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Arguing over GDP numbers won't convince investors. Government must focus on fiscal correction
The ministry of finance has responded strongly to the Central Statistics Office (CSO) estimates for GDP growth of 5 per cent in 2012-13, saying that it is an underestimation. Normally, it would be surprising to see the ministry respond to growth numbers as loudly as it has done this time. But in this case, it was not entirely unexpected. The CSO's estimates can upset the finance ministry's promise of a lower fiscal deficit number. On his recent foreign tour, Finance Minister P. Chidambaram promised a 5.3 per cent budget deficit. This rests not only on projections of revenue, expenditure and the gap between them, but also on the denominator, GDP.
All the important assumptions made in the projections for the 2012-13 budget deficit have gone awry. During April-October, tax revenues grew by 14.54 per cent. This was lower than the 20 per cent growth assumed in the budget. Expenditure growth, at 14.6 per cent, on the other hand, was higher than the 13 per cent expenditure growth.
The fiscal situation is already difficult. With unmet disinvestment targets, a large subsidy bill that has yet to be impacted much by higher fuel prices and a newly launched cash transfer scheme that is unlikely to give efficiency gains or any reduction in expenditure in this budget, cutting expenses on the big ticket items is not easy. The finance ministry's credibility is already fragile. The CSO's GDP estimates can further hurt it. A smaller GDP number will yield a higher fiscal deficit to GDP ratio.
Under the current system of budget making, the government makes an assumption of GDP growth while preparing estimates for the budget. The ministry has insisted that growth will be 5.5 per cent. Since these are all only projections of production in the economy till March 31, 2013, it is surprising how anyone can be very confident about what GDP growth is going to be. Indeed, during the last two years, most projections of GDP growth for India have been slashed. The IMF's projection for GDP growth for India in 2012 is 4.5 per cent. Looking at the relentless decline in investment growth, it seems a more plausible estimate than the ministry of finance's 5.5 per cent. Even if the ministry is seeing green shoots of recovery, none of the publicly available indicators show them yet.