The first quarter of 2006-07 has not been good for government finances. Despite some increase in revenue collections, the fiscal deficit rose 46 per cent over its level during the first quarter of 2005-06, and accounted for over 50 per cent of the full year’s Budget estimate. Of even greater concern is the fact that the revenue deficit, supposed to be eliminated in three years under the Fiscal Responsibility and Budget Management (FRBM) Act, reached over 80 per cent of the year’s Budget estimate during the first three months. The government’s credibility on fiscal discipline is clearly under threat.
Two factors are responsible for this rather worrisome development. First, revenue collections, while showing some growth, have consistently failed to keep pace with the expansion in the base. Tax collections during the quarter were about 13 per cent of the full-year estimate, in a quarter in which manufacturing output, in all likelihood, grew by over 10 per cent and GDP by over 8 per cent. The former is the base for excise and customs collections. The corporate sector, the main contributor to direct taxes, also clocked better than expected sales and profit numbers during the quarter. As of now, the Reserve Bank of India as well as most independent forecasters see GDP growth for the year as being in the 7.5- 8 per cent range for 2006-07. This implies a slowdown, even if mild, over the next three quarters, which cannot do the tax base any good. The fact that collections are not responsive to the kind of buoyancy in the base seen during the first quarter suggests that tax compliance and enforcement are below the levels needed to achieve the FRBM objectives. This should be a real matter of concern for the finance ministry, in whose exclusive hands this issue lies.
Second, expenditure surged during the quarter. This could be because of increasing efficiency in the execution of projects, as Mr Chidambaram suggested in his comments to the media, but this does not seem to be the explanation because Plan expenditure during the quarter was 22 per cent of the full-year estimate, while non-Plan expenditure was only 13 per cent. In other words, even if it has happened, the front-loading cannot be very significant. The offtake of funds by ministries during the first quarter may have deviated from historical norms, explaining the surge over last year’s numbers, but to link this to efficiency is premature. The finance ministry’s worries on this score are reflected in its diktat to cut non-Plan expenditure by 5 per cent across the board, not to mention specific restrictions on items like foreign travel.
Of course, it may be too early to read danger signals in the first quarter’s performance. Mr Chidambaram has the remaining nine months to make adjustments on both the revenue and expenditure fronts, and he may well meet his deficit targets even in the event of a moderate slowdown in growth. The larger question, however, relates to the efficiency of the Budget-making process and the ministry’s ability to exercise control over its revenue department and the ministries that spend the money. Noble intentions to eliminate the deficit look like they are being held hostage by ineffective implementation.
Two factors are responsible for this rather worrisome development. First, revenue collections, while showing some growth, have consistently failed to keep pace with the expansion in the base. Tax collections during the quarter were about 13 per cent of the full-year estimate, in a quarter in which manufacturing output, in all likelihood, grew by over 10 per cent and GDP by over 8 per cent. The former is the base for excise and customs collections. The corporate sector, the main contributor to direct taxes, also clocked better than expected sales and profit numbers during the quarter. As of now, the Reserve Bank of India as well as most independent forecasters see GDP growth for the year as being in the 7.5- 8 per cent range for 2006-07. This implies a slowdown, even if mild, over the next three quarters, which cannot do the tax base any good. The fact that collections are not responsive to the kind of buoyancy in the base seen during the first quarter suggests that tax compliance and enforcement are below the levels needed to achieve the FRBM objectives. This should be a real matter of concern for the finance ministry, in whose exclusive hands this issue lies.
Second, expenditure surged during the quarter. This could be because of increasing efficiency in the execution of projects, as Mr Chidambaram suggested in his comments to the media, but this does not seem to be the explanation because Plan expenditure during the quarter was 22 per cent of the full-year estimate, while non-Plan expenditure was only 13 per cent. In other words, even if it has happened, the front-loading cannot be very significant. The offtake of funds by ministries during the first quarter may have deviated from historical norms, explaining the surge over last year’s numbers, but to link this to efficiency is premature. The finance ministry’s worries on this score are reflected in its diktat to cut non-Plan expenditure by 5 per cent across the board, not to mention specific restrictions on items like foreign travel.
Of course, it may be too early to read danger signals in the first quarter’s performance. Mr Chidambaram has the remaining nine months to make adjustments on both the revenue and expenditure fronts, and he may well meet his deficit targets even in the event of a moderate slowdown in growth. The larger question, however, relates to the efficiency of the Budget-making process and the ministry’s ability to exercise control over its revenue department and the ministries that spend the money. Noble intentions to eliminate the deficit look like they are being held hostage by ineffective implementation.