Controller General of Accounts

Fiscal Deficit for First Four Months of 2016-2017 is Highest in Eight Years

At the end of every month the Controller General of Accounts (CGA) declares the fiscal deficit of the government, up until the previous month of the financial year. Fiscal deficit is the difference between what a government earns and what it spends.

Hence, as of August 31, 2016, the CGA declared the fiscal deficit number for the period April to July 2016. During the period the fiscal deficit of the central government was at Rs 3,93,487 crore. This was at 73.7 per cent of the annual target for the financial year and is the highest in eight years.

Fiscal deficit a percentage of annual target 

Take a look at the above chart. It shows the fiscal deficit as a percentage of the annual target, for the first four months of the financial year, over a period last twelve years. It is clear that only in July 2007 and July 2008, was the fiscal deficit as a percentage of the annual target, at a higher level in comparison to where it is at during the course of this financial year. The year 2008 was the year when the financial crisis started and the government tried to beat the impending slowdown by spending much more than it what normally did during the first four months of the year.

Another point that needs to be mentioned here is that expenditure of the government is front loaded whereas a major chunk of its revenues start to come in only in the second half of the year. Even with this disclaimer, the fiscal deficit for the first four months of this financial year is worrying, given that one of the biggest expenditure items of the year, the extra salaries and pensions that the government needs to pay to its current and former employees after accepting the recommendations of the Seventh Pay Commission, kicks in only from August 2016.

This higher fiscal deficit is also visible in the gross domestic product number for the first three months of the financial year (April to June 2016). One way of measuring the gross domestic product (GDP) is to calculate the total expenditure by adding the consumption expenditure, the government expenditure, investments and the net exports (exports minus imports).

For the three-month period between April to June 2016, the government expenditure went up by 18.8 per cent (in real terms). This helped the GDP grow by 7.1 per cent. Without this push from the government, the growth would have been much slower at 5.7 per cent, as per Nomura.

The trouble is that the government doesn’t have an unlimited amount of money and if it is spending money without earning it first, it’s bound to push up its fiscal deficit. A higher fiscal deficit comes with its own set of problems, from higher inflation to higher interest rates.

Further, if the government wants to achieve the fiscal deficit target of 3.5 per cent of the GDP, that it set at the time of presenting the budget, it will have to be a little more aggressive about raising its revenues.

Take the case of the disinvestment target for 2016-2017. It has been set at Rs 56,500 crore. The way it has worked in the previous years is that the government has waited all through the year for the stock market sentiment to improve. And then towards the end of the year, the Life Insurance Corporation of India, has been encouraged to buy what the government has had to sell.

In 2015-2016, of the disinvestment target of Rs 69,500 crore, only around Rs 25,312.6 crore was earned. Of this amount, a major chunk came from the Life Insurance Corporation of India. From the looks of it, something similar may happen this year as well. The Life Insurance Corporation picking up shares being sold by the government is hardly genuine disinvestment, with the money moving from one arm of the government to another.

It is worth pointing out here that timing the market by trying to sell when the stock market is peaking, is very difficult to achieve. And the same applies to the government as well. An ideal strategy would be sell the government stake in companies, little by little almost every month. This wait for the market to pick up is not the best way to operate. The moment any disinvestment of shares stops being an event, will be the day, this strategy will really take off.

Further, given its ambitions in the infrastructure sector, the Modi government needs to look at newer ways of raising revenue. One such way is by selling land. As the Economic Survey of 2015-2016 points out: “Most public sector firms occupy relatively large tracts of land in desirable locations. Parts of this land can be converted into land banks.”

These land banks can then be sold in order to raise revenues for the government. This money can go into a sort of an infrastructure fund which can be used to finance the ambitious plans of the government when it comes to roads and railways.

Of course, for this to happen, the reluctance of the bureaucrats to sell land has to be overcome. This reluctance, the Economic Survey comes in large part from the “the fear of ‘causing pecuniary gain’ to the other side.” And this fear will not be so easy to get rid of.

(The column originally appeared in Vivek Kaul’s Diary on September 6, 2016)

Nailed: Chidu's lie on the fiscal deficit

P-CHIDAMBARAM
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) 
 

More trouble for Chidu: Fiscal deficit hits 75% of target in first 5 months

P-CHIDAMBARAMVivek Kaul
The finance minister P Chidambaram has reiterated time and again that the government will adhere to the fiscal deficit target of Rs 5,42,499 crore or 4.8% of the GDP(gross domestic product) that it has set for itself. On September 5, 2013, he had said that the fiscal deficit target of 4.8% of GDP was a “red line and the red line will not be crossed.” Fiscal deficit is the difference between what a government earns and what it spends.
But the latest data released by the Controller General of Accounts (CGA) on September 30, 2013, shows that fiscal deficit has already reached 74.6%(or Rs 4,04,651 crore of the targeted Rs 5,42,499 crore) of the full year target, as on August 31, 2013. Hence, three fourth of the fiscal deficit target has been reached during the first five months of the financial year (i.e. the period between April 1, 2013 and August 31, 2013).
Now how does the situation look in comparison to the past data? 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.
During the period of 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.
In fact, only in 2008-2009 was the number greater than this year. As on August 31, 2008, the fiscal deficit for the first five months of the financial year had already reached 87.7% of the annual target. This was the year when the Congress led UPA government was getting ready for the Lok Sabha elections which happened in April-May 2009, and hence, had gone overboard on the spending front.
The fiscal deficit in 2008-2009 was estimated to be at Rs 1,33,287 crore or 2.5% of the GDP. It finally came in at Rs 3,36,992 crore or 6% of the GDP. The point being that when the Lok Sabha elections are scheduled to happen next year, the initial estimates of the fiscal deficit can be way off the mark. Lok Sabha elections are due in May 2014 as well. Before that there are several state assembly elections as well. So, it remains to be seen whether the Congress led UPA government sticks to the fiscal deficit target of 4.8% of the GDP or goes overboard with the expenditure as it did last time when the elections were due.
What also does not help the government is a slowdown in tax revenues. 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.”
When the revenue is growing at around one fourth of the expected rate, meeting the revenue target will be very difficult. Expenditure on the other hand continues to rise more or less at the rate assumed in the annual budget.
Given this, the government will have to make a significantly greater effort to control its expenditure, if it has to get anywhere close to meeting its fiscal deficit target. As Varma puts it “In our view, the government will have to announce another round of spending cuts to offset the fiscal slippage from slowing revenue collections and to meet its financial year 2013-2014 budgeted fiscal deficit target of 4.8% of GDP.”
The government had announced some measures to cut expenditure on September 18, 2013. A mandatory cut of 10% in non plan expenditure of all departments was announced. This did not include expenditure on interest and debt repayment, defence capital, salary, pension and grants to states. Over and above this, restrictions have been put on holding seminars/conferences as well as air travel. These measures will not be enough and more expenditure cuts will have to be put in place. In fact, when the government was in a similar but slightly better scenario last year, it simply froze spending, during the last few months of the year.
As Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley, said in a recent interview to the Forbes India magazine “We achieved the [fiscal deficit] target last year, but you have to understand how that was done. The government will have to really freeze spending, and that in turn will compress consumer demand. The issue is whether they have the political appetite to do that…So can the government meet its fiscal deficit target? Of course it can. But the price in this case will be economic growth.”
Varma had written along similar lines in a note titled Government Announces Austerity Measures and dated September 18, 2013. As she wrote “The spending cuts will adversely impact growth. High government spending was one of the main drivers of real GDP growth of 4.4% year on year in Q2 2013. With spending likely to be slashed and financial conditions much tighter starting July, we expect private demand to slow down further.” And this will impact economic growth.
The other option before the government is to raise diesel prices. The under-recovery on diesel being sold by oil marketing companies(OMCs) for the fortnight starting October 1, 2013 is at Rs 10.51 litre. In the previous fortnight the under-recovery on diesel stood at Rs 14.50 litre. This fall has been primarily on account of the rupee rallying against the dollar, leading to the price of oil falling in rupee terms. Despite the fall, at Rs 10.51 per litre, the under-recovery on diesel continues to be substantially high.
The government compensates the oil marketing companies for a part of this under-recovery and this means higher expenditure for the government. The oil producing companies like ONGC and Oil India Ltd, compensate the oil marketing companies for the remaining part of the under-recovery.
If the government has to meet its fiscal deficit target it needs to bring down the under-recovery on diesel. And this can only be done by raising diesel prices significantly. Currently, the oil marketing companies increase the price of diesel by 50 paisa every month, which is clearly not enough, given that the under-recovery is greater than Rs 10 per litre.
As Sharma put it “The government will have to raise diesel prices. Currently, they are Rs 9-10 behind on under-recoveries. They need to raise diesel prices by such a massive amount to stick to the fiscal deficit target.”
Other than diesel, there are significant under-recoveries on cooking gas as well as kerosene. The under-recovery on cooking gas for the week starting October 1, 2013, stands at Rs 532.86 per cylinder whereas the under-recovery on kerosene is at Rs 38.32 per litre.
The government is essentially in a situation where it has to decide between either meeting the fiscal deficit target or sacrificing economic growth. If it looks like that the government will be unable to meet its fiscal deficit target then India is likely to be downgraded by rating agencies.
A sovereign downgrade will see India’s rating being reduced to ‘junk’ status. This would lead to many foreign investors like pension funds having to sell out of the Indian stock market as well as the bond market, given that they are not allowed to invest in countries which have a “junk” status.
When they sell out, they will will be paid in rupees. In order to repatriate this money, they will have to sell rupees and buy dollars. This will increase the demand for dollars and put further pressure on the rupee, in the process undoing all the damage control carried out by the RBI to prevent the rupee from falling.
A weaker rupee will mean that our oil import bill will shoot up further. We will also have to pay more for the import of coal, fertilizer etc. This will put further pressure on the fiscal deficit as the government expenditure will increase given that it currently offers subsidies on oil as well as fertilizer.
To conclude, in order to meet its fiscal deficit target the government will have to raise diesel prices and at the same time cut its expenditure dramatically, which will have an impact on economic growth. As things currently stand, it looks like the government will have to sacrifice economic growth on the altar of the fiscal deficit.
If the government does not meet its fiscal deficit target then the repercussions of that will also have a huge impact on economic growth. Hence, the choice is between the devil and the deep sea. 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.” The Congress led UPA government has been running high fiscal deficits for way too long and the negative consequences of that have started to catch up.
The article originally appeared on www.firstpost.com on October 2, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

Deficit Crisis: Hope Chidamabaram is praying to goddess Lakshmi


One of the many Diwali traditions that have come up over the years is the idea of leaving the doors and the windows of the house open. This is done to facilitate the entry of Lakshmi, the goddess of wealth, into the house.
The Union Minister of Finance, P Chidambaram, hopefully is a believer, and had left the doors and windows to his house open yesterday, in the hope that Lakshmi will come into the coffers of the government he is a part of.
The way the finances of the government of India are placed, it’s time for Chidambaram to do what most Indians do when they are stretched and stressed. Pray to god. And hope for the best. So if he isn’t a believer it’s high time he becomes one and starts praying that Lakshmi doesn’t give the government a slip.
The fiscal deficit of the government of India for the year 2012-2013(i.e. the period between April 1, 2012 and March 31, 2013) has been targeted at Rs 5,13,590 crore or 5.1% of the gross domestic product. Fiscal deficit is the difference between what the government earns and what it spends.
Targets need to be met and it’s unlikely that the government of India will meet the fiscal deficit target it has set for itself. As the Kelkar committee on fiscal consolidation recently pointed out “A careful analysis of the trends in the current year, 2012-13, suggests a likely fiscal deficit of around 6.1 percent which is far higher than the budget estimate of 5.1 percent  of GDP, if immediate mid-year corrective actions are not taken.” The committee estimated if the government continued to function as it currently is it will end up with a fiscal deficit of Rs 6,15,717 crore.
In order to control this burgeoning fiscal deficit the government can do two things, increase its income or control its expenditure. But some recent developments show that the government is more than faltering on both the fronts.
Take the case of the auction of the 2G telecom spectrum. The government expected to raise Rs 30,000 crore from this. But the actual number is nowhere near that. The other big entry into the revenue figure was supposed to come from the disinvestment of shares that the government holds in public sector enterprises. Not a single rupee has been raised on that front.
Also what does not help is the fact that the amount of tax collected seems to be slowing down. As economist Shankar Acharya recently wrote in the Business Standard “By end September the government’s tax receipts amounted to less than 40 per cent of the year’s Budget target.”
So things are looking bad on the income front. The other big headache for the government has been the fall of the rupee against the dollar. As I write this one dollar is worth around Rs 55.
And this means increased expenditure on the oil front. Oil is sold internationally in dollars and when rupee loses value against the dollar that means Indian oil companies have to pay more in rupee terms to buy the same amount of oil. Currently the price of crude oil for the Indian basket is at $106.09 per barrel. At Rs 55 to a dollar this means Rs 5835 per barrel in rupee terms. Compare this to October 4 when the rupee touched a recent high against the dollar. On that day one dollar was worth Rs 51.5. At that price crude oil would have been at Rs 5464 per barrel in rupee terms, much lesser than what it is today.
Hence, as rupee loses value against the dollar, the oil bill goes up. This wouldn’t have been a reason for worry if products made out of oil i.e. petrol, diesel and kerosene, were sold at their market price. But they are not. The government subsidises the oil marketing companies (OMCs) for selling diesel and kerosene at a loss. It also subsidises the OMCs for selling cooking gas at a loss. As the rupee loses value against the dollar it means increased losses for the OMCs unless prices of the products they sell are raised. And in the process it also means increased expenditure for the government and hence a greater fiscal deficit.
Also recent numbers released by Controller General of Accounts project a worrisome picture. Fiscal deficit for the first six months of the year (i.e. between April 1 and September 30) was at Rs 3,36,00 crore. This means that for the first six months of the year the fiscal deficit stood at 65.6% of the estimated fiscal deficit of Rs 5,13,590 crore. This clearly is not a good sign. If the government continues at the same pace it will end up with a fiscal deficit of Rs 6,72,000 crore or 6.7% of the GDP.
A high fiscal deficit is worrying. As the Kelkar report points out “High fiscal deficits tend to heighten inflation, reduce room for monetary policy stimulus,  increase  the risk of external sector  imbalances and dampen private investment, growth and employment.”
Over and above that a high fiscal deficit can also lead to a “likely…sovereign credit downgrade and flight of foreign capital.” As foreign money leaves India this would put further pressure on the rupee against the dollar, leading to a higher oil bill and in process a higher fiscal deficit. So a higher fiscal deficit will lead to an even higher fiscal deficit.
Hence, the government has to either increase its income in some way or control its expenditure. One way of doing that is controlling on subsidies which can be done by increasing prices of oil products as well as fertilizer. But that is unlikely to happen given that it is politically enviable.
So that leaves the government with only one way out and that is to get aggressive on the disinvestment front. Very little action has been seen on that front. But with the government getting a massive amount of bad press over the last few months for being involved in a variety of scams, whether investors pick up shares in public sector companies that the government decides to disinvest, remains to be seen.
In this scenario the government’s one and only hope is the Life Insurance Corporation (LIC) of India. The government can direct LIC to pick up shares of companies it decides to disinvest. When it comes to LIC it is best placed to carry out such operations in the last three months of the financial year (i.e. between January and March).
At that point of the year people start seriously thinking about their tax saving investments and in large parts of the country that means buying a new LIC policy or paying the premium for the existing ones. And that’s when the insurance behemoth has a lot of cash which can be used to rescue the government by picking up shares of companies that it decides to disinvest.
Till then Chidambaram can at best continue to pray to Lakshmi, the goddess of wealth and hope that it blesses the government.
The article originally appeared on www.firstpost.com on November 14, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])