Jaitley’s Fiscal Deficit Math Turns More Difficult – The Budget preparation has brought the focus on the fiscal deficit target that Finance Minister Arun Jaitley is likely to announce.
The Central Statistics Office on Monday released the advanced estimates for 2015-16. It forecast real gross domestic product (GDP) growth for the year at 7.6 per cent and nominal GDP growth at 8.6 per cent. The lower-than-expected GDP growth could make it more challenging for Finance Minister Arun Jaitley to meet his fiscal deficit target for the year.
According to 2015-16 budgeted estimates, the nominal GDP for the year was pegged at Rs 141 lakh crore and the fiscal deficit was estimated to be Rs 5.56 lakh crore. Last week, the government came out with advanced estimates for 2014-15 and pegged last financial year’s nominal GDP at Rs 124.88 lakh crore. According to data released on Monday, nominal GDP for the year was now expected to be Rs 135.67 lakh crore.
Jaitley and other senior finance ministry officials have said time and again that this year’s fiscal deficit target of 3.9 per cent of GDP would be met. That comes up to Rs 5.29 lakh crore. The budgeted deficit target of Rs 5.56 lakh crore was in fact 4.1 per cent of the nominal GDP advanced estimates.
The Budget preparation has brought the focus on the fiscal deficit target that Finance Minister Arun Jaitley is likely to announce. However, the challenge will be even greater on the revenue deficit front arising from higher government expenses on salaries and pensions. A likely higher revenue deficit has the potential to make India’s fiscal balance sheet unhealthy.
The revenue deficit is a situation when the government’s outgo on salaries, pensions and subsidies is higher than receipts, not resulting in any asset creation. The government’s efforts to contain the revenue deficit at 2.4 per cent of the gross domestic product in 2016-17 appears to be an uphill task with Jaitley expected to make a provision of Rs 1.1 lakh crore in the next financial year to implement the recommendations of the Seventh Pay Commission and the one rank, one pension (OROP) scheme.
On the revenue front, the finance ministry was expecting higher proceeds from non-tax revenue, especially through record dividends from state-owned companies and financial institutions and the Reserve Bank of India.
The government has also imposed additional revenue generating measures such as duties on diesel and petrol. That, coupled with an increase in service tax, was expected to lead to indirect tax figures being revised to higher than the budgeted amount by as much as 20 per cent.
On the other hand, the government’s disinvestment programme had come a cropper this year due to volatile market conditions. The Centre had asked state-owned companies to buy back shares from it to make up for any shortfall. Additionally, Revenue Secretary Hasmukh Adhia said the direct tax shortfall this year could be as high as Rs 40,000 crore.
The costs of OROP and the Food Security Act were not taken into account at the time of making the road map for containing the fiscal deficit at 3 per cent of GDP by 2017-18. The revenue deficit essentially arises when capital expenditure and receipts are taken off the fiscal deficit.
There is a debate in the government whether Jaitley should stick to the Fiscal Responsibility and Budget Management-mandated fiscal target of 3.5 per cent of GDP or re-assess it in the face of additional spending burden due to the recommendations of the Seventh Pay Commission; the one rank, one pension payout; pension; rural sector push and higher capital spending.
The Seventh Pay Commission’s recommendation of a 23.55 per cent increase in the pay and allowances of government employees from January 1, 2016, will need an estimated Rs 1.02 lakh crore extra expenditure. “The targets under the existing FRBM need to be re-looked at, if not for the fiscal deficit, then for the revenue deficit. When the existing FRBM was drawn up in February 2015, the OROP and food security were not factored in,” said N R Bhanumurthy, professor at the National Institute of Public Finance and Policy.
The defence pension budget was likely to be around Rs 65,000 crore for 2016-17, up 20 per cent from the 2015-16 budget estimate of Rs 54,000 crore, the defence ministry said last week. It said the annual recurring financial implication on account of OROP would be around Rs 7,500 crore. The statement said the arrears from July 1, 2014, to December 31, 2015, would be about Rs 10,900 crore.
“The Seventh Pay Commission and the OROP will indeed exert pressure on the revenue deficit target in the next fiscal year. The government will need to re-look at the targets,” said Pronab Sen, chairman, National Statistical Commission.
“Currently there is a classification issue with the revenue deficit because any expenditure in the form of a grant to states is shown as revenue expenditure while a large part of these are capital in nature.” Sen added expenditure on government services towards law and order, health care and education were central to asset creation and “we actually spend very little on these, which we should try to enhance”.
Source: Business Standard