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Capital expenditure growth dips

The mid-year review of the economy has drawn attention to a sharp deceleration in the growth of capital expenditure to 3.6 per cent in April-September even as non-Plan revenue expenditure spurted by 14.4 per cent.

The review however says the fiscal situation in the first half of 2002-03 has been more or less satisfactory compared to the disappointing performance of 2001-02, when the fiscal deficit touched 5.9 per cent of GDP. But it also acknowledges that revenue projections for the current financial year have been too high.

The growth in net tax revenue is projected to grow 6.8 per cent and this is higher than even the revised growth estimates for 2001-02. To achieve higher revenue, better recovery of user charges and restructuring of tax revenues with minimum exemptions in central excise and sales tax were needed.

The review clearly indicates that if the fiscal condition does not improve, the economy will not be able to break away from the current growth rate levels of 5-5.5 per cent. The review warns of a possible revenue shortfall in 2002-03.

On the expenditure side, it says the huge plan size should be pruned because it is pushing states into a debt overhang, Finance Secretary S Narayan and Chief Economic Adviser Ashok Lahiri explained at a press conference.

Lahiri said the government borrowings would become a drag on the economy once the demand for credit from the manufacturing sector sharpened. Along with expenditure overrun, "unanticipated weakening of the growth momentum may affect revenue collections in the absence of appropriate corrective measures".

The expenditure problem will come from enhanced food and fertiliser subsidies, larger subsidies on distribution of LPG and kerosene at below market prices and a Rs 2,000 crore (Rs 20 billion) unanticipated expenditure on drought relief, it adds.

Narayan said the reduction in the fiscal deficits of the central and state governments was the biggest challenge in the next few months. He said because interest, defence, wages, pensions, and plan expenditure were committed, the option with the government to reduce overall expenditure remained minimal.

There was also a need to improve expenditure management. Traders regularly bought cheap from godowns and sold the stocks back to the Food Corporation of India. It makes a mention of following through the recommendations of the Expenditure Reforms Commission.

A reduction in interest rates is not possible unless the states and the Centre reduce primary deficits. Such deficits pushed up the debt burden of these entities. Narayan, however, added that the finance ministry would continue to push for lower interest rates.

The review has also questioned the rationale for a large plan expenditure. It creates a problem of debt servicing without increasing revenue, because it leaves unaddressed the issue of recovering user charges.

It suggests its gradual replacement by public private partnership. On the size of the disinvestment kitty in 2002-03, Lahiri said he was an optimist and expected the government would reach the Rs 12,000 crore (Rs 120 billion) target.

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