Column : Watch that budget unravel

The GDP collapse will make a mockery of tax targets, but even before this, the budget was unrealistic

If even the optimistic Prime Minister's Economic Advisory Council (PMEAC) hasn't given a fiscal deficit target while giving one for almost every other thing, there is a good reason. It's also the same reason why finance minister P Chidambaram has asked a panel headed by Vijay Kelkar to examine the facts on the ground and give him a sense of how bad the fiscal situation is, so he can present a reasonable picture of the deficit while outlining a medium-term fiscal target.

Based on the figures available till June, tax revenues were 13.6% of the budget target for the full year and the deficit 37.1%. When we had similar numbers last year, we ended the year with a deficit of 5.9% of GDP as compared to the budget estimate of 4.6%. We have had years with worse April-June performances when the full year's deficit target hasn't been breached so badly, but those were years of high growth. In 2008-09, the April-June performance was even worse (the deficit in this period was 64.6% of that for the full year), and given the collapse in growth that year (from 9.3% the previous year to 6.7%), the deficit was 6% of GDP as compared to the 2.5% target.

If the GDP growth estimate of 9% in the 2011-12 budget went awfully wrong as compared to the actual growth of 6.5%, things aren't dramatically different this year. As against the budget target of 7.6%, most private forecasters like Crisil are looking at a 5.5% growth in case of a bad monsoon, and a bit higher if the monsoon is merely poor. Indeed, even the optimistic PMEAC is looking at a growth of 6.7%. There are no well-established tax-to-GDP elasticities as tax growth tends to be slow when GDP is slowing and fast when GDP is on an upswing. When growth picked up from 7% in 2004-05 to 9.5% in 2005-06 and 9.6% in 2006-07, tax growth picked up from 20% in 2004-05 and 2005-06 to 29% in 2006-07. When GDP growth fell from 8.4% in 2010-11 to 6.5% in 2011-12, tax growth fell from 27% to 13.7%.

... contd.

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