Budget 2018: Fiscal slippage not a bigger worry than faltering economy; Jaitley shouldn't repeat UPA's mistake
The additional spending, if directed to kickstart economic engines, can work well to regain the growth momentum, even at the cost of a one-off fiscal slippage
It is now certain that the government will breach the fiscal deficit target this year. With Rs 50,000 crore additional borrowing scheduled and fears of lower-than-expected tax collections, it is clear that keeping the 3.2 percent fiscal deficit target will not be an easy task for finance minister Arun Jaitley. The government machinery has already begun to justify and defend such a likely slippage. Earlier this week, NITI Aayog vice-chairman Rajiv Kumar said a higher fiscal deficit doesn’t cause a fiscal risk.
“There shouldn't be a fear of fiscal risk because of slippage, because if at all, a fiscal slippage happens, it would only be for the right reasons,” said Kumar. Fiscal slippage, according to Kumar, is a concern only “if the government was going to be populist, splurging and cutting taxes here and there.”
Kumar is bang on his assessment. In an economy that is struggling to find its lost mojo, where critical growth engines remain stuck, unemployment is on the rise and recovery prospects remain fragile, it doesn’t make any sense to stick to the fiscal deficit figure alone. The additional spending, if directed to kickstart economic engines such as manufacturing, consumer spending, can work well to regain the growth momentum, even at the cost of a one-off fiscal slippage.
But can Jaitley prove Kumar right and not make the budget a package? It will be a difficult task for the finance minister. Remember, this will be Narendra Modi government’s last full budget and is coming close on the heels of a series of state elections this year in the run-up to 2019 General Elections.
There is considerable resentment on the ground even now on account of the pain inflicted by note ban and the transition pain of Goods and Services Tax (GST). To get back consumer confidence and win political points, the government will have to pack goodies for individuals and corporations. The government has promised to lower corporate tax.
As this PTI report points out, the industry is doubtful whether Jaitley will fulfil his promise of reducing corporate tax rate from 30 percent to 25 percent over four years. However, it wants the minister to consider moderating it to at least 28 percent in the forthcoming budget. In the 2015-16 budget, the FM had proposed to reduce the rate of corporate tax from 30 percent to 25 percent over the next four years, saying this will lead to higher level of investment, higher growth rate and more jobs. But, going by reports, the industry doesn’t expect the tax rate to come down so sharply and is content even if the government brings it down to 28 percent. Lower revenues will make it difficult for Jaitley to go for a larger reduction in corporate tax rates. The government suffered a double whammy on the revenue front when it received lower than expected GST collections since introduction of the indirect tax reform in July last year.
In November, the figure stood at Rs 80,808 crore, in October Rs 83,346 crore, September at Rs 92,150 crore, August Rs 90,669 crore and in July at Rs 94,063 crore. The government is facing a difficult task in shaping the budget this year on account of less than expected dividend from the Reserve Bank of India (RBI). With fall in revenue and expenditure pressure on the other hand (particularly due to absence of revival in private investments), the government is walking a tightrope.
Despite facing a difficult fiscal situation, the Modi government has swung on to support a sagging economy announcing a mammoth fiscal stimulus package. Earlier this year, the government announced a massive economic bail-out package of Rs 9 lakh crore, of which a recapitalisation plan of Rs 2.11 lakh crore is earmarked for the banking sector.
There are aggressive disinvestment plans lined up including that of national carrier Air India. Together, these measures can give a leg-up to the economy going ahead. But, in the immediate term, there are challenges on the revenue front.
In the present economic context, Jaitley shouldn’t be too worried about a one-off breach in the fiscal deficit target. There is nothing sacrosanct about the figure itself when the economy is looking weak. The obsession to target the fiscal deficit figures at the cost of economic growth is an UPA-era mistake. There will be no harm either even if the Fiscal Responsibility and Budget Management (FRBM) target is deviated for a year for a good cause.
For full coverage of Union Budget 2018 click here.
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