Govt breaches fiscal deficit target for FY18

Jeannie Matthews
February 3, 2018

It has indeed addressed them, though not fully. The joker in the pack still is underlying growth, which could upset the fiscal deficit target.

The fiscal slippage and the worsening quality of the GoI's expenditure, in conjunction with the recent rise in the CPI inflation, may prompt a hawkish tone in the upcoming policy review. Disinvestment is estimated slightly lower than past year but in FY18 a significant contribution was made to the disinvestment proceeds by the ONGC -HPCL transaction. The question is whether the government would deliver this. The government is leaving it to market forces to drive growth in the coming year. Moreover, the capital expenditure for FY2018 has been revised downward by Rs. 364 billion, entailing a 4% contraction over the level for FY2017 and a concomitant worsening of the quality of expenditure and the fiscal deficit. But what is at stake is credibility. There is reason to be optimistic, therefore, about the medium-term outlook for government finances whatever the problems in the next year or two.

Caught between the devil and the deep blue sea, the Centre chose to up spending and slip on its fiscal deficit target.

It remains to be seen if the government bites the bullet on fiscal deficit or continues to put up a courageous face in the upcoming Budget. We can compare the revised estimate for 2017-18 with the actual for 2016-17 and the Budget estimate for 2017-18 with the revised estimate for 2016-17. Air India may also be divested next financial year. The Budget projects an increase in tax revenues of 16.6% compared to 15.3% in the previous year, which appears achievable.

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Foreigners have remained heavy net buyers on higher yields and stable currency and we need to watch for signs on their behavior. His speech also focused on education and healthcare. But the problem is how well tuned the expenditure programmes are and how effectively the funds are spent. While operation green would help to smoothen repeated volatility in prices of perishable, the plan to increase and extend MSPs may emerge as an inflation risk. The choices open are a limited procurement to suck the excess supply or to compensate the farmers with the difference between MSP and market price.

The government has made a decision to adopt the principle of providing a 50% mark up over cost in arriving at MSP for agricultural produce. Similarly it is not clear how National Health Protection Scheme to cover 10 crore poor families will be implemented. Foreigners still own less than 5% of outstanding bonds and there is a merit to slowly allow them to invest upto 10% of outstanding over the next 5 years. A lower corporate tax of 25%, hitherto applicable to enterprises with a turnover of Rs. 50 crore, is now applicable to companies with a turnover of up to Rs. 250 crore.

The Budget however, is a dampener for the much expected relief to the salaried class as the standard deduction of 40, 000 has been given by taking away the existing benefits on medical and transport. However in principle, there can be no objection to the proposed change. There are reports that the government may budget for 12 per cent nominal GDP growth in 2018/19, up from 11.75 per cent for 2017/18. But the revised estimate for FY18 is almost 10% lower than the original budget estimate for FY18. This is part of larger set of measures it has announced in the budget as part of its commitment to double farm incomes by 2022. It remains around 26% of GDP as against 33% in 2007-08.

The fiscal strategy appears to be channelizing spending to sectors that have the potential to maximize backward and forward linkages in the economy through capacity enhancement and job creation. The composition of expenditures is geared to meet current concerns and is appropriate. The Surcharge replaces the earlier Education Cess and Secondary and Higher Education Cess. The committee says that breach the fiscal deficit target by 0.5 per cent in case of some economic instabilities.

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