February 16, 1998

Political instability and an unresponsive economy send Chidambaram's calculations into a tailspin.

By Shefali Rekhi

If Union Finance Minister P. Chidambaram is canvassing for votes in Sivaganga, his constituency in Tamil Nadu, on the issue of his "dream budget", it could well be his nightmare. The budget is now torn between a gaping revenue shortfall and mounting government expenditure. The United Front (UF) Government was banking on a revenue collection increase of 16.65 per cent but according to estimates, it will barely cross 4 per cent. Inflow on the disinvestment front is a dismal Rs 940 crore against the set target of Rs 7,000 crore. While together the shortfall on these accounts is a staggering Rs 20,000 crore, expenditure has already overshot ceilings by Rs 4,600 crore. Though there have been some unexpected inflows from VDIS and small savings and cuts in day-to-day spending, that is simply not enough.

The Government seems certain to slip on its fiscal deficit target with even the GDP growth rate one percentage point lower than the targeted 7 per cent. Though the UF had promised to limit the deficit to 4.5 per cent of the GDP, the economy has not responded to the many budget incentives, and the current financial year may finally close with a deficit figure of over 5 per cent. For a government that presented the most celebrated budget ever and pursued it with further reforms, the results are disturbing. "The budget is a failure," says Raja Chelliah, chairman, National Institute of Public Finance and Policy (NIPFP). "The cuts in revenue were too dramatic and the Government did not study its full impact. The economy it is leaving behind is in a worse shape than what it inherited."

DAUNTING TASK

This means more problems for the new government taking over in March. Its priority will be to inject life into the economy. High fiscal deficit and revenue shortfalls will act as speedbreakers ensuring less funds at its disposal to invest in capital-intensive projects such as power plants and roads. Reviving the economy will not be an easy task. And most political parties agree on that. "We were sceptical of the budget all along," says Jagdish Shettigar, member, National Executive of the BJP. "The Government's unrealistic policies have led to the current recession. It will not be easy correcting everything that it did wrong."

It is the low revenue accruals which have been the cause of much concern. North Block's projected increase of 16.65 per cent over total collections of Rs 97,212 crore in 1996-97 was based on a dramatic lowering of tariffs. Customs duty was brought down by 20 per cent, corporate tax by 8 per cent and Central excise was rationalised to 18 per cent. The projection was also based on the belief that lower rates meant higher compliance. But that's not how things turned out. Internal projections suggest that growth will not be more than 4 per cent over last year. But Revenue Secretary N.K. Singh maintains that the Government was "realistic" in its projection and the measures represented continuation of reforms. "However, we certainly did expect higher industrial growth and imports," he says.

Others like Jairam Ramesh -- who was part of the team that shaped the dream budget and has now crossed over to the Congress to chart its manifesto -- hold political instability responsible for the unresponsive economy. "The Government was not overoptimistic," says Ramesh. "It did not think that in so short a time there would be two prime ministers, that there would be elections within less than a year of the budget. Political uncertainty upset all calculations." The political scene notwithstanding, imports did turn sticky, exports fell, the sensex was hit by the Asian meltdown and businessmen were left with huge piles of stocks. This in turn hit revenue inflows and is now marring perceptions of a budget which otherwise was reform-oriented. The customs revenue accruals in the current year may be less by Rs 8,000 crore-Rs 9,000 crore while Central excise is estimated to be off budget by Rs 3,000 crore. The two account for two-thirds of revenue mobilisation. Direct taxes don't look any better. Income tax collections from individuals and corporate tax may show a shortfall of Rs 2,300 crore against the target.

The problem was further compounded by lower disinvestment inflows. The Government had initially set a target of Rs 4,800 crore to be collected from the sale of public-sector shares. But following the pay hike to Central government employees, the figure was upped to Rs 7,000 crore. Till date, only about Rs 940 crore has flowed in from the sale of the shares of Mahanagar Telephone Nigam Ltd. And given the turmoil in global financial markets, the negative perception of Asian economies and India's own political uncertainty, it is unlikely that the Government will be able to sell any more in the current fiscal. The collection shortfall of Rs 20,000 crore apart, the Government will need an additional Rs 4,600 crore on account of pay hikes and higher food and fertiliser subsidy bills.

SAVING GRACE

There is some consolation though. The fiscal imbalance this year would have been worse had it not been for some unexpected inflows. The Government puts these inflows at around Rs 15,200 crore, but the rationale does not seem entirely convincing. Roughly Rs 10,000 crore is from the tax accruals under VDIS. Ideally, 77.5 per cent of this should have gone to the state governments in the current year (promised by Chidambaram in his budget speech), but Gujral's caretaker government has put off the issue to the next fiscal. For the new government, however, it will mean a hole of Rs 7,750 crore on the expenditure side at the very outset.

While Rs 3,000 crore is expected to come from small savings, an additional Rs 1,200 crore is expected to flow back as taxes from officials who got the pay hike. And Rs 500 crore similarly from states where governments have hiked salaries of their employees. Plus there could be a bounty of Rs 500 crore if Harshad Mehta's securities scam cases are resolved. He actually owes the Government Rs 1,500 crore -- without penalty and interest. But with case hearings concluding anytime now, the Government expects to recover at least a third of it in the current year.

There are elements of doubt in the Government's expectations. But even forgetting the ifs and buts for the moment, there is no denying that the fiscal deficit will remain under strain. Says D.H. Pai Panandiker, chief economist with the RPG Foundation: "A higher fiscal deficit is definitely something to worry about. It will either push up inflation or interest rates, companies will find it difficult to borrow from the market." In other words, a higher fiscal deficit will make economic recovery that much more difficult. In the past few years, whenever deficits have gone out of hand, productive investments have suffered. Even in the UF Government's first budget, when the failure of the disinvestment rounds threatened to mar deficit targets, the Government cut back spending on education and nutrition to make up the shortfall. The exercise was repeated in the current year. When pay-hike arrears exceeded the budget, the Government announced a string of measures to mop up extra needs. They included a cut-back in spending of 5 per cent each on plan and non-plan account totalling Rs 3,200 crore. A substantial chunk of this cut was on the development front and economists link such cut-backs with the economy's current pace.

For any government, getting a sluggish economy back on the rails is a daunting task. For the new government that will take over, it is an unenviable way to start.

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