Centre’s finances on firm ground

After a shaky start, the Centre’s finances have begun to look promising towards the later half of the year. The increase in tax revenues by over 30% could put an extra Rs 30,000 crore in its kitty by the end of this financial year, enough to wipe off nearly 20% of the fiscal deficit estimated for the year. If that is the case, not only will this year close with its highest growth in tax revenues in the last six years, but also with a fiscal deficit lower than the target of 3.8% of GDP. However, this is possible only if the government manages to keep its expenditure level within budgeted estimates.

According to economists, with the buoyancy in overall corporate and GDP growth, tax collections are expected to grow by 30% for the remaining part of the year. “Tax revenues have been growing by around 30%, much higher than the expected growth of 19%. Buoyancy in revenues is likely to stay for the rest of the year as well,” says Dr Surjit Bhalla, managing director, Oxus Research and Investments. No wonder then, that the finance minister is confident of achieving the fiscal deficit target and has also sought approval for extra spending of Rs 11,445 crore. Moreover, S&P is looking at upgrading India’s sovereign rating if current fiscal improvements continue.

During April-October 2006, tax revenues grew by 34% on YoY basis, which is the highest growth for this period in the last six years. This has resulted in an overall increase of around 26% in total receipts. If this growth is maintained for the rest of the year, the Centre could end up with close to Rs 4.4 lakh crore of total receipts (including revenue receipts and non-debt capital receipts) instead of Rs 4.1 lakh crore projected in the Budget. So far, growth in tax collections has been aided by a buoyant growth in the industry.

“Not only are tax collections looking much better, the country’s GDP is also likely to grow higher than expected, thereby helping fiscal deficit as a percent of GDP to fall further,” says Dr Shashanka Bhide, senior research counsellor, National Council for Applied Economic Research (NCAER).

However, in trying to meet fiscal targets, the capital expenditure has suffered. For instance, both plan and non-plan expenditure on the capital account fell dramatically. The trend has continued this year as well, with barely 29% of non-plan capital expenditure and 42% of plan capital expenditure being utilised so far. Much of the Centre’s expenditure continues to go into subsidies and interest payments (that form bulk of the revenue expenditure) and asset creation takes a backseat. In fact since 1991, revenue deficit as a percentage of fiscal deficit has increased from around 45% to around 65% during 2005-06.