On March 16, when the finance minister presents the budget, expect him to announce a much bigger deficit for the year than he promised last February. The hike in the deficit figure could be as much as Rs 1,26,034 crore, or 6% of GDP (up from 4.6% of GDP announced in the budget). More spending and lower revenues than expected are to blame. The slowdown in 2011 led to lower than expected tax collections and earnings from disinvestment. Moreover, the government cut taxes on petroleum products to cushion consumers from the impact of petrol price hikes. this too has led to a fall in tax revenue. As of January, 70% of the government revenues budgeted for the year had actually flowed into its coffers compared with 92% the previous year. On the expenditure side, the total expenditure grew by 13.4% year-onyear in the April-January period compared with budgeted estimates of a 3.4% growth.
Past Outcomes Not Great...
A stark difference between what the government expects its finances to be at the beginning of the year, and what the actual pattern of finances are is an old problem. The result .a sharp uptick in government borrowing, and frantic attempts at cutting exactly the kind of expenditure that we need more of, such as infrastructure.
Fiscal deficit exceeding targets by more than 15% in 4 out of 10 years is not a good signh says M Govind Rao, member of economic advisory council to the PM and director, National Institute of Public Finance Policy (NIPFP). There has historically been an underestimation of fiscal deficit, except between 2003-08, when fiscal deficit turned out to be actually better (lower ) than budgeted. The main reason for the better than expected performance in this period was a significant rise in income tax collections, partly due to better tax administration and enforcement.
A particularly bad year was 2008-09, when the fiscal deficit hit 6% of GDP compared with the budgeted 2.5%. This was mainly due to the global financial crisis and the consequent fiscal stimulus packages that were not budgeted at the start of the year. Moreover, there was significant under-budgeting of expenditure proposals on account of pay revision of government employees, funds for food and fertilizer subsidies, loan waiver schemes for farmers, and additional allocations for programmes like NREGA.
In the beginning of the year, expenditures are budgeted by the finance minister on the basis of proposals put forward by individual ministries. This is what parliament votes on, and approves during the budget session. During the rest of the year, though, the government could go back to parliament and ask for more funds in case budgets turn out to be inadequate.
According to a 2010 NIPFP paper by PR Jena, a large part of these supplementary demands have become routine. "This practice has raised questions relating to the sanctity of the annual budget as a policy instrument and the absence of a concept of a hard budget constraint in observing fiscal discipline," the paper says. In laymanspeak: if ministries feel they can keep asking parliament to approve more money even after their main budget has been passed, there is little incentive for them to control their finances. The paper notes that aggregate expenditure (net of interest payments) was substantially higher than budget estimates between 2006-09, the difference being 27% in 2008-09.
Better Planning Needed
But there is significant 'collateral damage' to the repeated overshooting of budget targets. The government may not be able to cut fuel subsidies for instance because that involves hiking fuel prices, which is a politically-sensitive issue.
So to offset that, it cuts spending in other less sensitive areas. A prime candidate is capital expenditure.
Actual capital expenditure has been less than budgeted in the last five years and the difference is close to 10% in two of those years. Even between 2006-07 and 2007-08, when realised revenues were higher than expected, capital expenditure was lower than promised, even as total spending exceeded the budgeted values. This is hardly ideal. what the government is doing is cutting long-term investments in critical areas such as infrastructure, to offset ballooning current expenditure.
Another component that has often faced the axe is Plan expenditure, which covers schemes under the Five-Year Plans.
In the beginning of the year, expenditures are budgeted by the finance minister on the basis of proposals put forward by individual ministries. This is what parliament votes on, and approves during the budget session. During the rest of the year, though, the government could go back to parliament and ask for more funds in case budgets turn out to be inadequate.
According to a 2010 NIPFP paper by PR Jena, a large part of these supplementary demands have become routine. "This practice has raised questions relating to the sanctity of the annual budget as a policy instrument and the absence of a concept of a hard budget constraint in observing fiscal discipline," the paper says. In laymanspeak: if ministries feel they can keep asking parliament to approve more money even after their main budget has been passed, there is little incentive for them to control their finances. The paper notes that aggregate expenditure (net of interest payments) was substantially higher than budget estimates between 2006-09, the difference being 27% in 2008-09.
Better Planning Needed
But there is significant 'collateral damage' to the repeated overshooting of budget targets. The government may not be able to cut fuel subsidies for instance because that involves hiking fuel prices, which is a politically-sensitive issue.
So to offset that, it cuts spending in other less sensitive areas. A prime candidate is capital expenditure.
Actual capital expenditure has been less than budgeted in the last five years and the difference is close to 10% in two of those years. Even between 2006-07 and 2007-08, when realised revenues were higher than expected, capital expenditure was lower than promised, even as total spending exceeded the budgeted values. This is hardly ideal. what the government is doing is cutting long-term investments in critical areas such as infrastructure, to offset ballooning current expenditure.
Another component that has often faced the axe is Plan expenditure, which covers schemes under the Five-Year Plans.
