Friday, March 16, 2012

Reining in the Fiscal Deficit

The government is embroiled in corruption charges, the mandate of the people in the recently held state elections was not encouraging, and the so called allies are not being too helpful either. Not much is expected from the financial year 2013-14 budget as the country goes to elections in 2014, assuming that the UPA government manages to hold on till then.


So the budget being presented tomorrow by Finance Minister Pranab Mukherjee, might be the only chance to push for reforms, save some face by doing it, and bring India back on the growth trajectory. One of the primary concerns this year is to rein in the Fiscal Deficit.

Last year, Mr. Mukherjee had said that the government would target a budget deficit of 4.6 per cent for 2011-12, compared with the 5.1 per cent expected for 2010-11. We are nowhere close to the targeted figures. Subir Gokarn, the Deputy Governor of RBI has predicted that the Fiscal deficit would be close to 7% by the end of March 2012. The government badly missed their own revenue and expense predictions. Government borrowing has been increasing. This has resulted in high interest rates. On the one hand the government is not able to control expenses; on the other hand, it is not doing much to improve revenues.

The four areas, which are being talked about and are very likely, the budget may target to rein in the fiscal deficit are Subsidies and welfare schemes, Foreign Direct Investment, non-tax revenues and tight fiscal management policies. Let’s look at the state of and the challenges facing each one of these areas.

Subsidies and welfare schemes: Year after year, the government has rolled out more and more subsidies (fuel, food, fertilizers) and welfare schemes (MNREGA, NHRM) for the people that have now turned into giants, with ever increasing appetite for cash. Various subsidies account for close to 3% of the GDP!

On the one hand, the government spends close to Rs55,000cr in food subsidies every year, on the other, the estimated wastage of food in an year is close to 60 million tones, approximately 20% of the total production. The prices of diesel and fertilizers are far from reality and decontrolling them or reducing the subsidy might result in early polls. Apart from this, there is lack of transparency about how the money is spent on various welfare schemes. Accountability and achieving the targets should be the key words in such schemes, but they are not!

Foreign Direct Investment: FDI in aviation, retail, insurance, and infrastructure are all pending since long and need urgent attention. There are benefits to be gained from FDI apart from the capital, in terms of technology, expertise, backward and forward linkages etc. Simplifying processes for the foreign investors, reducing the number of days taken to conduct business and set up operations could all go a long way in attracting investors. Though it might now be difficult to build consensus in the Parliament and it may be impossible to push through bills like FDI in multi- brand retail.

Non-tax revenues: Divestment or sale of stake in Public Sector Undertakings is one way to raise money without putting burden on the common man. The Government failed miserably in this last year. The recent example of investors shying away from ONGCs follow-on public offering and LIC being ordered to pick up the shares to save the offer from falling through is a case in point.

Tight fiscal management policies: Except the Non-Direct Tax collections, the government has fallen short on almost all other forms of Revenues collection. The estimated shortfalls for the FY2011-12 are Rs20,000cr in Direct Taxes, Rs35,000cr in Non-Tax revenues, Rs27,000cr in Divestments and Rs37,000cr in Non-Debt Capital. The expenditure has been as budgeted to a great extent, in fact it might be lower than budgeted as on the year end. With transparency and good governance, proceeds from divestment could go up. Measures to improve the tax and non-tax collections have to be put in place, including coming down heavily on corruption, which might be leading to money going into private coffers rather than the exchequer. Voluntary Disclosure Schemes or Amnesty Schemes could be put in place to encourage people to bring back the black money stashed away in tax havens.

Overall it seems that the fiscal deficit situation that we have gotten into is mainly due to mismanagement and poor planning. Taking calculated and tough stand and having clarity in the policies will definitely help rein in the fiscal deficit.

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