Deficit is reined in, but at a cost

The government’s success in reining in the fiscal deficit for 2014-15 at four per cent of GDP (at Rs 5,01,880 crore), surpassing its own estimate of 4.1 per cent made in February, is quite creditable, though it has been achieved at a price. The Manmohan Singh government’s finance minister, P. Chidambaram, had left a deficit at 4.4 per cent of GDP. These are provisional figures released by the finance ministry but  the final figures, to be released later this month, are not likely to be different. This was achieved at the cost of cutting down on capital expenditure, which is bad for future growth.

The government has always been trying to pressure the Reserve Bank of India to cut rates in order to stimulate investment that could lead to growth. It is almost laying blame for sluggish investment on the high rate of interest. Of course, interest rates in India are the highest when compared to most of the countries with which India competes in exports. But, under the circumstances, even if the RBI cuts rates in its June 2 policy, it is hardly likely to lead to the private sector rushing to invest in a big way.

The private sector will not invest unless it sees the government starting to invest in infrastructure projects. The government seems to have had little choice, with the rating agencies holding out the threat of a downgrade of India’s sovereign rating to junk status.

So it chose discretion over valour and cut down on Plan and non-Plan expenditure, saving Rs 54,397 crore, as  its revenue receipts were not enough to meet the requirements of the fiscal deficit target. Its gross tax collection was up nine per cent at Rs 12,45,037 crore and non-tax revenue was at Rs 196,959 crore, 90 per cent of its revised estimates of Rs 217,831 crore. Its non-debt receipts, including from disinvestment, was Rs 43,439 crore, 103 per cent over its revised estimates.   

The government now has tough challenges ahead. It has to spur investment and growth and, equally importantly, widen its tax net. Apart from the number of people paying taxes being minuscule, there are lakhs of shopkeepers and traders, for instance, who don’t seem to be in the tax net. It is a sad state of affairs that it has been unsuccessful in unlocking several thousand crore rupees in taxes locked in disputes.

In addition, we have FIIs and multinational companies challenging every tax demand. The government has to find a way out of these logjams as this money, and the black money both within and outside the country, are enough to wipe out the fiscal deficit.