It should be noted that for the fiscal 2005-06, the second year of operation of the FRBM Act, the Finance minister announced a 'pause' for the reduction in the revenue deficit, which resulted in the same accounting for 2.7% of GDP (2.5% in FY05).
Having said that, the pause was temporary and the process was resumed thereafter. Consequently, in the current fiscal (2006-07), revenue deficit (as % of GDP) reduced by 60 basis points to 2.1%. Looking at the nine-month actual performance, the revenue deficit stood at 70% of the fiscal deficit (74% in FY06).
While the 9mFY07 revenue receipts have grown by 30%, the same (as a percentage of the budgeted estimates FY07) also stand at a much higher 69.6% (61.7% in 9mFY06). The capital receipts for the same period are, however, lower by 11%. Gross tax revenues have grown by 33%, surpassing the estimated growth of 19.5% in tax receipts in 2006-07 (BE).
The gross-tax to GDP ratio, which had stagnated at 8%-10% range, increased to 10.3% in FY06 and is expected to further improve to 10.8% in 2006-07 (BE). As a result, overall revenues for the 9mFY07 (as a percentage of the budgeted estimates for FY07) are higher at 68% (64.6% in 9mFY06).
Revenue sources
| Rs bn | 2006-07BE | 9mFY06 | 9mFY07 | % change | % of budgeted for 2007 |
| Total Revenue Receipts | 4,035 | 2,167 | 2,809 | 29.6% | 69.6% |
| - Tax Revenues | 3,272 | 1,688 | 2,322 | 37.6% | 71.0% |
| - Non Tax Revenues | 763 | 480 | 487 | 1.5% | 63.9% |
| Total Capital Receipts | 1,605 | 1,158 | 1,028 | -11.2% | 64.0% |
| - Recovery of loans | 80 | 74 | 80 | 7.3% | 99.4% |
| - Other receipts | 38 | 0 | - | 0.0% | |
| - Borrowings | 1,487 | 1,083 | 949 | -12.4% | 63.8% |
| Total receipts | 5,640 | 3,325 | 3,837 | 15.4% | 68.0% |
On the expenditure front, while the non-plan revenue expenditure has risen by 14% YoY, the non-plan capital expenditure has increased by 13%, which is an encouraging sign. Having said that, if one were to consider the total revenue expenditure (both plan and non-plan), then the same has grown by 17%.
In contrast, the total capital expenditure (actual investment in asset creation) has actually declined by 0.1%. In our view, capital expenditure has to be increased substantially in the long-term interest of the Indian economy. To summarise, the revenue deficit for the 9mFY07 has decreased by 12% YoY and its share in the fiscal deficit stood at 70%.
Expenditure breakup
| Rs bn | 2006-07BE | 9mFY06 | 9mFY07 | % change | % of budgeted for 2007 |
| Non Plan Expenditure | 3,913 | 2,379 | 2,722 | 14.4% | 69.6% |
| a) Revenue account | 3,444 | 2,216 | 2,538 | 14.6% | 73.7% |
| - Interest Payment | 1,398 | 810 | 926 | 14.4% | 66.3% |
| - Major Subsidies | 445 | 332 | 402 | 21.1% | 90.3% |
| - Pensions | 195 | 146 | 151 | 2.9% | 77.0% |
| - Others | 1,405 | 927 | 1,059 | 14.2% | 75.3% |
| b) Capital Account | 468 | 164 | 184 | 12.6% | 39.3% |
| Plan Expenditure | 1,727 | 946 | 1,115 | 17.9% | 64.6% |
| a) Revenue expenditure | 1,438 | 749 | 939 | 25.4% | 65.3% |
| b) Capital Account | 290 | 197 | 176 | -10.7% | 60.8% |
| Total Expenditure | 5,640 | 3,325 | 3,837 | 15.4% | 68.0% |
Outlook
The process of realizing the full growth potential of the economy through appropriate fiscal adjustments is a long-term process. While the reduction in the fiscal deficit has been a result of the buoyancy in tax revenues, what the government needs to focus on is the curtailment of expenditure (especially on the revenue front), a fact which has not been witnessed this fiscal and in the previous fiscals as well.
Though there exists headroom for further increase in tax revenues by improving the tax administration and the tax to GDP ratio, the critical factor is to reduce the expenditure by improving productivity and efficiency. And the government needs to do this, not by curbing capital expenditure, but by reducing the cost that it incurs in running the government machinery.
Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.
More from rediff