It occurred across the board but the fall was largest in domestic indirect taxes such as central excise duties and service tax, which together fell short by about Rs 70,000 crore compared to the budget estimates. There was also an underachievement of the budgeted disinvestment target by close to Rs 30,000 crore.
Given that the government had decided to stick to the 2014/15 fiscal deficit of 4.1 per cent, the burden of adjustment fell on expenditure, which had to be cut by a corresponding amount. Most of this adjustment had to be done on capital expenditure, which fell by about Rs 34,000 crore or 0.3 percentage points of GDP. Because of the expenditure compression, the government policy becomes contractionary.
Although the advance GDP estimates put 2014/15 GDP growth at 7.4 per cent, there are issues with this number both in terms of inconsistency with other indicators of economic activity as also because of the contractionary stance of the government. In later versions of growth estimates, we may well see a downward revision of the 2014/15 real growth estimate. From this somewhat doubtful starting point, the Budget has targeted growth in the range of 8 to 8.5 per cent.
Comparing the mid-point of this range with the 7.4 per cent growth of 2014/15, an increase of about 0.9 percentage points is being targeted. This requires an increase in the investment rate of at least four percentage points of GDP.
Of this, only 0.2 percentage points of GDP comes directly from the central budget. It is a pity that even the additional fiscal space of 0.3 percentage points of GDP in terms of fiscal deficit could not be fully used to increase capital expenditure.
Some people argue that we have existing unutilised capacity which can be used first before additional capacity needs to be created. On the demand side also, there is hardly any support coming from the Budget. The budgeted increase in total government expenditure is only 5.7 per cent in nominal terms with plan expenditure slated to fall. Nor did the Budget provide any space for increase in private disposable incomes through, for example, an increased income tax exemption limit.
Clearly, any tangible rise in investment rate does not appear to be on cards. Would it come from the state governments? Contrary to general belief, there is no tangible increase in the overall transfers to the state governments from the Centre. States have also suffered revenue shortfall as most of it comes from indirect taxes. These are ad valorem in nature and linked to the fall in the inflation rate, including the fall in prices of petroleum products. With the continuing downslide of inflation, the central and state governments may be looking at falling buoyancy of their tax revenues even in 2015/16.
It is the public sector along with the departmental enterprises and the private sector that will have to perform extra if we are to see India's growth story through. With inflation in general and petroleum product prices in particular keeping low, household demand would eventually pick up as their real disposable income increases. The public sector may also be persuaded to activate their expansion plans aggressively.
Speaking of aggressive approaches, the Centre's policy strategists clearly missed the chance of eliminating the distinction between plan and non-plan expenditures. The 14th Finance Commission merged plan and non-plan expenditures in making their assessments.
We know that the total central government expenditure at 12.6 per cent of GDP is at a historical low because of the resource crunch. The one area where Finance Minister Arun Jaitley proved to be timid was subsidy cut. It is surprising as to why subsidies were not brought below 1 per cent of GDP. May be the cricketer in the finance minister was waiting for appropriate signals from some politically-oriented team owner.
(The writer is Chief Policy Advisor, EY India, and former member of the 12th Finance Commission)