Even as we debate on whether or not the government should adhere to the fiscal deficit target, numbers over the past few years show that while the government has managed to stay on course (2012-15), fiscal consolidation has not been without its costs.
After bringing down the fiscal deficit (as a percentage of the GDP) from 6.2 per cent in 2001-02 to 2.5 per cent in 2007-08, the government abandoned fiscal consolidation in 2008-09. The 2.5 per cent fiscal deficit was, in fact, the lowest ever fiscal deficit achieved, at least since the 1990s.
However, given the massive stimulus provided by the Centre in 2008-09 in the backdrop of the global economic crisis, the fiscal deficit overshot to 6 per cent. This was way above the targeted 2.5 per cent. That this was a pre-election year too did not help. The next year, the fiscal deficit rose further to 6.5 per cent.
Returning to the fiscal consolidation path in 2010-11, the government brought down the fiscal deficit to 4.8 per cent, only to have it shoot up to 5.7 per cent in 2011-12. Lower than expected disinvestment proceeds and a shortfall in tax revenue on the back of a slowdown in economic growth upset the fiscal math.
But since 2012-13, the government has managed to meet its fiscal deficit target every year. But, what also matters is the quality of fiscal consolidation.
Spending more, investing less
Over the last three years, even as the government kept the deficit (both the absolute number and as a percentage of the GDP) below target, the fiscal consolidation was not completely desirable as the details reveal. In each of these years, the government fell short of generating as much revenue as was budgeted for. This was primarily because tax revenue, which accounts for about 50 per cent (excluding states’ share) of the Centre’s total revenue turned out to be smaller than expected.
To add to that, the disinvestment proceeds too fell short of what had been budgeted for. As a result, the fiscal deficit target was adhered to (in fact, more than adhered to) by cutting back on expenditure that had been planned at the start of the year. And it was the more productive capital expenditure (investment-related spending) that was cut back sharply while the less productive revenue expenditure was reduced only a bit (relative to the budgeted estimates).
Budget allocations across several central ministries, too, have had to be slashed in the course of reining in the fiscal deficit.
To put things in perspective, in 2013-14, for instance, even as the government’s revenue expenditure (on the items mentioned above) at ₹7.5 lakh crore overshot the budgeted ₹7 lakh crore, investment related allocations of ministries were cut down to ₹1 lakh crore from the budgeted ₹1.1 lakh crore.
So, while revenue expenditure (includes interest payments, subsidies, pensions and police) as a percentage of the government’s total expenditure went up from 83 per cent in 2007-08 to 89 per cent in 2014-15, capital expenditure correspondingly went down.
So, even as the government stuck to its fiscal targets, that these were achieved at the expense of the more productive capital expenditure has adverse implications for long-term growth. In the coming fiscal year, the government already faces pressure on the revenue expenditure front due to the Seventh Pay Commission recommendations and the One Rank One Pension plan.
Will it again cut back on capital expenditure to stay on course? Only, the Budget day will tell.