My previous column was a satirical
take on why Finance Minister Pranab Mukherjee may
not have a free rein to slash various hand-outs in
the Union Budget, despite his suffering sleepless
nights on account of subsidies. This piece is a more
serious look at the fiscal situation — and why
Pranab-babu must take hard calls if he wishes to be
known as a responsible CFO of the nation.
Let’s start with revenues. For 2011-12 (FY2012), the
budget estimate (BE) for gross tax revenue was
Rs.932,440 crore. It was almost 25 per cent higher
than the BE for FY2011, and 18.5 per cent above the
revised estimate (RE) for the same year. The
assumption was tax revenue would rise quite a bit
faster than the assumed nominal GDP growth of 14 per
Ditto for central government’s net tax revenue: at a
BE of Rs.664,457 crore for FY2012, it was to be 24.4
per cent higher than BE FY2011, and 17.9 per cent
higher than the RE.
Unfortunately, these numbers won’t come good. Not by
a long shot. My guess is that we are looking at
roughly a 10 per cent shortfall in the RE of gross
tax revenue for FY2012, and 9.3 per cent slippage in
net tax revenue to the centre. The latter translates
to revenue gap of around Rs.61,700 crore, or 0.69
per cent of GDP.
What about divestment, which while timorously
referred to as ‘miscellaneous capital receipts’ is
always added to the government’s calculus of inflows
in estimating the deficit? It looks as if
Pranab-babu won’t get his Rs.40,000 crore either.
Many sleight of hand schemes are making the rounds.
But the bottom-line is that the government will be
lucky to garner Rs.25,000 crore. And I am being
generous. That is another slip of 0.17 per cent of
GDP — taking the shortfall up to 0.86 per cent of
GDP only on the revenue side.
Now to expenditure, especially subsidies — the stuff
that gives Pranab-babu insomnia. Thanks to the
phenomenal rise in crude oil and naphtha prices in
the second half of FY2012, I reckon that:
• the fertiliser subsidy in RE FY2012 will overshoot
the BE by some Rs.15,000 crore, or 30 per cent; and
• the petroleum subsidy will also increase by 30 per
cent, or Rs.7,000 crore.
In addition, it seems par for course to overshoot
the BE of food subsidies by 10 per cent. If so, that
is an additional Rs.6,000 crore. Thus, the total
excess expenditure on account of subsidies will be
Rs.28,000 crore, due to fertiliser, petroleum and
food. That is another 0.31 per cent of nominal GDP.
The slippage count rises to 1.17 per cent of GDP, or
around 1.2 per cent.
Thus, bereft of window dressing, the fiscal deficit
for FY2012 will rise from 4.6% of GDP to more like
5.8%. That is a huge slip, more like an
uncontrollably destructive fiscal avalanche than a
few rock falls here and there. This is no time to
pretend that the exchequer is robust. It isn’t.
Pranab-babu can’t fix the past. But he can secure
the future, particularly when his government is
committed to an additional deficit of 0.3 per cent
to 0.4 per cent of GDP in FY2013, after the National
Food Security Bill becomes law. He must use the
gravity of the present to do a number of unpleasant
things, such as:
• Raise excise duties and Cenvat rates to where
these were before the global crisis. Industry will
• Eliminate as many tax exemptions as possible —
both for corporate as well as personal income tax.
Many will hate that too.
• Slash subsidies as much as possible — some in the
budget and lot more shortly afterwards — especially
for petroleum and fertilisers.
• Keep the rise in non-plan expenditure to a few
percentage points below nominal GDP growth. Assuming
15 per cent nominal GDP growth for FY2013, don’t
allow non-plan expenditure to increase beyond 10 to
12 per cent.
• Announce that the Goods and Services Tax (GST)
will definitely come into play in FY2014.
Will Pranab-babu make such tough calls? From his
personal and professional perspective, he has
nothing to lose: though respected as the
trouble-shooter par excellence, he is neither going
to be the Prime Minister nor the President. A tough
budget costs him nothing. And he has everything to
gain: cleaning the fisc; making way for the GST;
gaining respect for having the gumption to take hard
decisions in difficult times; and no longer losing
sleep over subsidies.
So, will he? Pranab-babu has said that he will
finalise the budget proposals after the election
results. That means he has Plan A for victory and
Plan B for defeat. Defeat will probably force the
politics of subsidy-led appeasement. Will victory
give him the licence to reform? For India’s sake,
let’s pray so.
Published: Business World, March