February 25, 2020
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A Few Good Sums

That is, if the revenue receipts finally add up

A Few Good Sums

ALL give and no take? Taxes and duties cut across the board, all prices except for those of cigarettes and postal stationery unchanged or set to fall, yet at the end of next year lower revenue and fiscal deficits, even a small primary surplus?

With euphoria running high currently, it would be interesting, though politically incorrect, to probe where the money for so many giveaways is coming from.

The success of Budget 97 as a growth instrument hinges on the receipts side. One, revenue receipts, mostly tax revenues, which are expected to jump 17 per cent. It's clear the finance minister expects revenue buoyancy to continue on the belief that lower taxes induce compliance.

The second factor is capital receipts—expected to provide 22 per cent more next year, thanks equally to Rs 4,800 crore of disinvestment and extra borrowings. The total receipts are expected to fund an expenditure higher by close to 15 per cent at Rs 232,196 crore. This exactly matches the receipts, so the numbers do add up to a lower revenue deficit.

There is a small financial catch here. From the new fiscal year, a 43-year-old practice is being discontinued. The popular ad hoc treasury bills—the bane of the Reserve Bank of India (RBI)—will be replaced by a ways and means advance (WMA), with the limit and the interest rate being fixed by the Centre and the RBI jointly from time to time. The Centre will not be allowed to exceed the limit beyond 10 working days, but in the difficult transition period of the next two years, it will be penalised with a higher rate if it does so. This is meant to put a check on rampant government borrowing from the RBI. Also, since the Central bank is no longer needed to print money and fill year-end shortfalls, the old concept of budget deficit will be replaced by a monetised deficit. Which is a whopping Rs 16,000 crore.

It is now easy to understand why the fiscal deficit is down and a surplus accrued instead of primary deficit (fiscal deficit minus interest payments). The fiscal deficit is the Government's total new borrowings (in other words, borrowings and other liabilities plus the budget deficit). With a GDP growth assumed at over 15 per cent nominally (7 per cent growth plus 8 per cent inflation) and the budget deficit gone, it has dropped to 4.5 per cent of GDP next year. A similar inflation figure also helped the Government meet its fiscal deficit target for the current year, even though the budget deficit had actually risen by almost 5 per cent as lack of disinvestment pushed capital receipts down.

All this is financially justifiable, so Chidambaram definitely cannot be accused of cooking his books. But three worries remain: a little-too-optimistic tax revenue estimate, increased market borrowings that will keep interest rates tight, and a sharply higher monetised deficit (or RBI support) of Rs 16,000 crore that could fuel inflation beyond the assumed 8 per cent. They might just upset the demand-push growth strategy, especially should food subsidies balloon and the monsoon fail after eight good years. The finance minister evidently didn't want to put today's sun under tomorrow's clouds and who can blame him for that? Hope, after all, is the fuel for growth.

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