Fiscal situation better but spending cuts likely in FY16 too
In his attempts to meet this year’s fiscal deficit target, Finance Minister Arun Jaitley has a number of factors working in his favour. This is despite the fact that the official economic growth estimate for this financial year is likely to be scaled down.
Contrary to what senior government policymakers have been saying, spending cuts are likely in FY16, too. Only these won’t be as deep as in the past three years.
If the estimate for growth in gross domestic product (GDP) in FY16 is cut to 7.5 per cent (close to the Reserve Bank of India’s estimate and the lower end of the range given by some officials in public), the finance ministry will see its spending space contract by ~30,000-35,000 crore. To meet the fiscal deficit target of 3.9 per cent of GDP, the ministry has to cut spending by this amount or carry it forward to the next financial year. This amount is less than the corresponding figures of ~1.14 lakh crore for 2014-15, Rs 1.02 lakh crore for 2013-14 and ~79,653 crore for 2012-13.
Earlier this week, Chief Economic Advisor Arvind Subramanian had said the official GDP growth forecast would be revised once data for the July-September quarter was available. Given RBI’s growth estimate of 7.4 per cent and the fact that forecasts by most rating agencies and multilateral organisations are below eight per cent, the official estimate will likely be scaled down from the Economic Survey estimate of 8-8.5 per cent.
“As Finance Secretary Ratan Watal said, the fiscal deficit target will be strictly maintained. However, if GDP estimates are revised downwards, there will have to be some spending cuts or rollovers of certain spending items to stay within that target,” said a senior government official.
Earlier this week, Watal had said expenditure cuts were unlikely this year.
Though officials the Business Standard spoke to declined to give the size of the cuts, here’s what calculations based on already available information show: The FY16 Budget assumes real GDP growth of 8.5 per cent, and 11.5 per cent growth in nominal GDP. Provided the deflator of three per cent remains constant, growth of 7.5 per
Nominal GDP
Fiscal deficit
Gross tax revenue
Tax revenue
Total receipts
Total expenditure
Additional factors cent could lead to a bump of 10.5 per cent, or nominal GDP of ~138.58 lakh crore for FY16, compared with the government’s current estimate of ~141.08 lakh crore.
For ~138.58 lakh crore, the fiscal deficit target of 3.9 per cent works out to ~5.4 lakh crore, against the Budget estimate of ~5.56 lakh crore.
Revenue Secretary Hasmukh Adhia has said combined tax collections will stand at ~14 lakh crore, a shortfall of ~50,000 crore compared to the Budget estimate. As such, net tax collections, excluding devolution to states, will also be hit. These could stand at ~8.96 lakh crore, against the current expectation of ~9.2 lakh crore.
Adhia also said the nontax revenue and non-tax capital receipts targets would be met. If these are also constant, total receipts could be ~11.98 lakh crore. If this is added to the fiscal deficit, it works out to ~17,37,986 crore. Hence the spending gap between what the centre is planning to spend and what it will have to spend to stick to the fiscal deficit target is ~39,491 crore.
Add to that about ~25,000 crore of expected additional spending on ‘one rank, one pension’ and on Pay Commission recommendations this financial year and take away ~30,000-35,000 crore of major subsidy savings for this year, and amount that the budget makers may have to save is around ~30,000-35,000 crore.
That isn’t likely to be difficult. A part of the amount can be carried forward to the June quarter of 2016-17, especially the under-recovery payments to upstream companies.
Officials say crude oil prices of less than $70/barrel are expected next financial year, too, which will make it easier for the Centre to roll over some of the spending. Second, sources say as the finance ministry has pushed various departments to complete their allocated capital expenditure, spending has been frontloaded, in line with the finance minister’s stated commitment of increasing public spending on infrastructure.
For April-August, the overall capital expenditure, Plan and non-Plan, was ~92,000 crore, the highest for the period since 1998-99, according to available data. “This means even if some of the expenditure is pared in the second half of the financial year, we would still have fulfilled our commitment to spending more on infrastructure,” said a second official.