Finance ministers often find themselves in tricky situations. Managing growth without raising taxes or opening the credit tap (debt) is a mastery achieved only by a few. Facts and fortune have favoured Finance Minister Arun Jaitley this fiscal. On Monday, as he presented the NDA government’s third Union Budget, he stumped critics not just by sticking to the fiscal deficit target of 3.9 per cent this fiscal, but by extending the commitment to meet rolling targets for the next two years at 3.5 and 3 per cent for FY17 and FY18 respectively.
Jaitley stressed the fiscal consolidation roadmap would be met without having to compromise on the development agenda. He went on to propose an expenditure of Rs 19.78 lakh crore including Rs 5.50 lakh crore of plan expenditure and Rs 14.28 lakh crore of non-plan expenses.
Around this time last year, Jaitley had delayed the fiscal consolidation roadmap in order to build infrastructure by boosting public investment. The macro environment was relatively favourable then and the additional spending was seen as a tool to revive the ailing sector, where projects worth over Rs 2 lakh crore are stuck either due to regulatory hurdles or for want of capital. A year later, global headwinds have derailed growth and volatility has become a new normal for commodities and nations that excessively depend on it. That’s when economists started doling out advice to Jaitley against carrying forward more red ink into the country’s debt chronicle, and potentially curtail our economic health. Jaitley has done well to not toe that line.
Last month, French economist Thomas Piketty had suggested that the Narendra Modi government raise India’s taxes to spur spending. This is something economies elsewhere have been following -- reducing the debt flab, raising taxes and cost-cutting public expenses. Take, for instance, Britain. Just last week its Chancellor of the Exchequer, George Osborne, warned that he may make further cuts in public spending this year. Japan, too, is proposing a revolutionary sales tax increase for 2017.
Back home, the intent to comply with fiscal discipline is good, but the roadmap to implement it over the next three years is, however, unclear. For the next fiscal, the government hopes GDP growth will not slide, thereby dragging tax revenue down with it.
For FY17, if total expenditure is expected to grow by 10.8 per cent over the previous fiscal, gross tax revenue is set to grow at 11.7 per cent at Rs 16.30 lakh crore. It’s pertinent to note here that tax revenue often falls short of projections. As a result, governments will be compelled to either cut plan expenditure or borrow from the market to meet expenses. Interestingly, the current financial year is an outlier. Two things worked in its favour. One, falling oil prices helped Jaitley and team pocket a neat Rs 2 lakh crore. Second, auction of assets like coal and spectrum brought in a similar amount.
But if the proposed expenditure is to be met, tax revenue needs to grow proportionately. This growth is dependent on the economy. The higher the GDP, the higher the tax revenue will be. Though the nominal GDP growth rate has been set at around 11 per cent this fiscal, the government is expecting a modest 11.76 per cent growth at Rs 16.25 lakh crore.
But it’s the non-tax revenue that the government is pinning its hopes on. Typically, this comprises revenue from interest earned on loans, dividend from public sector outfits, revenue earned on government services, etc. Such revenue is estimated at Rs 3,22,921 crore, about 25 per cent higher than the estimated receipts during FY16. The estimated increase factors higher receipts through spectrum auction and dividends receipts. This healthy double digit is based on potential for higher receipts through rationalisation of user charges/fees etc on services provided by various ministries and departments, and a realistic increase projected under the general and social services.
Then there are non-debt capital receipts, which largely includes disinvestment proceeds aggregating Rs 56,500 crore, including Rs 36,000 crore from the sale of stakes in public sector enterprises as well as Rs 20,500 crore from the sale of strategic and minority stake holdings. But there’s a catch. The Disinvestment Commission was first constituted in August 1996 and, ironically, the government has missed the set divestment target all the time till date. Reasons are aplenty: weak capital market sentiment, labour unrest, delay in decision-making and so on. In the rough and tumble of modern financial markets, whether this revised target will be met remains to be seen. But from the government perspective, to be sure, it has tempered down the target for next financial year to a more realistic level and in Jaitley’s words, it will be pursued ‘vigorously. ‘
Of all the government income and expenditure, what really matters is the capex — amount spent on creating assets. Unfortunately, this fell from 23.2 to 12 per cent in last 10 years. If for FY16, it is project at 13.6 per cent of total expenditure, it remains to be seen if this will go up or down in FY17.
Special Correspondent, TNIE