Though most expected the budget’s tax estimates to get derailed since they were wildly optimistic—to cite one instance, excise duty collections were slated to rise 15.4% in FY15 as compared to FY14’s 1.7%—few expected things to be as bad as they are now. The government’s Mid-Year Economic Analysis, presented on Friday, is candid enough to put the likely shortage at over R1 lakh crore. Of this, R78,000 crore is on account of exaggerating the tax buoyancy at the time of the budget—against a historical 0.8 between FY09 and FY14, the budget assumed a buoyancy of 1.5—and R27,000 crore on account of overestimating the likely FY15 nominal GDP growth. If, and that cannot be ruled out given the levels of volatility in the stock market, there is any slippage in disinvestment receipts—the target is R63,425 crore—matters will get a lot worse; the saving grace here is LIC which, as in the past, will be there to play white knight if need be. Even right now, the net tax revenues for the centre will be short by around R75,000 crore. Based on how things look right now, this means a massive crunching of capital expenditure, in quite the same manner P Chidambaram cut such expenses by around 17% of the initial FY14 target—till October 2014, capital expenditures were around 52% short of the full year’s target for FY15.
In such a situation, as FE has been advocating for quite some time, the FM simply has to sell the ITC and L&T stock that SUUTI holds—this is worth around R47,000 crore today and does not form part of the budget’s disinvestment target. Another R22,000 crore can be got by simply sticking to the target announced some months ago of selling 15 million tonnes of wheat and rice—this was announced as a price-quelling measure, but there are big revenue implications as well. The numbers put out in the mid-year appraisal suggest there has been little or no progress in settling old tax disputes though at one point a target of settling 60% had been set by the government.
As in the case of the Economic Survey, those drafting the mid-year review are not the same as those making the budget, so we may be guilty of, once again, reading too much into it. To the extent it reflects government’s thinking, and not just that of the chief economic advisor, the next budget will not have the finance minister accepting foolish challenges as he did in July when he decided to stick to Chidambaram’s 4.1% fiscal deficit target. Apart from suggesting the government may spend less on MGNREGA which probably drove up rural wages, and that is will also slash subsidies by moving aggressively on cash transfers, the mid-year review suggests the government will actively increase public spending to stimulate the economy. Indeed, it suggests the need to revisit the medium-term fiscal policy and make ‘a case not just for counter-cyclical but counter-structural fiscal policy, motivated by reviving medium-term investment and growth’—in other words, when private balance sheets are stressed and make investment an impossibility, increasing public investment is a necessity. This is also important since, as the review acknowledges, PPP hasn’t really worked for a variety of reasons, so cannot be depended upon to kickstart investments in even the medium-term.
