COMMENTARY
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numbers have since undergone a signifi-
Budget 2011: Veering Off the
cant change on account of a revision of the base year to 2004-05. These revised num-
Fiscal Consolidation Road Map
bers were used by the ministry of finance (FINMIN) in a status paper “Government Debt: Status and Road Ahead” in Novem-Mala Lalvani ber 2010 to revise the debt target set out
The overarching message of the government in Budget 2011 was that it was not enhancing the tax burden. It was a revenue neutral budget, claiming to spend adequately on developmental schemes and yet getting back on the fiscal consolidation road map. The verdict, however, is that Budget 2011 seems to be just one more on the beaten track of backtracking on developmental expenditures when in fiscal correction mode.
G
1 Finance Commission Road Map
The road map of fiscal consolidation laid out by the Thirteenth Finance Commission (THFC) is in terms of debt, and the fiscal and revenue deficits (Table 1).
Table 1: Fiscal Consolidation as Per the Finance Commission (as a percentage of GDP)
Debt Fiscal Deficit Revenue Deficit
2010-11 53.9 5.7 3.2
2011-12 52.5 4.8 2.3
by the THFC. The GDP numbers for 2010-11 (revised estimates or RE) and 2011-12 (budget estimates or BE) in the budget document of 2011-12 have undergone a further change (see “Budget at a Glance”, Budget 2011). Consequently we now have three sets of GDP figures (Table 2).
Table 2: GDP – Forecast of THFC, Revised (FINMIN) and Re-Revised (Budget 2011) (in Rs crore)
| GDP as | Revised GDP | Re-Revised- | |
|---|---|---|---|
| Projected | (as per FINMIN) | GDP (as per | |
| by THFC | Budget 2011 | ||
| Figures) | |||
| 2009-10 | 58,56,569 | 62,31,171 | 65,50,271 |
| 2010-11 (RE) | 65,88,640 | 70,10,067 | 78,77,947 |
| 2011-12 (BE) | 74,45,163 | 79,21,376 | 89,80,860 |
| 2012-13 | 84,50,260 | 89,90,762 | |
| 2013-14 | 95,91,046 | 1,02,04,515 | |
| 2014-15 | 1,08,85,837 | 1,15,82,124 | - |
The THFC laid down the fiscal consolidation road map as a percentage of GDP and not in absolute numbers. However, the FIN-MIN in its status paper (GOI 2010) has revised the debt targets of the THFC as the denominator is now larger. Such upward revisions in the denominator would imply
2012-13 50.5 4.2 1.2 that the debt-GDP ratios that the THFC tar
2013-14 47.5 3.0 0
geted would now be smaller. This would, of
2014-15 44.8 3.0 -0.5
Mala Lalvani (mala.lalvani@gmail.com) is at course, imply that we consider the underlythe Department of Economics, University of
Underlying the above target was a ing debt targets set by the THFC in absolute
Mumbai.
GDP number forecast by the THFC. These terms rather than as a percentage of GDP. It
Economic & Political Weekly
COMMENTARY
| Table 3: Tracking Debt/GDP Ratios (in %) | While technically speaking this argument | |||||
|---|---|---|---|---|---|---|
| Debt Projection by THFC | Target Debt/GDP Ratio (Originally | Target Debt/GDP Ratio (Revised GDP | Effective Target Debt/ GDP Ratio (Re-revised | Outstanding Debt/ GDP Ratio (as Set Out | is not completely misplaced, we would | |
| (Rs Crore) | by THFC) | as per FINMIN) | GDP as Per Budget | in the MTFP Statement, | like to point out that from an economic | |
| (1) | (2) | (3) | 2011 Figures) (4) | Budget 2011)(5) | standpoint, with base revision a smaller | |
| 2009-10 | 31,74,260 | 54.2 | 50.9 | 48.46 | 48.1 | ratio is intuitively reasonable to target: |
| 2010-11 (RE) | 35,51,277 | 53.9 | 50.7 | 45.08 | 45.3 | since the scale of operation (i e, GDP) is |
| 2011-12 (BE) | 39,08,711 | 52.5 | 49.3 | 43.52 | 44.2 | now larger, i e, there is greater room for |
| 2012-13 2013-14 | 42,67,381 45,55,747 | 50.5 47.5 | 47.5 44.6 | -- | improving on the debt/GDP and deficit/ | |
| 2014-15 | 48,76,855 | 44.8 | 42.1 | - | GDP ratios set out by the THFC. Whatever |
Col (1): Debt projection implied by THFC. It is calculated from the Debt/GDP ratios and projection of GDP. Col (2): Projection of THFC. Col (3): Col 1/Col 2 of Table 2. Col (4): Col 1/Col 3 of Table 2. Col (5): “Medium Term Fiscal Policy Statement”, Budget Document 2011.
Table 4: Tracking Gross Fiscal Deficit/GDP Ratios (in %)
Deficit Projection Target GFD/GDP Target GFD/GDP Target GFD/GDP GFD/GDP Ratio by THFC Ratio (Originally Ratio (Revised GDP Ratio (Re-revised GDP (Actual and Budget (in Rs Crore) by THFC) Pas Per FINMIN) as Per Budget 2011 Figures) 2011-12)
(1) (2) (3) (4) (5)
the position that one may take, it would be interesting to compare the original THFC targets, the revised targets by setting the GDP at 2004-05 base as documented by the FINMIN and the re-revised targets by setting the GDP as given in the budget documents. We call these targets with
2009-10 3,98,247 6.8 6.4 6.1 6.4 the re-revised GDP as “effective targets”.
2010-11 (RE) 3,75,552 5.7 5.4 4.8 5.1 Such a comparison is presented for debt,
2011-12 (BE) 3,57,368 4.8 4.5 4.0 4.6
fiscal deficit and revenue deficit figures
2012-13 3,54,911 4.2 3.9
as a percentage of GDP (Table 3). Juxta
2013-14 2,87,731 3 2.8
posing these various versions of targeted
2014-15 3,26,575 3 2.8 Col 1: Deficit figures as implied by THFC. It is calculated from the deficit/GDP ratios and projection of GDP; Cols 2, 3, 4 and 5 are ratios as set out by the THFC, FINMIN computed as in Table 3 above by using revised and re-revised GDP.
and as per GDP of the budget documents is observed that Budget 2011 has re-revised Some may argue that this revision is not vis-à-vis the actual for 2009-10, the 2010the GDP figures further upwards. Conse-required since the targets were meant to 11 RE and the 2011-12 BE would suggest quently the targets set out by THFC would be met as ratios to GDP irrespective of the how we are progressing on the road of undergo a further change. magnitude of the absolute numbers. fiscal consolidation.
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may 14, 2011 vol xlvI no 20
COMMENTARY
Table 3 suggests that although technically the finance minister was right when he said that the THFC has recommended a 52% debt/GDP ratio and that his budget was targeting 44%, thus implying that the budget was well within the parameters
Table 5: Tracking Revenue Deficit/GDP Ratio
suggesting that the return to fiscal consolidation is rather slow. What is especially worrying is that capital surpluses (i e, the excess of borrowings for revenue expenditures which are non-asset creating) continue to be as high as 3.2% in 2011-12(BE).
Revenue Deficit Target RD/GDP Target RD/GDP Target RD/GDP Ratio RD/GDP Ratio Projection by Ratio (Originally Ratio (Revised GDP (Re-revised GDP as Per (Actual and Budget the THFC by THFC) as Per FINMIN) Budget 2011 Figures) 2011-12)
(1) (2) (3) (4) (5)
2009-10 2,81,115.312 4.8 4.5 4.3 5.2
2009-10. Table 8 shows that the share of economic services in GDP is not only lower than in 2010-11(RE) but marginally lower than in 2009-10.
Table 9 takes a look at the budgetary allocations for Bharat Nirman – the umbrella programme that the UPA has initiated as its signature programme for improving basic infrastructure. In 2010-11 the expenditure on the programme exceeded the budgeted amount by 0.6 percentage
2010-11 (RE) 2,10,836.48 3.2 3.0 2.7 3.4 points. Budget 2011 surprisingly allocates
2011-12 (BE) 1,71,238.749 2.3 2.2 1.9 3.4 a share of only 3.14% of total expenditure
2012-13 1,01,403.12 1.2 1.1 to Bharat Nirman which is lower than not
2013-14 0 0 0.0
2014-15 -54,429.185 -0.5 -0.5
Col (1) absolutes is computed from the ratios and GDP projections of THFC; Cols 2,3,4 and 5 are computed as in Table 3 above by
using revised and re-revised GDP.
spelt out by the THFC for fiscal consolidation. If, however, we use the re-revised GDP figures as in Budget 2011 (col 4 of Table 3) then the effective target would work out to 43.5%. This would suggest that the budgeted 2011 target of 44.2% is in fact crossing the effective target implied by the THFC by almost 1 percentage point.
In Table 4 (p 18) we use the same methodo logy spelt out above for Table 3 and use the re-revised GDP figures from the budget 2011 and obtain the effective target for gross fiscal deficit (GFD)/GDP.
The effective target for GFD/GDP when using re-revised GDP is 4% while the BE is expected to be 4.6%. In 2009-10 and 2010-11(RE) we have missed this by 0.3 percentage points. Along similar lines Table 5 tabulates the effective target for the revenue deficit/GDP ratios vis-à-vis the actual and budgeted amounts.
2 Quality of Fiscal Consolidation
The quality of fiscal consolidation is being tracked here by assessing the trends in deficit measures and expenditure measures especially that on social and economic services over the National Democratic Alliance (NDA), the UPA-I and the UPA-II phases.
The fiscal, primary and revenue deficits are all seen to be higher during UPA-II as compared to UPA-I. This is, however, expected given the fiscal stimulus that was required to perk up the economy. The 201112 budget has sought to improve on the deficit indicators as compared to 2009-10 and 2010-11(RE). These, however, continue to be higher than the UPA-I average thus
Turning our attention to expenditure indicators (Table 7), we find that in the first two years of UPA-II, total expenditures as a percentage of GDP has been higher than in the first phase of UPA. In 2011-12(BE), total expenditure as a percentage of GDP has been reduced by 1.5 percentage points. Revenue expenditures are seen to come down from 13.4% of GDP 12.2%, i e, a 1.2 percentage point reduction. Capital expenditure as a percentage of GDP is seen to
fall from the already low 2% to 1.79%. This goes contrary to the Fiscal Responsibility and Budget Management (FRBM) Act requirement which mandates that the revenue deficit to GDP should progress to zero and GFD/GDP should progress towards 3%. Instead of enhancing the share of capital expenditure to GDP, Budget 2011 has taken one step back and reduced it. Clearly, on this count, the road map of fiscal consolidation and the spirit of FRBM has been left aside by the budget.
The share of allocations for developmental expenditure, i e, on economic and social services (Table 8 and Table 9 (p 20)), provides a benchmark for assessing the quality of fiscal correction that has been attempted in Budget 2011. Expenditure on social services as a whole constitutes 1.85% of GDP. It is lower than the previous year and also marginally lower than the share allocated in only 2010-11(RE) but also the actuals of 2009-10.
The above trends suggest that Budget 2011 appears to be just one more budget on the beaten track of backtracking on developmental expenditures when in the fiscal correction mode.
3 Receipts
On the receipts side, Budget 2011 is projected as a revenue neutral budget with losses on the direct tax front on account of tax concessions and equivalent gains on the indirect tax front and from service tax. The fiscal stimulus packages announced
Table 6: Fiscal Deficit Indicators (as a percentage of GDP)
NDA UPA-I avg UPA-II (1998-99 to (2004-05 to 2009-10 2010-11 (RE) 2011-12 (BE) 2003-04) 2008-09)
Fiscal deficit 5.22 3.96 6.40 5.10 4.60
Primary deficit 0.69 0.48 3.14 2.04 1.61
Revenue deficit 3.73 2.49 5.18 3.43 3.42
Capital surplus -3.79 -2.55 -5.20 -3.62 -3.20
Table 7: Expenditure Indicators (as a percentage of GDP)
UPA-II NDA UPA-I avg 2009-10 2010-11 2011-12 (RE) (BE)
Total expenditure 15.78 14.33 15.64 15.47 14.01
Revenue expenditure 12.90 12.48 13.92 13.40 12.23
Capital expenditure 2.88 1.84 1.72 2.07 1.79
Table 8: Expenditure on Economic and Social Services (Percentage of GDP)
UPA-II NDA UPA-I avg 2009-10 2010-11 2011-12 (RE) (BE)
| Economic services (ECO) | 1.95 | 2.18 | 2.33 | 2.57 | 2.32 |
|---|---|---|---|---|---|
| Agriculture and allied | 0.19 | 0.27 | 0.19 | 0.25 | 0.21 |
| Rural development | 0.33 | 0.48 | 0.59 | 0.59 | 0.52 |
| Irrigation and flood control | 0.12 | 0.10 | 0.08 | 0.06 | 0.08 |
| Transport | 0.56 | 0.64 | 0.71 | 0.78 | 0.69 |
| Social services (SOC) | 1.19 | 1.54 | 1.87 | 2.07 | 1.85 |
| Edu, art and culture | 0.39 | 0.58 | 0.65 | 0.66 | 0.65 |
| Health and family welfare | 0.25 | 0.28 | 0.31 | 0.28 | 0.30 |
| Water supply, sanitation, | |||||
| urban development | 0.26 | 0.30 | 0.37 | 0.33 | 0.29 |
| ECO+SOC/GDP | 3.14 | 3.72 | 4.19 | 4.64 | 4.17 |
COMMENTARY
Table 9: Expenditure Allocations for Bharat Nirman (in Rs Crore) number of concessions from customs duty
2009-10 2010-11(BE) 2010-11(RE) 2011-12(BE)
on art and antiques, spares and capital
Pradhan Mantri Gram Sadak Yojana 7,156.79 6,451.88 14,898.5 12,667.1
goods required for ship repair, high speed
Accelerated Irrigation Benefit Programme Indira Awaas Yojana (IAY) 8,799.9 8,996 9,333.5 8,996 printing presses rolls of cinematic film,
IAY (net) 3,519.9 548 2,333.5 548 raw pistachio, bamboo for agarbatti, etc.
National Rural Drinking water prog 9,195.74 9,522 9,512 9,900 The gain projected from widening of the Rural telephony 2,400 2,400 3,100 2,100
tax net on the indirect taxes and service
Rajeev Gandhi Grameen Vidyutikaran Yojana 5,000 4,852 4,429 5,326
tax together is approximated at Rs 11,300
Total expenditure on Bharat Nirman 36,072.33 32,769.88 43,606.5 39,537.1
crore. While widening the tax net is a step
Total expenditure of GOI 10,24,487 11,08,749 12,16,576 12,57,729
Total expenditure on Bharat Nirman as a percentage of Total Exp 3.52 2.96 3.58 3.14 in the right direction for fiscal consolida
tion, such micro detailing and the large
Table 10: A Guesstimate of Tax Relief Available to Corporate Sector (Rs Crore)
2009-10 2010-11(RE) 2011-12(BE) number of concessions go against the ten-
Corp Tax Rates (%) 33.99 33.218 32.445 or of simplification of the tax policy with (base=30%; (base=30%; (base=30%;
minimal exemptions/concessions as is de
surcharge=10%; surcharge=7.5%; surcharge=5%; edu cess=3%) edu cess=3%) edu cess=3%) sired under the GST regime.
Corp tax revenue (actual obtained and budgeted) 2,44,725 2,96,377 3,59,990 On the direct tax front, there was some
Corp tax base (computed as tax revenue/tax rate) 7,19,991 8,92,218 11,09,539
relief for individual income tax and corpo-
Corp tax revenue if tax rate was 33.99 2,44,725 3,03,265 3,77,132
rate taxpayers (for corporate tax there
Corp rax revenue if tax rate was 33.218 -2,96,377 3,68,567
was a reduction in surcharge from 7.5% to
Revenue Loss implied because rate did not remain at 33.99% (Row 4 - Row 2) 0 6,888 17,142 5% while keeping the base rate at 30% and
Revenue loss implied because rate did not remain at 33.218% the education cess of 3%) which is projected (Row 5-Row 2) -0 8,577
to result in a net revenue loss of Rs 11,500 over the past two years have reduced cen-to be precise). This is a positive step to-crore. We attempted a small back of the tral excise and service tax rates. Budget wards withdrawal of the stimulus. How-envelope calculation to get a feel of how 2011 does not tamper with the broad rates ever, the finance minister chose the path this revenue loss was distributed between but widens the base in case of the service of tax incentives for agriculture, manufac-individual income tax (which has an imtax and withdraws exemptions for a large turing, environment and infrastructure. pact on larger numbers) and corporate number of items from central excise (130 The budget speech spelt out a large tax.1 From the data on corporation tax
may 14, 2011 vol xlvI no 20
rates and revenue rates we could compute the corporation tax base. We ask what would have been the revenue with the previously prevailing rate of 33.99% and 33.218% and compared it with the revenue that is projected at the reduced rate that would now prevail (i e, 32.445%). This provides us with an approximation of the revenue loss on account of this the corporation tax rate
reduction in(Table 10, p 20).
Table 10 provides a guesstimate of revenue losses in 2010-11 and 2011-12 on account of the reduction of corporate tax rate from 33.99% in 2009-10 to 33.218% in 2010-11, and to 32.445% in 2011-12. If the rate had remained at 33.99% the revenue loss implied is estimated at Rs 6,888 crore in 2010-11 and Rs 17,142 crore in 2011-12. Budget 2011’s announcement of a further reduction of surcharge to 5% implies a loss of Rs 8,577 crore in 2011-12. If we accept the aggregate revenue loss on the direct tax front as given in the budget speech of 2011, then 75% of the tax relief of Rs 11,500 crore on the direct tax front is directed towards the corporate sector, i e, corporate with incomes above Rs one crore. Clearly, the quality/direction of fiscal correction on the receipts side too is worrisome.
In addition to this, it is also possible to track from the data provided in the budget documents the trend in revenue forgone on account of tax incentives over the last few years on account of exemptions. This information is available for customs, excise, individual income tax and corporation tax. The proportion in which this revenue forgone is distributed over the last few years is tabulated in Table 11.
Two important observations from
Table 11: (a) The total amount of revenue forgone on account of concessions has almost doubled. This points to increasing exemptions and goes against the tenor of simplification and reduction in exemptions as a preparation for GST regime. (b) The share of revenue forgone on account of tax concessions is lowest for individual taxpayers and it has come down from 13% in 2007-08 to 9.9% in 2010-11. While it is true that the corporate sector needs a boost to incentivise investment, the fact that tax concessions are provided to them in terms of both rates (Table 10) and exemptions (Table 11) needs to be borne in
COMMENTARY
mind as we progress on the fiscal consoli-responsibility rules which plugs the loopdation path. holes in the first generation rules and help
us get back on the fiscal consolidation road 4 Conclusions map with the quality of consolidation The overarching message of the govern-
being kept under check. Some possible ment in Budget 2011 is that we are not loopholes in the first generation rules that enhancing tax burdens in any big way – need to be urgently plugged include (a) ex-Table 11: Distribution of Revenue Forgone penditure rules to improve on
(percentage distribution)
expenditure quality especially
2007-08 2008-09 2009-10 2010-11
in the direction of social and
Corporate income tax 21.82 16.16 15.11 17.25
economic services which are
Personal income tax 13.35 9.07 9.36 9.90 Excise duty 30.68 30.98 35.06 38.76 in the nature of pure public Customs duty 34.14 43.79 40.48 34.09 goods where markets do not Total revenue forgone (crores) 2,85,052 4,14,099 4,82,432 5,11,630
function, (b) explicit rules for it is a revenue neutral budget but we are debt targeting (Buiter and Patel 2010), spending adequately on developmental wel-(c) spelling out “exceptional circumstances” fare-enhancing schemes and yet getting which allow the rules to be relaxed (THFC back on the fiscal consolidation road map Report), and (d) an inbuilt penal clause a la and managing our deficits well. the European Union (Lalvani 2009).
Resumption of the path of fiscal consolidation is crucial to achieving a sustainable Note
1 The composition of the loss of Rs 11,500 crore on fiscal situation at the centre. However, the the direct tax front and the gain of Rs 11,300 crore on the indirect tax front is not possible to compute
quality of fiscal consolidation is necessary
from the budget documents. We were informed to keep track of, given the temporary that this was an internal calculation of the minis
try of finance which could not be computed from
duration of all governments and hence
data in the public domain, hence this attempt at their natural impulse to axe politically making a guesstimate.
convenient expenditure categories and fall
References
back on debt (the impact of which is not
Buiter, W and U Patel (2010): “Fiscal Rules in India: Are felt immediately) for incurring expenditure They Effective?”, NBER Working Paper No 15934, http://www.nber.org/papers/w15934.pdf
on those components which give the
GOI (2010): “Government Debt: Status and Road greatest political mileage. Ahead”, Ministry of Finance, Department of Economic Affairs, Government of India, November.
Having taken the first step of imposing
Lalvani, M (2009): “Persistence of Fiscal Irresponsithe FRBM Act, it is imperative that we look
bility: Looking Deeper into the Provisions of the
FRBM Act”, Economic Political Weekly, 12 Septowards a set of second generation fiscal tember, pp 57-63.
