Double jeopardy for budget maths

By M H Ahssan

Slowdown Squeezes Revenues, Deficits Balloon As Pay Panel Hikes Spending

The global economic slowdown and the Sixth Pay Commission’s recommendations have between them made a mess of the budget arithmetic for the current year, more than quadrupling the revenue deficit from 1% of GDP in the budget estimates (BE) to 4.4% in the revised estimates (RE). The fiscal deficit too has more than doubled from 2.5% of GDP in BE to 6% in RE.

When the Budget was announced by the then finance minister P Chidambaram in February last year, it had been pointed out that the Pay Commission’s award had not been adequately factored in, but the FM believed there was enough cushion in his estimates to absorb some extra spending if the need arose.

What he could not have anticipated then was the global meltdown and its impact on India’s own economy. The result of the slowdown has been that gross tax revenues are over Rs 65,000 crore lower in RE than in BE. The sharpest decline has been in excise duties, which in the BE were supposed to fetch Rs 137,874 crore but are now projected to rake in only Rs 108,359 crore.

Part of the nearly Rs 30,000 crore shortfall on this account is a natural outcome of a rapidly slowing industrial sector in the second half of the year. But in part it must also be because one of the measures adopted to stimulate a recovery involved a 4% across-theboard cut in excise duties.

Customs collections are almost Rs 11,000 crore lower in RE than in BE, corporate income tax are now expected to yield roughly Rs 4,400 crore less than earlier estimated and personal income tax, North Block now believes, will fetch about Rs 15,700 crore less than the BE. That’s the bad news on the receipts side. On the expenditure side, an increase of almost Rs 58,000 crore in the subsidy bill – largely due to fertilizers – of about Rs 15,000 crore in pay and allowances for civilian Central government staff and another Rs 18,000 crore in defence salaries and perk have all contributed to the BE going completely awry.

Thus, while revenue expenditure in BE was pegged at Rs 658,119 crore, it is now estimated that the figure would be Rs 803,446 crore. That’s an increase of over Rs 1.5 lakh crore. Put the higher expenditure and the lower revenue receipts together and the revenue deficit which was supposed to be just Rs 55,000-odd crore has crossed Rs 2.4 lakh crore.

This, in turn, has meant that the government has had to borrow about twoand-a-half times the amount it had originally intended to do — Rs 3.3 lakh crore rather than Rs 1.3 lakh crore.

For the coming year, the FM has preferred to play it safe in projecting income. Though the Budget assumes a 7% growth in GDP and no changes in tax rates, excise and customs duty collections are projected to rise by just about 2% over the RE for the current year. Surprisingly, though, taxes on both corporate and personal incomes are projected to go up by around 10%.

This is because of recent experience when indirect taxes proved less buoyant than direct taxes. From a situation in early 1990s when less than one in five tax rupees came from direct taxes, there has been a seachange to one in which these taxes are expected to contribute almost 57% in the BE for 2009-10.