Full marks on fis­cal deficit

The Pak Banker - - OPINION - C. Ran­gara­jan

THE high point of the Bud­get for 2016-17 is its ad­her­ence to the road map for fis­cal con­sol­i­da­tion by fix­ing the fis­cal deficit at 3.5 per cent of the gross do­mes­tic prod­uct (GDP). This is an ex­tremely wel­come step and sends out a clear mes­sage that the goal of the govern­ment is to ac­cel­er­ate growth un­der con­di­tions of macroe­co­nomic sta­bil­ity. How­ever, in this con­text, two dif­fer­ent ques­tions arise. One is about the cred­i­bil­ity of this com­mit­ment and the other, a more fun­da­men­tal one, is whether it is nec­es­sary at all to ad­here to a fixed road map.

On cred­i­bil­ity, let us look at the num­bers. To­tal ex­pen­di­tures are pro­jected to in­crease by 10.8 per cent. How­ever, it is not clear to what ex­tent the bur­den of the Sev­enth Pay Com­mis­sion has been taken into ac­count. It ap­pears that a sig­nif­i­cant part of the bur­den has been left out. As and when the govern­ment takes a fi­nal de­ci­sion, it can very well hap­pen that the to­tal ex­pen­di­tures will rise. Thus, there is some fear of un­der­es­ti­ma­tion as far as ex­pen­di­tures are con­cerned. On the rev­enue side, gross tax rev­enue is pro­jected to grow by 11.7 per cent against a back­drop of the nom­i­nal GDP grow­ing at 11 per cent. This is a rea­son­able as­sump­tion. How­ever, re­ceipts from dis­in­vest­ment in 2016-17 are es­ti­mated at Rs.56,500 crore as against an ac­tual col­lec­tion of Rs.25,300 crore in 2015-16. The pro­jected re­ceipts of Rs.99,000 crore from spec­trum auc­tion in 2016-17 are also way above what was ob­tained in 2015-16. There might thus be an over­es­ti­ma­tion of rev­enues. There­fore some doubts per­sist around the fis­cal deficit tar­get of 3.5 per cent.

As for the need for con­tain­ing the fis­cal deficit, it is im­por­tant to note that sus­tained high fis­cal deficits not only lead to a rise in the debt-GDP ra­tio but also to an in­crease in in­ter­est pay­ments as a pro­por­tion of rev­enues, leav­ing less for pro­duc­tive ex­pen­di­ture. As a per­cent­age of net tax rev­enues to the Cen­tre, in­ter­est pay­ments have jumped from 38.9 per cent in 2007-08 to 46.7 per cent in re­cent years. For2016-17, the Bud­get re­tains it at the same level. It is a good sign that the ra­tio re­mains the same de­spite the rev­enue base com­ing down be­cause of in­creased de­vo­lu­tion to States. With­out a con­scious ef­fort to con­tain fis­cal deficit, this ra­tio will only keep ris­ing.

There is also an­other an­gle from which the im­pact of high fis­cal deficit can be looked at. Un­der the Fis­cal Re­spon­si­bil­ity and Bud­get Man­age­ment Act, 2003, the man­dated tar­get for the Cen­tral govern­ment is 3 per cent of GDP. The States taken to­gether will also take an­other 3 per cent of GDP. Thus the com­bined fis­cal deficit of the Cen­tre and the States will be 6 per cent of GDP. Both pri­vate busi­ness and govern­ment are deficit sec­tors in the sense that they in­vest more than they save. They draw on the sur­plus of the house­hold sec­tor. House­hold sec­tor sav­ings in fi­nan­cial as­sets which are called trans­fer­able sav­ings used to re­main at 11 per cent of GDP. The man­dated fis­cal deficit of 6 per cent was con­sis­tent with this level of house­hold sav­ings in fi­nan­cial as­sets. But house­hold sav­ings in fi­nan­cial as­sets have come down to al­most 7.3 per cent of GDP. This leaves very lit­tle for sec­tors other than govern­ment (in­clud­ing pub­lic sec­tor en­ter­prises) to draw on the sur­plus of the house­hold sec­tor. Thus, there is con­sid­er­able merit in favour of mov­ing to­wards the tar­get of 3 per cent of GDP. In fact, so far the govern­ment has not taken a 'rigid' po­si­tion on fis­cal deficit. The fis­cal deficit for 2015-16 is al­most 1 per cent above the man­dated level. Flex­i­bil­ity should not mean un­der­cut­ting the ba­sic prin­ci­ple.

The ma­jor thrust of the Bud­get speech was in out­lin­ing the var­i­ous schemes of pub­lic spend­ing in agri­cul­ture, in­fra­struc­ture and so­cial sec­tors. It is not un­com­mon to push for pub­lic ex­pen­di­ture at a time when pri­vate in­vest­ment sen­ti­ment is weak. With ref­er­ence to pub­lic spend­ing, there are two is­sues. The first re­lates to the de­sign of schemes. Sec­tor ex­perts need to ex­am­ine care­fully how well the pro­posed schemes meet the needs of the sec­tor. The se­cond and more im­por­tant is­sue re­lates to the abil­ity of the govern­ment to en­sure that the schemes are ac­tu­ally im­ple­mented on the ground. It may also be noted that while a large in­crease in cap­i­tal ex­pen­di­ture on in­fra­struc­ture has been con­tem­plated, a sig­nif­i­cant pro­por­tion of the fi­nanc­ing will come from "ex­tra bud­getary re­sources", which means bor­row­ing. This will be over and above what the govern­ment is bor­row­ing. Cap­i­tal ex­pen­di­tures of the govern­ment showed a steep rise this year. But in 2016-17, the rise has been pro­jected at only 3.9 per cent. To do away with the dis­tinc­tion be­tween plan and non-plan ex­pen­di­ture is a sug­ges­tion that was made by a com­mit­tee headed by me some years ago. Later the Four­teenth Fi­nance Com­mis­sion also en­dorsed this idea im­plic­itly.

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