Impact of second additional demand of expenditure 2011-12 on fiscal deficit

Today, the government announced the second supplementary demand foe expenditure for 2011-12.  Basically this supplementary demand is for additional expenditure outside the budget and has to be approved by the parliament.

For FY 2011-12 Government budgeted expenditure of Rs 12,57,729 Cr. Plan was Rs 4,41457 Cr and Non Plan was Rs 8,16,182 Cr.

The first additional demand was announced in Aug-11. Here is how the numbers added up post first supplementary demand:

Total Expenditure (in Rs cr)

1257729

  Plan

441457

  Non Plan

816182

First Supplementary
Gross (1)

34724.5

Savings from Ministeries (2)

25707.84

Token provision (3)

0.6

Net Funds needed (1-(2+3))

9016.06

   Plan Exp

7325.33

   Non Plan Exp

1690.73

Net funds went for following main purposes
Ministry of Women and Child Development

1500

Ministry of Finance (For Clean energy)

1066.46

Home Ministry (Police and payment to AirIndiafor VVIP travel)

935.34

Ministry of Statistics (Capacity building of local agencies to monitor various govt. programs

2375

So after First Supp Demand Total Exp is

1266745

A rise of just

0.7%

Second supp. demand looks like this (details not yet out just picked up from newswires):

Total Exp (BE)

1257729

First Supplemenatry demand

9016.06

Second Supplementary
Gross (1)

63200

Savings from Ministeries (2)

6400

Net Funds needed (1-2)

56800

These funds needed for following:
Ferilizer Subsidies

13800

Oil Subsidies

30000

Food subsidies

2300

Defence

3800

So after Second Supp Demand Total Exp is

1323545

A rise of

5.2%

So basically the expenditure has risen by nearly 6% from budgeted figures. And most of this increase is because of increase in non-plan items like subsidies. Non-plan forms 82% of the rise in expenditure and subsidies around 79% of the rise.

Even just after budget markets criticised for under reporting subsidies. But there was denial that numbers are all right. Now we have oil subsidies rising by 63% and fertilizer by 14%. Food is surprisingly very low still and could be revised afterwards in third grant or even budget.

BE 11-12

Grants

% rise

Fertiliser Subsidy

49997.87

13800.00

13.8

Food Subsidy

60572.98

2300.00

1.9

Oil Subsidy

23640.00

30000.00

63.5

Apart from this rise in expenditure, the revenue side looks pretty bad as well. Just a while ago, the government announced additional borrowing worth Rs 52,800 cr on account of shortfall in revenues. Markets expected additional borrowing on account of higher expenditure and lower tax revenues. But government mainly announced on account for shortfall in small savings fund. See my report on the same here.

Markets have been guessing (sorry forecasting :-)) how much the fiscal gap is likely to be. Govt put fiscal deficit at 4.6% of GDP. Post additional borrowing nothing much  changed as only sources of financing changed. I have put q-marks as we do not know what the outflows will be in Small Savings fund (likely to be lower after deregulation of the schemes) and State Provident funds will be.

BE

Changed on Sep-11

Total Receipts (1)

844912

844912

Tax

664457

664457

Total Expenditure (2)

1257729

1257729

Fiscal Deficit (2-1)

412817

412817

Fiscal Deficit to be raised by
External Financing

14500

14500

Internal Financing

398316.6

Market Borrowings

358000

410800

Securities against small savings

24182.46

??

State Provident Fund

10000

??

After this rise in expenditure, what will be the impact on fiscal deficit. If we assume revenues will remain as per budget the deficit alone is coming at 5.3% of GDP.  Disinvestment of Rs 40,000 Cr is most unlikely to happen. So far only 1145 Cr has come. If we assume disinvestment of around Rs 5,000 Cr we get fiscal deficit at 5.7% of GDP.

All revenues as per budget

Disinvest of Rs 5000 Cr

Total Receipts (1)

844912

809912

Tax

664457

664457

New Expenditure (2)

1323545

1323545

Fiscal Deficit Estimated

478633

513633

Fiscal Deficit % of GDP

5.3

5.7

Most people don’t assume tax revenues to be as per government estimates. This will lead to higher fiscal deficit. But then GDP base is likely to be higher as government assumed nominal growth at 14 % (9% growth + 5% inflation) but is likely to be 16 % (9% inflation and 7% growth). I would assume overall both these trends should even out (which is a bad assumption as getting lazy) and we will get fiscal deficit around 5.3-5.7% kind of range.

At 5.3% of GDP additional deficit is Rs 65816 Cr and at 5.7% it is 1,00,816 Cr. Most likely this funding will be raised by additional market borrowing. Government will try hard to keep  deficit at around 5.2%-5.3% so one can expect additional borrowing to the tune of Rs 50-60,000 Cr. Tough times for banks and primary dealers. Interest rates could move up and loads of red ink balance sheets ahead…

These numbers are pretty high. So what are the options? There are few of them actually (read gimmicks):

  • Govt will get some revenue source from somewhere (ask PSUs to share losses, dole higher dividend etc)
  • Govt can cut the plan expenditure as has mostly been the case
  • Allow the nominal GDP base to rise. As growth is unlikely to rise, let inflation be high :-). This way overall deficit will remain higher, but in % of GDP terms, targets will be achieved…And we all care about this % of GDP figure..

Interesting times..Lots of fiscal jugglery to follow…

All this just after  two major reforms announced yesterday – FDI in retail and Companies Bill. It is like taking one step forward and two steps backwards. Unless we solve this fiscal problem, we are not going anywhere..

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5 Responses to “Impact of second additional demand of expenditure 2011-12 on fiscal deficit”

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