The story about how Finance Minister P Chidambaram will manage to rein in the current financial year's fiscal deficit to about 3 per cent of the GDP is by now quite well-known. This might come as no surprise for either Chidambaram or those who have closely followed his previous Budgets.
With an Infosys-like ability (the software giant is known in the market as one corporate entity which has consistently managed to better its own results guidance it announces every quarter), Chidambaram has always set a fiscal deficit target that he improves upon when he presents his revised numbers for the year.
For 2006-07, he had set a fiscal deficit target of 3.8 per cent of GDP and he will end the year at a lower figure just as he did for all his previous Budgets - except the one in 1997-98, when he exceeded his estimates by 20 basis points only.
But what is not commonly known or understood is the manner in which he will achieve that magical figure of 3 per cent fiscal deficit, a target he was to achieve only by 2008-09.
Going by the revenue and expenditure figures available for the first three quarters of the current financial year and assuming that this trend is likely to be maintained in the fourth quarter, it appears that his tax revenue (which grew by 37 per cent till December and is set to even better in the last quarter) for the full year will give him a net benefit of Rs 51,000 crore (Rs 510 billion) over the Rs 3,27,205 crore (Rs 3272.05 billion) he had budgeted for.
Chidambaram had budgeted for a 19 per cent growth in tax revenue in 2006-07. He might end the year doubling that growth figure. His non-tax revenues have not done too well and might see a shortfall of about Rs 800 crore (Rs 8 billion). Even then his total revenues will show an increase of over Rs 50,200 crore (Rs 502 billion) or about 1.2 per cent of GDP.
If the story had ended here, Chidambaram would have gone home with a fiscal deficit figure of less than 2.5 per cent of GDP, assuming that he would have also got the extra benefit of a higher than anticipated GDP base making his gross fiscal deficit amount look smaller by at least 20 basis points. But that was not to be and that is why Chidambaram and his men in North Block are not looking too pleased with themselves.
Just as revenues knew no bounds, his expenditure in the current year went berserk. The government's non-plan expenditure (of which interest payments account for the largest chunk) has already gone up by 14.42 per cent in the first three quarters, compared to a budgeted target growth of about 7 per cent.
Thus, Chidambaram's non-plan expenditure grew at a rate that is almost double of what was budgeted at the start of the year. Given the way interest rates are hardening, there is no possibility of the growth in non-plan expenditure being reined in.
So, the year might end with an excess of Rs 26,300 crore (Rs 263 billion) over the non-Plan expenditure budgeted for the current year. There will be savings of about Rs 3,000 crore (Rs 30 billion), thanks to his ability to squeeze Plan expenditure, particularly on the capital side.
This may not be a healthy trend, but the savings will mean the total advantage of extra revenues would be reduced only to Rs 26,900 crore (Rs 269 billion), which is a little over 60 basis points of the GDP.
If oil prices continue to maintain their average current levels (for every one dollar per barrel rise in the price of crude oil, the central exchequer's kitty swells by about Rs 1,600 crore (Rs 16 billion) or vice versa and the GDP numbers remain as strong as anticipated, Chidambaram may still manage to reduce his fiscal deficit to around 3 per cent. But several questions will arise causing concern for those managing the government's finances.
One, a government that allows its non-Plan expenditure grow by almost double the projected rate should take a close look at its own budgeting methods and expenditure management techniques.
Two, success in reducing capital expenditure under the Plan may achieve the fiscal targets for the current year, but will have damaging consequences for the long-term efficacy of such programmes in terms of their delivery.
Three, taking advantage of rising oil prices and robust GDP growth to achieve fiscal targets is a lost opportunity if such developments are not used to implement reforms in oil pricing and in other sectors.
And finally, the sanctity of all the numbers put out as Budget estimates is lost, if the actual growth in tax revenue and non-Plan expenditure turns out to be more than double that of the budgeted rates.
Wouldn't there be a credibility issue when the finance minister announces next week the key revenue and expenditure numbers for 2007-08? To be fair to Chidambaram, twelve months may be too long a time to project an annual target correctly.
Perhaps, a way out is to do what companies practise. The finance minister may still set an annual revenue and expenditure target, but he could review this figure every quarter and make appropriate announcements to that effect.