficit,” the finance minister had said on December 11, 2013.
The latest set of numbers make it clear that Chidambaram will have a tough time ensuring that the government does not cross the red line.
What is interesting is that the between April and November 2013, the government spent Rs 10,21,195 crore. The annual target on the expenditure front is Rs 16,65,297 crore. Given this, the government plans to spend Rs 6,44,102 crore in the period of December 2013 and March 31, 2014. The question is where is this money going to come from?
Things look to be slow on the tax collection front. During the period April to November 2013, the government has managed to collect around 44.8% of its annual target. During the same period last year the number was at 47.9% of the annual target.
The average tax collected for the first eight months of the financial year between 1997-1998 and 2012-2013, the data for which is available online, was at 48.92% of the annual target. This clearly tells us that the tax collections have been slow this year. Also, the only year since 1997-98, when the tax collections during the first eight months have been lower than the current year was 2001-2002. During that year, the number had stood at 40.8% of the annual target.
Given these reasons, the only way the government can hope to meet its fiscal deficit target is by essentially postponing the recognition of expenditure. What this means is that even though the expenditure will be incurred it will not be accounted for during this financial year. As a recent report in The Economic Times points out “The Centre is…not likely to pay any fertiliser and oil subsidy remaining for this year, amounting to nearly Rs 85,000 crore, which would also then get pushed to next fiscal.” This will be a huge headache for the next government.
Over and above this, the government is likely to go slow on tax refunds. “Going slow on refunds will help inflate collections,” The Economic Times report quoted earlier points out.
Before the 2008-2009 Lok Sabha election, the Congress led UPA government went on a spending spree. This led to the fiscal deficit more than doubling from a target of around 2.5% of GDP to an actual of 6% of the GDP.
The temptation might be to repeat that exercise before the 2014 Lok Sabha elections. But the government doesn’t have that have the same kind of flexibility that it had in 2008-2009 because the fiscal deficit target is already high at 4.8% of GDP, unless, of course, it chooses to take the country towards economic disaster.
Funnier things have happened whenever bad politics has triumphed over good economics.
The article originally appeared on www.firstpost.com on January 2, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)