27 Jan 2017 13:24 IST

Quality of spending comes under radar as fiscal draws to a close

Economists warn that revenue deficit may breach target

Will the Exchequer’s switch to a new classification of expenditure from 2017-18 help lower the revenue deficit and improve the quality of spending?

The Finance Ministry believes that shift in classification to revenue and capital expenditure from April 1, departing from the current distinction of Plan and Non-Plan spending, will help it direct expenditure towards productive purposes.

It is also hopeful that measures taken to encourage capital expenditure by Ministries will help balance the skewed spending pattern from 2017-18.

Fiscal consolidation

The report of the NK Singh Committee on the future fiscal consolidation roadmap is also expected to give further pointers on how to tackle the deficit while improving the quality of spending.

Analysts, however, are cautious and point to the high revenue deficit, which is in danger of breaching its budgeted target in 2016-17.

“The Centre is likely to meet the fiscal deficit target of 3.5 per cent, but going by the Central government accounts till November, I think it will miss the revenue deficit target of 2.3 per cent of GDP by a reasonable margin in 2016-17,” said DK Srivastava, chief policy advisor, EY (India).

According to data with the Controller General of Accounts, the revenue deficit between April and November 2016 touched a two-year high of Rs. 3.48 lakh crore or 98.4 per cent of the Budget Estimate.

The Fiscal Responsibility and Budget Management Act, 2003 aims to lower the revenue deficit to 2 per cent by the next fiscal year and, accordingly, the Centre plans to lower its revenue deficit to 1.8 per cent of GDP in 2017-18 and further to 1.3 per cent in 2018-19.

Key indicator

Revenue deficit is the excess of the government’s revenue expenditure over revenue receipts. It is an indicator of how well the government is spending its money and what part is going towards unproductive expenses, such as salaries, pension and interest payments, instead of productive spending on capital assets.

“Both the fiscal and revenue deficits are on the higher side. We expect the revenue deficit to be about 2.5-2.8 per cent this fiscal due to the lower receipts from disinvestment and the spectrum sale,” said Rucha Randive, Associate Economist, CARE Ratings.

Sunil Sinha, Principal Economist, India Ratings, believes that the challenge of a high revenue deficit is not a new phenomenon. “The revenue deficit as a per cent of the fiscal deficit has been on the rise for quite a few years now. Consequently, three-fourth of the Centre’s borrowing is not to fund capital expenditure but unproductive revenue spending,” he said.

Pointing out that of every Rs. 100 spent by the Centre, Rs. 80 is on committed expenditure, such as salaries, pensions and debt servicing of interest payout, Sinha said just about Rs. 20 is left for capital expenditure.

“The fiscal deficit target in many years has been met by compressing the capital spending and not the revenue spending,” he noted, adding that this year the Centre had front-loaded its expenditure and the revenue deficit still has time to correct before the end of the fiscal year.

In previous years, too, the Centre has managed to contain its revenue deficit, despite breaching the Budget target in the course of the financial year.

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