Tweaking the fiscal road map NEW DELHI DIARY

Finance Minister Arun Jaitley’s fifth Budget is being prepared under the most unusual circumstances. Estimating the tax revenue collections has always been a challenging task for makers of the Budget even in normal years. That challenge has now become more formidable with the roll-out of the goods and services tax (GST) from July this year. It is true that mandarins in the Union finance ministry won’t have to worry about the excise and service tax rates for the coming year; that job now rests with the GST Council. But that advantage has been nullified by the uncertainty associated with tax collections under the GST.

This is because the Budget preparations will have to rely on partial tax revenue numbers for the current year. The Union government can take credit for GST revenues for only 11 months this year. Under the GST rules, taxes even for March can be paid till the third week of April, unlike in the earlier excise and services tax regime, where such taxes for the last month of the financial year had to be paid up by the last day of March.

GST revenues roughly account for about 35 per cent of the Union government’s gross tax collections. Accounting for only 11 months’ revenue under GST will thus be a handicap that Mr Jaitley will face while he strives hard to meet the fiscal deficit target of 3.2 per cent of gross domestic product (GDP) for 2017-18.

Add to this the uncertainty over the pace of revenue flows under GST in the first few months after its roll-out. Finance ministry officials concede that GST collections have still not stabilised and the refund pressure, based on input tax credit claims, could mount in the next couple of months. This will put further pressure on tax revenues in the current year, making the task of meeting the fiscal deficit target a little more difficult.

Thus, the comfort in the healthy growth in tax revenues so far may not last long. For the April-October 2017 period, net tax revenues for the Centre grew by over 19 per cent, compared to the budgeted growth of only 13 per cent. Experts note that this growth could decline as the pace of refunds under the GST increases in the next few months. Add to that the 43 per cent decline in the Union government’s non-tax revenues in the first seven months of the current financial year, you will see why Mr Jaitley may be a little worried about meeting his fiscal deficit target.

Almost half of the budgeted non-tax revenues of ~2.88 lakh crore is to come from dividends and profits of public sector enterprises, state-owned banks and the Reserve Bank of India. Another ~43,000 crore is to come by way of spectrum fees from telecommunication companies. A shortfall in collections under all these heads has resulted in a record decline in non-tax revenues. The Union government has not yet given up persuading the central bank to transfer some more money as surplus to the Centre. State-owned enterprises are also being asked to declare special dividends so that the Centre can increase its revenues. Even if additional revenues can be raised from stateowned enterprises, it is unlikely that spectrum receipts will be able to meet the target set in the Budget.

The only silver lining seems to be the government’s disinvestment receipts from the sale of its equity in state-owned enterprises. Against a target of ~72,500 crore in the current year, disinvestment proceeds have already crossed ~52,000 crore and it seems that the target can be exceeded by about ~20,000 crore. But that alone will not be enough to bridge the widening gap between the government’s expenditure and receipts. Already, 96 per cent of the annual fiscal deficit target has been reached by the end of October 2017. Last year, only 79 per cent of the annual target was reached at the same time.

The point to be noted here is that in spite of the government’s best intentions, the fiscal deficit target of 3.2 per cent of GDP may not be met during the current financial year. It is to be hoped that the slippage is restricted to 0.3 percentage point, so that the revised number of 3.5 per cent of GDP for 2017-18 will only signify a pause in the pace of fiscal consolidation, and not a reversal. In 2016-17, the government’s fiscal deficit was cut to 3.5 per cent of GDP, from 3.9 per cent in the previous year.

The more substantive question is about the fiscal consolidation stance that the finance minister will like to adopt in the Budget for 2018-19, when he will be under greater pressure to increase spending significantly. The terms of reference for the Fifteenth Finance Commission provide a pointer to the government’s thinking in this area. The Finance Commission, headed by former Planning Commission member N K Singh, has been specifically asked to also recommend a fiscal consolidation road map for sound fiscal management.

Remember that Mr Singh, as the head of the committee to review fiscal responsibility and budget management, has already completed that exercise and his report is with the finance minister. In that report, Mr Singh had recommended a fiscal deficit target of 3 per cent of GDP for three years from 201718 to 2019-20, followed by a glide path to reduce it gradually from 2020-21 and reach 2.5 per cent of GDP by 2022-23.

In this context, asking the Finance Commission to present another fiscal consolidation road map for a period starting from 2020-21 is indicative of a desire for some fiscal headroom and even relaxation. What then happens to the recommendations of the Singh committee on FRBM? In his last Budget, Mr Jaitley had said that though he was opting for a 3.2 per cent fiscal deficit target for 2017-18, he remained “committed to achieve 3 per cent in the following year”. Will he remain committed to that target when he rises in Parliament next February? Or will he seek recourse to the Singh committee’s escape clause of “far-reaching structural reforms in the economy with unanticipated fiscal implications” to postpone the 3 per cent fiscal deficit target by another year or till he gets another set of recommendations from the Fifteenth Finance Commission? In other words, will the GST as a structural reform come to the aid of the government’s plans for a big expenditure push?