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Economy Sep 1, 2012

No miracles in Chidu's first month as FM: Budget in a mess

By Blog

Like every middle class salary earner who struggles to find money in the last week of the month, the government of India, too, finds itself in a similar situation. Only worse. It is finding it difficult even in the beginning of the month - or year, rather.

According to data released for the April-July period of 2012-13, the Central government has used up more than half the year's projected fiscal deficit - the gap between revenues and expenses that has to be bridged by borrowings from the public.

For the year as a whole, Pranab Mukherjee, before he was put out to grass on the lawns of Rashtrapati Bhavan, had pencilled in a fiscal deficit of Rs 5,13,000 crore. In four months, our mai-baap sarkar has swallowed up Rs 2,64,000 crore - much more than half the number for the whole year.

What will the Finance Minister do next? AP

At this run rate, in the worst-case scenario, the government could end up with nearly Rs 6,50,000-7,00,000 crore by the end of the year, unless it does something drastic to cut expenses or increase revenues. Only higher disinvestment, more spectrum revenues, and/or higher taxes can raise revenues.

As things stand, the bills are mounting.

The biggest bill is the oil subsidy burden, which is growing at the rate of Rs 405 crore a day, according to the Petroleum Planning and Analysis Cell (PPAC).

The first quarter subsidy - still unpaid - added up to Rs 47,811 crore, and if this figure holds for the rest of the three quarters, the year-end subsidy will be nearly Rs 2,00,000 crore. While ONGC, Oil India and Gail could pick up a part of the bill - say around Rs 60,000 crore, the balance of Rs 1,40,000 crore will have to be paid for by the centre if it does not want the oil companies to fall sick and die.

The budget subsidy allocation of Rs 43,000-and-odd crore was used up to pay last year's bills. So there's nothing left in the kitty to hand over to Indian Oil and BPCL and HPCL right now.

Adding Rs 1,40,000 crore of the balance subsidy bill - and assuming nothing else goes wrong on the budget numbers, which is a tall order when growth is slowing - the fiscal deficit is sure to hit at least Rs 6,00,000 crore for sure, even if the disinvestment target of Rs 30,000 crore is exceeded by Rs 10,000 crore.

At Rs 6,00,000 crore, and given a GDP number of Rs 101,59,884 crore projected in the budget (it may be met, given inflation), we are going to have a fiscal deficit of 5.9-6 percent once again. Rating agency Crisil has project 6.2 percent.

So much for Mukherjee's promise of bringing it down to 5.1 percent.

If this happens, it is difficult to see interest rates coming down, since the fiscal deficit is nothing if not more government borrowing. Five months into the financial year, there is more talk than action on the reforms and fiscal front.

A month after P Chidambaram took over as FM, much to the relief of one and all, no miracles have been noted.

If the fiscal mess continues, India could be looking at a ratings downgrade by the end of this year.

by Blog

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