India's fiscal deficit to shoot up
However, with monsoon having failed, leading to severe droughts in a large number of states (especially up North) and floods in a few states (down South), the spring season (or the khariff) crop has been badly affected. For the next two quarters, therefore, contribution of agriculture is ruled out of the equation.
Going forward, the bigger question is whether industry can shoulder the burden. It’s quite possible that it might not. The Index of Industrial Production (IIP), which started tapering off from August 2008, has shown signs of a rebound during June, July and August this year. But sustainability remains a question. The increase in production has a lot to do with demand generated through a substantial increase in government spending in the rural segment and the huge arrear payment received by the government employees in keeping up with the recommendation made by the 6th Pay Commission. This also coincided with the inventory built up that was taking place keeping in mind the likely surge in demand for the forthcoming festive season in India. However, it is quite likely that the tailwind is dying down as is evident from the fall in collection of excise duty data in September. It is quite likely, therefore, that the September IIP number would look anaemic.
Even the corporate results leave a lot to be desired. During the last two quarters, while the non financial companies have, on an average, been able to show improved profitability (mainly due to stringent cost cutting measures incorporated by them, falling commodity prices and interest rates), their revenue growth has virtually stagnated. This clearly indicates the domestic demand is yet to take root. Add to this the likely impact of plummeting rural demand (on the back of disastrous monsoon) going forward (remember the rural areas account for nearly 65 per cent of India population) and things do not look rosy indeed for the next couple of quarters at least.
In this scenario, how would India’s fiscal deficit scenario look like? Quite uncomfortable, I am afraid what with to revenue collection likely to be hit.
Till September, the Apr-Sep’09 excise tax collection figure was down by about 25 per cent as compared to the same period the previous year. Agreed, as part of the stimulus package, the government announced reduction in duties for various commodities and this is also reflected in their budgeted collection of excise duty for 2009-10, which was assumed to be lower than the previous year by about 1.75 per cent. Nevertheless, the surge in August collection (around 23 per cent) as compared to July’09 was a harbinger of hope. This was in line with the IIP growth of above 10 per cent. However, the latest data for the month of September dashed the hope. The September number was down by about 5 per cent as compared to August’09 and the Apr-Sep’09 collection is now down by around 21 per cent. This means that the excise collection has to grow by about 19 per cent every month if we are to match the targeted collection.
Same is the issue with corporate tax collection. Corporate tax accounts for about 35 per cent of total tax collection and the government expects the corporate tax revenue to jump by 15.64 per cent in this fiscal year. However, for the period Apr-Aug’09, corporate tax has increased by less than 8 per cent. This means that for the next seven month, corporate tax has to increase by more than 16 per cent month-on-month to achieve the target. Again a very tall order.
Overall, tax revenue collected during the first six months of this fiscal is about 39 per cent of the one budgeted for the full year. During the same period last year, the collection was close to 40 per cent of what was budgeted and the final collection figure showed a shortfall of close 9 per cent of the budgeted. The situation is unlikely to be different this time.
Add to this the huge spending requirement for the rural sector following the poor monsoon and there is every likelihood of the overall central fiscal deficit exceeding the 7 per cent mark.
Then there’s increasing below the line expenditure to contend with. Available indication suggests that India’s food subsidy bill will top Rs.600 billion this year, which is at least 15 per cent more than what was budgeted for at Rs.521 billion.
The fact that even the government is concerned about the deficit scenario is clear from the emanating vibes about possible withdrawal of excise concessions.
Overall, if we add the expenditures on various heads of subsidies and the deficit at the state government levels, India total fiscal deficit for the current fiscal year can touch a mind boggling 13 per cent of GDP.
(Note: The piece was published on 3rd November)
Comments
This is excellent Kunal, quite superb!
One query though as I have not been following statistics of the Indian economy religiously. It is quite well accepted that an alternative measure of fiscal deficit is public sector net borrowing. The advantage of this is that it additionally takes account of capital investment. Public sector net debt as a percentage of GDP is above 50% in most developed countries and if we take into account financial sector interventions of the last one year, it is probably better to keep it the number out of sight. My instinct is that India is much better off if we compare this statistic ... just painting a rosy picture for posterity in India !
Posted by: Dev Mukherjee | November 5, 2009 10:17 AM
I quite agree with you Dev. India is possibly better off. Not sure whether it’s much. Need to check the cross country numbers myself before making a comment. However, my problems are manifold:
• Our inability to conserve resources. Indian politicians prefer to play for the gallery. So when bad times come, they use up the resources to, say waive debts and probably buy rural votes. Problem is, the this does not stop the farmers from taking the next debt and then commit suicide when things are bad. The resources could have been better utilised for capacity building which has a much better multiplier effect
• Our revenue deficit is virtually three-fourths of our fiscal deficit. Meaning, only about 25% of our borrowings are used for, hopefully, capital expenditure and we hope that the payoff of such investment will enable us to service 100% of the borrowing
• If we could have conserved resources when the going was good (say 9% on an average for about four years) we would have been better placed to fund the stimulus requirement during the current difficult phase. Now, the moment, we think of stimulus, we start to worry about deficit shooting up
• There are ‘n’ number of instances of money being wasted in unfinished public projects, which are later abandoned or which has to face major time and cost over-runs
I mean the list can be unending. Bottomline is, we are paying price for our profligacy. Unfortunately, nobody cares.
I sincerely appreciate your comments Dev. It could trigger a minor discussion session.
Posted by: Kunal Kumar Kundu | November 5, 2009 10:18 AM
I think what saved us was pay commission, relief to farmers and stimulus last year .
Fiscal Deficit
Fiscal Deficit – used to be 8% of GDP at central level at one point of time in late 80’s and early 90’s . So we have experienced higher deficits than what have currently and still managed.
We must also remember that from 2004 to 2008 the average increase in gross tax collection was 25-30% per annum which is unlikely to continue .
Present year budget estimates a fall in gross tax receipts by about 7% which is sought to be covered by increase in non tax receipts, mainly proceeds from 3 G auction .
Hence deficit will widen if 3G auction does not go through this fiscal. The issue is more of a political one . But I also think disinvestment will exceed target very smartly this fiscal .
The reason for bloated fiscal deficit and increased non plan expenditure is stimulus and 6th Pay commission arrears which should not be a concern since these are essentially one time expenditures . It can only be concern if large deficits is trend rather than an exception.
Monsoon Impact
The structure of India economy has changed over the years as agriculture contributes about 20% to India’s GDP now and falling . NREGA will be able to mitigate the impact of weak monsoon to an extent . Further the impact of monsoon also depends on the states/region affected . If it fails in poor states /regions then there is not much impact .Moreover Rabi crop should do better due to late surge in Monsoon.
Drop in agriculture production also leads /had led to increase in prices . Hence overall rural income may not fall much or at all.
Sadly there is more human cost for weak or failed monsoon than purely economic one.
Posted by: Tushar Anand Jiwane | November 5, 2009 10:19 AM
Hi Tushar,
Thanks for your comment. A few pointers:
Fiscal deficit: It is more of statistical jugglery than any real improvement in the scenario. Remember what Chidambaram did to show lower deficit. He moved the certain items from the purview of calculation of deficit like oil bonds, fertilizer bonds etc. More of playing with numbers I would say. Actual deficit including these items will be precariously close to 10% this year, maybe even exceed that figure
Monsoon: Rabi crop might be better and I agree it probably would be, but the impact of Khariff crop would be felt in the next two quarters in the calculation of GDP. Also, for certain industry segments rural demand ends up playing an important role for them. Certainly that demand will not be there. Also it is important to note that there is absolutely no correlation between final food prices and the remuneration received by the farmers. The price differential arises mostly from out inefficient and middlemen driven distribution network. It is mostly the middlemen who pocket the price rise and not the farmers. Also remember that when a farmer is indebted and the government is unable to provide them with adequate storage facilities, they have to resort to distress selling and the middlemen gain in the process. I of course fully agree with you that NREGA is a fantastic scheme. It is really successful is some cases but it also, as usual, is impacted by our woefully inadequate delivery mechanisms leading to huge leakages as even reports from the CAG reveals
In fact, Dalal Street Investment Journal is going to publish my article on how the Agriculture sector has been dealt with badly by our poor policy making and foresight. I will share the same with you the moment that is published
The problem that I have is that we get so used to service sector driven high GDP growth, we seem to care even less for the rural people apart from making some politically correct statements. Unfortunately, India’s growth continues to be devoid of human face and this is also reflected in our undesirable Gini coefficient levels, huge incidences of malnutrition, about 30% of population living at or below USD 2 per day etc etc etc.
Nevertheless, thanks again Tushar for the mail. I really like to have discussions of these nature.
Posted by: Kunal Kumar Kundu | November 5, 2009 10:20 AM
Dear Kunal,
I could not agree more with you. India's fiscal deficit is going to be big problem going forward.
But as you rightly said, is the government really interested.
Well analysed indeed.
Thanks
Preity
Posted by: Priety Ghosh | November 5, 2009 3:14 PM