Indivjal Dhasmana / New Delhi Sep 26, 2012, 00:30 IST
The Vijay Kelkar panel on fiscal consolidation has questioned the Budget numbers on subsidies and tax receipts for 2012-13, because of which it expects the fiscal deficit to cross six per cent of GDP this financial year if the reforms suggested by it are not undertaken.
The panel wants the finance ministry to meet the disinvestment target of Rs 30,000 crore, as it has got feedback that only Rs 10,000 crore can be mopped up, according to those in know of the development.
he first step on fiscal consolidation is to correct the figures given in the Budget and then recommend measures to rein in the deficit close to the estimates, they add.
| KELKAR’S TAKE |
- Rs 7.71 lakh crore: Budget estimate of tax receipts
- Rs 70,000 crore: Amount that Kelkar panel finds tax receipts overestimated by
- Rs 1.90 lakh crore: Budget estimate of subsidies
- Rs 70,000 crore: Amount by which subsidies were underestimated, says panel
- 5.1% of GDP: Budget expectation of fiscal deficit
- 6% of GDP: Panel’s estimate of fiscal deficit if reforms are not undertaken
- 5.76% of GDP: Fiscal deficit in 2011-12, against Budget estimate of 4.6% and revised estimate of 5.9%
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The panel says the Budget has underestimated subsidies by Rs 70,000 crore and overestimated tax receipts by Rs 60,000 crore, they say. According to that, the Budget underestimated the fiscal deficit by Rs 1,30,000 crore.
Adding this figure to the Rs 5,13,590 crore of fiscal deficit given in the Budget, the gap between the Centre’s expenditure and receipts would turn out to be Rs 6,43,590 crore.
Given the GDP figures in the Budget at Rs 1,01,59,884 crore for 2012-13, the fiscal deficit would turn out to be over six per cent of GDP against the estimated 5.1 per cent.
However, the figure would be that much if no reforms happen, the committee is said to have stated.
In the first four months of 2012-13, the fiscal deficit has already crossed 50 per cent of the Budget estimate.
But if the government undertakes reforms on the oil and urea price fronts and the disinvestment targets are met, the deficit could be curtailed significantly, the panel is learnt to have observed. While the government has raised diesel prices by Rs 5 a litre, it is yet to undertake full decontrol of prices. Also, petrol prices remain decontrolled only on paper.
Urea has not been brought under nutrient-based subsidy, and it is the government that fixes prices and subsidies for the fertiliser.
Besides, the panel recommended improving the tax administration to shore up the tax-GDP ratio. The Centre’s tax-GDP ratio has remained below eight per cent since 2008-09 as against 8.81 per cent in the pre-crisis period of 2007-08. The panel gave its report to Finance Minister P Chidambaram earlier this month, but it has not been made public so far.
Those in know do not say by how much the fiscal deficit would ultimately be pruned this fiscal, saying it depends on the reforms carried out by the government. They concede oil reforms are not easy.
While the government has targeted to mobilise Rs 30,000 crore from disinvestment, the feedback the committee got from the ministry was that no more than Rs 10,000 crore could be mobilised thus. As such, the committee recommended meeting at least the target to prune the fiscal deficit.
http://www.business-standard.com/india/news/kelkar-panel-questions-fy13-budget-maths/487645/
| FinMin optimistic on fiscal deficit |
| Despite rising subsidy bill, says fuel price action and other steps in contemplation would keep it at 5.3% of GDP, not more |
Indivjal Dhasmana / New Delhi Sep 20, 2012, 00:46 ISTRecent government decisions to rationalise fuel prices have given the finance ministry confidence on reining in the fiscal deficit at 5.3 per cent of gross domestic product (GDP) for 2012-13, against the 5.1 per cent pegged in the Budget.
Independent economists, however, do not agree, and peg it at 5.7 per cent of GDP.
The Vijay Kelkar panel report on fiscal consolidation, which the ministry is expected to put in the public domain this week, could give clarity to the issue.
At a full Planning Commission meeting on Saturday, Finance Minister P Chidambaram had said major subsidies would be 2.4 per cent of GDP, against the 1.9 per cent projected in the Budget. At 1.9 per cent, it was estimated to decline from Rs 216,297 crore in the revised estimates of 2010-11 to Rs 1,90,015 crore in the Budget estimates for 2012-13. However, if subsidies rise to 2.4 per cent of GDP, the number would be Rs 243,837 crore. The net effect will be that the fiscal deficit rises to Rs 5.6 lakh crore against the estimated Rs 5.1 lakh crore, assuming the revenue side of the Budget behaves the way detailed in the document. At this level, the fiscal deficit turns out to be close to 5.5 per cent of estimated GDP (Rs 101 lakh crore).
However, the ministry is confident of curtailing this to 5.3 per cent of GDP, as the disinvestment target could be raised, some more could come from dividends by public sector entities, while non-plan expenditure will be curtailed.
Officials said oil subsidies will be more than projected and the additional amount will be provided in the second supplementary budget. Despite the latest fuel price moves, oil marketing companies (OMCs) are complaining of Rs 1.67 lakh crore of under-recoveries. About 40 per cent of it could come from upstream oil companies, which will leave the government with a subsidy burden of Rs 1 lakh crore. This will be in addition to the Rs 43,580 crore already listed for the OMCs for this year but used for meeting the under-recoveries of 2011-12. Officials said the second supplementary budget might only be for essential items such as the fuel subsidy.
They said the fertiliser subsidy would be close to the projected amount of Rs 60,974 crore against the Rs 67,198 crore in the revised estimates of 2011-12l. They also expect the revenue target to be close to the amount in the Budget on the tax front and some additional inflow of funds from non-debt capital receipts, such as disinvestment (where the budget estimate was Rs 30,000 crore.
The ministry has already told all departments to cut non-plan expenditure by 10 per cent. Some savings could come from this, too, officials say. Besides, public sector units have been asked to invest their surplus cash or give higher dividends to the government. The budget pegged the latter figure at Rs 50,000 crore, almost the same as the revised estimates of 2011-12. With all these, officials said, the deficit could be kept at 5.3 per cent of GDP.
Economists don’t agree. One of them said only Rs 15,000 crore could come from the disinvestment cleared by the cabinet. The cabinet has cleared nine companies for this, of which the auction process could be started in National Aluminium, NMDC, Minerals and Metals Trading Corporation and Oil India.
In the first four months of 2012-13, the government has already run up a little over half of the estimated fiscal deficit for the entire year. In the first quarter, it was 8.1 per cent of quarterly GDP. Devendra Bhatt, director with India Ratings (part of the Fitch group), says the deficit will end at 5.7 per cent of GDP, roughly the same as last year.
"The government is set to take more decisions to accelerate capital markets reforms and attract overseas capital," said a report in this paper last week ( Reforms Juggernaut to Come Rolling into Mkt, ET, September 24, 2012).
It then went on to listthe measures being contemplated by the UPA-II government in its reformist avatar: raising the ceiling on foreign borrowings, easing curbs on portfolio investors and liberalising norms for overseas borrowings.
The reliance on debt flows and fickle portfolio investors might seem at odds with one of the key lessons from the unfolding crises in key member states of the European Union. But the finance ministry, the report adds, is of the view that external commercial borrowings (ECBs) are a source of "long-term, cheap and stable funds".
Unfortunately, the finance ministry is off the mark on all three counts. ECBs are not always long-term. Nor are they always cheap or stable. On paper, ECBs may look cheaper than rupee loans. The flood of liquidity unleashed on the world by the powerful trio - the US Federal Reserve, the European Central Bank and the Bank of Japan - may even translate into cheap and abundant supply of funds.
For now! But a simple comparison of interest rates is misleading. Once the exchange risk or hedging cost is factored in, ECBs are no cheaper, and are often more expensive than rupee loans. A sharp depreciation in the rupee can cost borrowers dear.
Ask corporates that issued foreign currency convertible bonds when the rupee was quoting in the low 40s to the dollar and have to redeem their debt now when the exchange rate is over 50 to the dollar.
There is another problem. The revenue stream for many companies opting for ECBs is in rupees. So, there is no automatic hedge against currency fluctuations. Also, depending on the timing and the quantum of repayment, the resultant demand for dollars can rock the forex market.
Unfortunately, in any discussion of the twin deficits that beset the country today - the fiscal and the current account deficit - the latter barely gets a look in. The fiscal deficit hogs all the headlines though the current account deficit has the potential to cause far more damage. Consider: in a worst-case scenario, the fiscal deficit can be inflated away. But the current account deficit cannot.
Moreover, the fiscal deficit or the excess of government spending is subsumed in the current account deficit - since a large fiscal deficit usually spills over to the current account.
Despite this, the government seems more focused on finding ways to finance the current account deficit than on looking for ways to rein it in. However, any meaningful solution must look at both. Today, we need to find more forex sources to finance our stubborn and dangerously-high current account deficit of about 3.5%. But the search should not increase our dependence on more questionable means of financing. It must also focus on reducing the deficit.
Sadly, we have not seen much action on that front as yet. Exports have slowed down considerably but demand for exports is a function of both price and global economic well-being. So, there is not much we can do to increase exports.
Imports, on the other hand, are more amenable to control. The two main items in our import basket are oil and gold. But demand for oil is largely inelastic since the government is reluctant to let consumers feel the pain of rising global prices. So, the oil import bill will not shrink unless global prices fall or government follows through on the steps taken last month and allows a full pass-through of higher oil prices. This is unlikely.
We could make gold imports less attractive by restoring the public's faith in financial instruments. But that is not going to happen easily or quickly; not when real interest rates are again negative. SBI, for instance, offers an interest rate of 8.5% on deposits over three years even though consumer price inflation has crossed 10%. A negative real return of 1.5% is hardly going to encourage savers to move from gold to bank deposits.
In the short run, allowing corporates to access more overseas debt might increase foreign inflows. But the long-term implications of encouraging debt rather than non-debt inflows could cost us dear.
The RBI annual report puts it well, "To minimise the possibility of external shocks further disrupting India's growth sustainability over the next few years, it is important to not only focus on financing of current account deficit but also on compressing the deficit to lower, more manageable levels.
Otherwise, there are risks to current account deficit from both domestic and external events. In the recent period, current account deficit has been managed by improving debt inflows. However, this has long-term costs for debt sustainability and increases refinancing risks over time."
Despite this homily, the government seems to be toying with quick-fixes, eschewing the more sustainable remedy of reducing the current account deficit by allowing complete pass-through of oil prices and reducing the fiscal deficit. Ironically, the increased reliance on debt comes ata time when many of our external sector parameters have worsened (see accompanying graphic).
It is worth reflecting that we have fewer reserves today when we are a $2-trillion economy than when we were a $1-trillion economy!
Will the finance ministry heed the central bank? In the past, it has paid scant heed. But the newly-appointed chief economic adviser Raghuram Rajan has also flagged the issue. So, perhaps, this time, it will be different.
1 OCT, 2012, 06.19AM IST, SHAJI VIKARAMAN,ET BUREAU
India needs more growth, more public investment:
Vijay Kelkar
Mr. Vijay kelkar former finance secretary and advisor to the finance minister almost a decade ago, has often been one of the first port of calls for India's fiscal managers over the last few years when it comes to working out a blueprint for fiscal consolidation.
Kelkar, who headed the 13th Finance Commission, was told to present a fiscal road map for the medium term by P Chidambaram days after he returned to North Block.
A day after the report of the committee headed by him was made public, in an interview to Shaji Vikraman, he spoke about the approach of the committee and the dangers of not addressing macro economic imbalances. Edited excerpts:
The committee headed by you says that the economy is poised on the edge of a fiscal precipice and draws comparison to the situation reminiscent of 1991. The government's chief economic advisor, Raghuram Rajan, says that we are far from that. Aren't you being alarmist?
What we have said that if the present trend continues, the macro economic problems will get translated into a high fiscal deficit. Last year, we had a fiscal deficit of 5.8 % of GDP and a current account deficit of 4.2 %.
If this trend continues, the current account deficit could go up to 4.3 %.In our report, we have said that going by the trends this year, the fiscal deficit is likely to be 6.1 % of GDP which is far higher than the budgeted 5.1 %. As the Prime Minister said recently, money does not grow on trees. Remember, the Indian rupee is not a reserve currency.
So the options are either we boost exports, draw down our reserves or borrow from the world. At a current account deficit of 4.3 %, we would need $ 80 billion alone. Then there is maturing short term debt which needs further re-rolling. This will further increase the financing requirement. Such a trend would be unsustainable.
At this kind of financing and compared to 1991, the Indian economy is much more dependent on the global economy which itself is in turmoil. Energy prices are also three times higher in real terms compared to 1991 and our energy dependence is much higher now.
That's why there is a greater sense of urgency now especially when you don't have the headroom to counter cyclical policy measures and when you need to generate jobs for millions of young which requires high growth.
The Gangotri of growth deceleration and macro economic problems is the continued high fiscal deficit which also leads to high inflation. So we need to take corrective action swiftly.
Your report has projected a fiscal deficit of 6.1 % of GDP in FY13 in a no-reform scenario. The government has already indicated that it may not meet the target of 5.1 %. Your comments.
If there is no credible action being taken, we have said that fiscal deficit could be 6.1 % in 2012-13 due to a likely shortfall in gross tax revenues of close to 60,000 crore and higher subsidies of about 70,000 crore compared to the budget figures. The gross borrowing requirement is also likely be higher in such a scenario. Our assessment is that if you take corrective measures now, there is tremendous scope for pruning the deficit
You can attack inequitable subsidies, focus on greater tax compliance- an area where there is clearly scope to expand the tax base. The core of our argument is that India needs more growth, more public investment.
Once we have higher growth, there will be a virtuous cycle- deficits will come down, interest rates too and there will be higher private investment which will boost growth and employment. The engine of growth has to be greater momentum in public private investment which will boost growth.
Shouldn't we raise public investment to build infrastructure considering the problems with the PPP model?
It is still possible to boost public investment. The railways have been under investing. But we have also been lagging in power, roads and a number of areas such as airports, seaports and universities and urban infrastructure.
We need to speed up investment...It's important to remove obstacles in terms of regulatory and business climate to encourage investment. All this can be done through proper regulatory architecture and improved governance. We have not said anything that has not been said or done in the last 20 years. We can certainly do these supply side reforms which will boost growth.
The government has indicated that it would be difficult to be guided by your recommendations on cutting subsidies...
Our report shows that there could be a financial crisis for state-owned oil marketing companies if the current trend of under-recoveries continues. There could be a knock on impact on banks too. But why rule out what could be better than expected in terms of policy action or corrective steps.
For instance, there can be better innovations which the government may introduce than what we have outlined which could lead to better outcomes. India has done more than one fiscal correction in the last 20 years. Nothing is beyond us.
Through innovative approaches to divestment and the new instrument of monetising unutilised land with public sector undertakings as we have suggested, we can raise rapidly resources which can be used to finance infrastructure. The unutilised land according to one study can yield 33,000 crore in one city alone. This indicates there are enormous possibilities.
The recent Supreme Court judgement provides clarity and direction for taking steps in handling natural resources including land. All we need to ensure is that the process is fair and transparent. That is the test.
There has been criticism relating to the fiscal burden which could be imposed with the implementation of the Food Security Bill. How do you address this?
The government has multiple objectives such as promoting growth, social equity and macro economic stability. Given the state of the economy, there could be tensions in the pursuit of these objectives. Therefore, while implementing this legislation, the state of fiscal imbalance should be taken into account. That is what we have said.
The committee says that the MNREGA scheme should not be fiscally constrained. Should we attempt to integrate this and other social security schemes, including cash transfers?
The MNREGA scheme is one of the most important social safety nets. We should protect them. Our report says that it is possible to see a demand-led rise in spending under this scheme. Over time we can try and integrate social security measures like food and other things with cash transfers.
You have virtually said that the Direct Tax Code (DTC) should be junked
I am not saying junk it. What we have said is that the present DTC should be reviewed. Implementation of the DTC in its present form, will lead to revenue loss which we cannot afford at this current juncture. But in its present form we need to review it.
You have said in the past too that the GST can be a game changer. Can we afford to hasten such a significant reform without getting the design right?
A well-designed GST is a pre-condition. It is possible to move quicker on it especially since the finance minister, the chairman of Parliament's standing committee on finance and the Chairman of the empowered committee of state finance ministers are all reformers and want to support reforms. So, one should not rule out the possibility that it may happen sooner than later.
The tax to GDP ratio has become a worry for fiscal managers. What would you suggest to broaden and raise this base?
A well designed GST will be a major instrument towards increasing the tax base at the Centre and states. Getting the railways into the service tax net will also add to this.
How pragmatic are some of your recommendations?
The possibilities are interesting. The innovative approaches such as exchange-traded fund will help reduce risks for retail investors while helping diversify their portfolio as also the call option model and the offer sale model will help protect the government's interest and boost the capital market.
Current account deficit a major cause for rupee fall: Gokarn
CHENNAI, JULY 4:
India’s current account deficit has been a major factor for the downward movement of the rupee. As the current account deficit corrects, be it due to lower oil prices, increased exports or lower imports, it will have the reverse effect, said Dr Subir Gokarn, Deputy Governor, Reserve Bank of India.
Replying to a question on how the rupee managed to gain in the last few days, Dr Gokarn said there is clearly some positive news from the global front, especially after the EU summit and on the domestic front in terms of policy action, particularly the raising of the ceiling on FII investments. These, he said, might have contributed to the rupee strengthening.
Saying that one cannot directly correlate the rupee movement with the open market operations, he said OMOs are driven by judgments on liquidity conditions.
Speaking to a group of media persons on the sidelines of a conference here, Mr Gokarn said the Reserve Bank is continuously focussing on maintaining liquidity within the comfort zone. “Whatever is causing liquidity stress, whether it is the foreign exchange market or something else, we are focused on maintaining liquidity conditions within the comfort zone that we have stated. And that will continue to be the benchmark.”
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