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Jaitley's austerity measures not enough to beat fiscal deficit
According to government estimates these measures would result in a saving of around Rs 35,000 crore to Rs 40,000 crore, which works out to a mere 0.3% of GDP.
Shishir Asthana | Mumbai Last Updated at October 31, 2014 15:58 IST
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Finance Minister Arun Jaitley seems to have bitten off more than he can chew. By accepting the challenge set by his predecessor of bringing down fiscal deficit to a seven-year low of 4.1%, Jaitley is now desperate for solutions.
Copying a move from his predecessors Pranab Mukherjee and P Chidambaram, Jaitley has announced an austerity drive barring government officials from travelling first-class on flights, as well as on government departments purchasing vehicles or holding meetings at five-star hotels. The government has also barred the creation of new posts.
An ABP report claims that the measures are virtually the same as those taken by UPA finance ministers Mukherjee and Chidambaram, to the extent of even using the same language. The report quotes a retired secretary Surojit Roy saying "The only difference over the years has been the name of the man who signs it."
The other big difference this time around, of course, is the use of the word 'mandatory'. Jaitley has asked for a mandatory 10% cut in non-Plan expenditure for every department. Also, the responsibility for meeting the target has been set with secretaries of the ministries/departments. Financial adviser shall assist the respective departments in securing compliance with these measures and also submit an overall report to the minister-in-charge and the Ministry of Finance on a quarterly basis regarding various actions taken on these measures.
But will banning air travel and holding meetings really have an impact? According to government estimates these measures would result in a saving of around Rs 35,000 crore to Rs 40,000 crore, which works out to a mere 0.3% of GDP.
In order to meet the fiscal deficit target, Jaitley had assumed a 25.8% growth in indirect tax collection and a 15.6% growth in direct tax collection. But indirect tax collection for the first half of current fiscal has been only 5.8%, while net direct tax collection has increased by only 7%. The government will find it difficult to meet their revenue target this fiscal.
The only other option left for the government to meet its fiscal deficit target is to cut expenditure, especially since 74.9% of the targeted fiscal deficit had already been achieved in the month of August itself. But the problem of cutting expenditure through austerity measures will be that it poses risks to growth, says Japanese brokerage firm Nomura.
But unlike Chidambaram, Jaitley has not touched plan expenditure and has only attacked non-plan expenditure. Chidambaram had announced a 15% cut of both plan and non-plan expenditure in his austerity measure.
Jaitley has the benefit of lower crude oil prices, lower gold prices and its lower imports to bring down non-plan expenditure further. An Indian Express report quoting a government official says that lower crude oil prices and delay in rolling out the Food Security Act will result in saving of Rs 30,000 crore. Curtailing subsidies and other non-plan expenditures would surely bring the fiscal deficit target to the 4.1% mark, but the biggest problem facing the country is growth or rather the lack of it.
In order to boost growth government will have to take the lead in picking up the tools and start working. Vikram Limaye, MD and CEO of IDFC, the country's largest infrastructure finance company, in an interview on CNBC today said infrastructure lending has been quite low and same was the case with credit offtake. Unless there is a pickup in economic activity, preventing babus from flying would be like applying bandaid to a chronic disease. Current year tax collection number suggests the economy needs an overdose of Vitamin M aka liquidity. Re-directing the savings from flight tickets and five star hotel bills to constructive projects can be a solution to the problem.
First Published: Fri, October 31 2014. 15:49 IST