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The making of India's Rs 1 trillion fiscal deficit

Neena Haridas in New Delhi

BUDGET 2000

Has Yashwant Sinha concealed more than he has revealed in his Union Budget for 2000-2001? While admitting that the fiscal deficit has overshot the targeted 4 per cent to a whopping 5.6 per cent of the gross domestic product, Sinha attributed it to five primary expenditures -- the 50-day Kargil war, the supercyclone in Orissa, expenses due to the general election, somewhat weak monsoon, a near tripling of world oil prices and the continued fragility in world economic recovery.

But there is a wide gap between the current fiscal deficit of Rs 1.112 trillion (1,000 million = 1 billion; 1,000 billion = 1 trillion) and the budgeted deficit of Rs 799.55 billion which was then revised to Rs 1.088 trillion because of the Kargil conflict and the general election. In other words, there is a rise of Rs 23.77 billion on the revised estimate -- an increase of 2.1 per cent. But the rise on the budgeted estimate is much higher at Rs 333.94 billion.

Increased outlay on defence due to the 50-day Kargil conflict and advances to state government as per the interim award of the 11th Finance Commission were cited the main reasons for the rise in fiscal deficit.

Sinha had said, ''These two provisions together add up to Rs 24 billion, that is 1.2 per cent of the GDP. If these provisions were not to be made, I could have contained the fiscal deficit at four per cent.''

However, economists who have read between the Budget lines say, there are more villians in the fiscal drama -- the government expenses, interest payments and the failure in meeting the divestment targets. In fact, interest payments form 91 per cent of the fiscal deficit.

Amit Mitra, secretary-general, the Federation of Indian Chambers of Commerce and Industry or FICCI, says, "It is imperative that the government debt is brought down immediately, otherwise the economy may fall into an internal debt trap."

Dr BB Bhattacharya, economist, Institute of Economic Growth, says, "The Kargil war, cyclone, election, poor monsoon, etc, no doubt contributed to the increase in fiscal deficit. But the government has also failed in controlling its own expenses, and could not meet many of its targets."

Consider this: revenue receipts were targeted at Rs 1.828 trillion in 1999-2000, but the actual amount accrued is only Rs 1.495 trillion. Tax revenue (net to the centre) again fell shy of hte targeted Rs 1.323 trillion to touch just Rs 1.046 trillion. Recoveries of loans targeted at Rs 1.273 trillion fell short to a measely Rs 106.33 billion. But the greatest fall has been in the other receipts which divestment revenue was the main item -- against a targeted Rs 100 billion all that was accrued was Rs 58.74 billion.

While the reciepts fell short of target, the expenditure has overshot. Non-plan expenditure targeted at Rs 2.068 trillion amounted to Rs 2.125 trillion, while the plan expenditure was at Rs 668.18 billion. Which is why the fiscal deficit {(revenue reciepts + recoveries of loans + other receipts) minus total expenditure}stands at a mindboggling Rs 1.133 billion -- which is 5.6 per cent of the gross domestic product.

Sinha has stated that despite the fiscal deficit having soared to 5.6 per cent of the GDP as against the targeted 4 per cent, there was no reason to be over-concerned about India's fiscal situation. The government, he said, is now aiming to confine it to 5.1 per cent in fiscal 2000-01.

According to economists, the failure to control the deficit lies within the corridors of government itself. Despite Sinha's claim to trim the government expenses in the last budget, nothing of the sort happened. For one, the wage bills are on the rise.

For all talk of government downsizing, the actual number of government employees has increased by more than 81,000. Between March 1, 1999 and March 1, 2000, more than 100,000 people were recruited for the government services. According to data presented in the expenditure budget, the central government employed 3.82 million employees as on March 1, 2000. All this exclusive of recruitment in the armed forces.

Most of the new employment is in the department of telecommunications services which has added 26,000 employees during the current fiscal. And in 2000-20001, there will be another 16,000 employments in the department. In money terms, this means the wage bill has gone up to Rs 386.98 billion this fiscal from Rs 300.95 billion in 1998-99.

Tarun Das, director-general, Confederation of Indian Industry, says, "When the minister said 'hard budget', I thought he is serious about it. I thought there would be some major downsizing in the governement. But if you ask me, what the government should do is tell 40 per cent of the government employees to go home for two years, and that their salaries will reach home. They should be told to venture out and look for other opportunities in self-employment. After two years, if they want to come back they can. Believe me, nobody would want to come back."

The central ministries' absorptive capacity -- this indicates the offtake of the central ministries as against their budgeted amounts -- seems to be on a steep rise. According to figures released in the budget, the central ministries have been able to use 93 per cent of their budgeted funds.

In comparison to this year, trends show that in 1998-99, this capacity was 84.1 per cent.

In some of the key ministries, like the petrloeum and natural gas, the absorptive capacity in 1999-2000 is 104 per cent -- that is, they had to allocate more funds as compared to the budgeted figures. Similarly, the ministry of surface transport's offtake was more thatn 117 per cent.

This means the government has had to make provisions to allocate additional funds to the ministries. Says Bhattacharya, "What happens is certain schemes and plans are not implemented by the ministries in the specified time. There is a lot of backlog, which means the expenses rise." Mitra says, "The industry is concerned that the government has failed to address the issue of expenditure control and downsizing of the government."

But Sinha ducked the issue saying, ''It is not realistic to expect the government to cut expenditure and downsize government overnight. We are working on these issues and we will continue to deal with expenditure with a scalpel. We will do our very best but I cannot specify as to when I will bite the bullet.''

The government did not bite the bullet on the divestment front too, which has also added to the high fiscal deficit. CII's Das says, "Why should the government still sit on some of these public sector units. If it had divested last year, there would have been less problems. Instead, the minister is blaming it on the absence of a national consensus on divestment. In fact, it is being attributed to the uncertainty at the Centre -- to the six months lost in electioneering process last year."

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