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It's Crunch Time, Folks

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My previous column (‘What Fiscal Rectitude?') 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 Pranabbabu must take hard calls if he wishes to be known as a responsible chief financial officer of the nation.

Let's start with revenues. For 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 cent.

Ditto for the Centre'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 a 9.3 per cent slippage in net tax revenue to the Centre. The latter translates to a 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 Pranabbabu will not 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, which gives Pranabbabu insomnia. Thanks to the phenomenal rise in crude oil and naphtha prices in the second half of FY2012, I reckon that fertiliser subsidy in RE FY2012 will overshoot the BE by some Rs.15,000 crore, or 30 per cent; and 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 per cent of GDP to more like 5.8 per cent. 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 is not.

Pranabbabu cannot 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:

  • Raise excise duties and Cenvat (Central value-added tax) rates to where these were before the global crisis. Industry will hate it.

  • Eliminate as many tax exemptions as possible, both for corporate as well as personal income tax. Many will hate that too.

  • Cut subsidies as much as possible; some in the budget and a 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, do not allow non-plan expenditure to rise beyond 10 to 12 per cent.

  • Announce that the Goods and Services Tax (GST) will definitely come into play in FY2014.

Will Pranabbabu 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 GST; gaining respect for having the gumption to take hard decisions in difficult times; and no longer losing sleep over subsidies.

So, will he? Pranabbabu has said he will finalise budget proposals after 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.

The author is chairman of CERG Advisory. omkar(dot)goswami(at)cergindia(dot)com

(This story was published in Businessworld Issue Dated 12-03-2012)