Budget 2015: One time deviation from fiscal target is OK, Jaitley has no excuses in 2016

Are fiscal fundamentalists right to be worked up over finance minister Arun Jaitley’s decision not to stick to the laid down fiscal path? On the face of it, the decision is a realistic one. He could have stuck to the glide path goal of 3.6 percent of gross domestic product (GDP) this year and earned himself applause from rating agencies. The 3.6 percent fiscal deficit target for 2015-16 was set before the Fourteenth Finance Commission shaved off Rs 5.24 lakh crore from the centre’s tax kitty and gave it to the states. Another Rs 3.04 lakh crore will go by way of grants and plan transfers. So, as Jaitley said in his speech, 62 percent of the total tax receipts of the country will go to the states. [caption id=“attachment_2129437” align=“alignleft” width=“380”]  PTI[/caption] But this government was also faced with a huge challenge – that of reviving economic growth and pushing investments. Given the subdued sentiment in the private sector and the cold response to the public private partnership (PPP) route, public investments had to step in. This was something emphasised in both the Mid Year Economic Analysis as well as the Economic Survey which spoke about public investment playing a catalytic role. Given this, it was right for Jaitley to modify the glide path somewhat, and keep the fiscal deficit at 3.9 percent of GDP. He was perfectly right in saying, “Rushing into, or insisting on, a pre-set time-table for fiscal consolidation pro-cyclically would, in my opinion, not be pro-growth.” Jaitley’s predecessor P. Chidambaram also paused the implementation of the Fiscal Responsibility and Budget Management Act because of the recommendations of the Twelfth Finance Commission, which gave a far lower share of taxes to the states. But Chidambaram splurged the fiscal space he got on farm waivers and poorly designed welfare schemes, which brought more problems in their wake. Jaitely, in contrast, has said very clearly: “The additional fiscal space will go towards funding infrastructure investment.” He has budgeted a 25 percent increase in capital expenditure over the revised estimates of 2014-15 (which was lower than the budget estimate by 15 per cent). Revenue expenditure is set to increase by just 3 percent over the revised estimates. In absolute terms, this is a welcome redirection of expenditure from consumption to investment. But seen in relation to GDP, it does not seem so great. As a member of the Fourteenth Finance Commission, M Govind Rao has said in Financial Express, that capital spending is 1.7 percent of GDP, much the same as in 2014-15. And revenue deficit – the real problem area – continues to be 70 percent of the fiscal deficit, the same as in 2014-15. And there are some worrying signs on revenue assumptions. Gross tax revenue is expected to grow 6.2 percent but after devolution to the states, the Centre’s tax revenue is set to decline 1.2 percent, thanks to the Finance Commission recommendations. Hopefully, there is no overestimation as there was the last time around. Non-tax revenue growth is also not pitched too high – 1.7 percent. Jaitley seems to be relying too much on receipts from disinvestment – Rs 69,500 crore. Will the government get it if it confines strategic sales only to loss making units? A lot of savings will come from the Centre deciding to discontinue spending from its kitty on eight schemes – National e-Governance Plan, Backward Regions Grant Funds, Modernisation of Police Forces, Rajiv Gandhi Panchayat Sashaktikaran Abhiyan, Scheme for Central Assistance to the States for developing export infrastructure, scheme for setting up 6000 model schools and National Museum on Food Processing and Tourist Infrastructure. Hopefully there will be some additions during the year. Jaitley has also pruned the subsidy bill – it is down 8 percent over the revised estimates of the current year. Its share in tax revenue is also coming down – 31 percent in 2013-14, 29 percent in 2014-15 and 26 percent in 2015-16. But much of the savings are coming on the petroleum subsidy front. Both food and fertiliser subsidy are set to increase. It would be good if the government takes steps through the year to bring spending on these two items down as well, not by cutting subsidies to the deserving but by excluding the non-deserving and going full steam ahead on the JAM trinity for cash transfers. One can take heart from Jaitley’s statement: “We need to cut subsidy leakages, not subsidies themselves. We are committed to the process of rationalising subsidies based on this approach.” Finally, how did the government achieve the very stiff fiscal deficit target? Well, at the first sight, it does not seem to be the result of any creative accounting. But like always it has come at the cost of capital expenditure – there’s been a 15 percent cut over the budgeted estimates. The subsidy bill is down too, but once again it is on account of lower oil prices which brought down both the fertiliser and petroleum subsidies. The food subsidy bill was supposed to bring in considerable savings because of the delayed rollout of the National Food Security Act but that didn’t happen. The revised estimates of food subsidy are 6.6 percent higher than the budget estimates. But a course correction seems to be on the cards this year. Pressure has to be kept up on the government to stay this course. Revenue expenditure needs to be pruned and subsidies are the only item that lend themselves to pruning. Jaitley will be excused for deviating from the glide path this year. He will not be excused if he strays again.