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Arun Jaitley said the government will stick to the fiscal deficit target of 4.1% of GDP set by his predecessor
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New Delhi: In the run-up to the budget, finance minister Arun Jaitley talked of the unpaid bill that he has inherited and the need to come clean on the extent of the subsidy burden on the government. However, much to the disappointment of analysts, Jaitley provided few details in his maiden budget about the extent or manner in which he is going to deal with this legacy. His only statement was that he has set up an Expenditure Management Commission which would look into various aspects of expenditure reforms to be undertaken by the government.
To his credit, Jaitley said the government will stick to the fiscal deficit target of 4.1% of gross domestic product (GDP) set by his predecessor, on the hope there will be higher receipts from disinvestment and larger dividend receipts from the Reserve Bank of India.
“My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1% of the GDP in the current year," Jaitley said. “Considering that we had two years of low GDP growth, an almost static industrial growth, a moderate increase in indirect taxes, a large subsidy burden and not-so encouraging tax buoyancy, the target of 4.1% fiscal deficit is indeed daunting. Difficult as it may appear, I have decided to accept this target as a challenge," Jaitley said in his budget speech.
Jaitley has budgeted to receive ₹ 43,425 crore in 2014-15 through disinvestment in public sector units, compared to ₹ 16,027 crore a year ago. He has also estimated to receive ₹ 6,500 crore through sale of stakes in Specified Undertaking of the Unit Trust of India (SUUTI). Though market conditions have improved significantly, the government’s past track record of failing to meet its disinvestment target casts doubts on the prudence of relying on such one-off revenue streams for fiscal consolidation.
Another significant contribution to non-tax revenues is expected to come through dividends from the RBI and other financial institutions— ₹ 62,414 crore in 2014-15, against ₹ 45,113 crore the previous year.
This year, Jaitley has budgeted only ₹ 27,815 crore as dividend from public sector undertakings; in the previous fiscal, such PSUs had paid higher dividend of ₹ 43,075 crore, which was well beyond their means.
On the expenditure front, Jaitley has allocated higher Plan and non-Plan expenditure than in the interim budget, with the additional revenue that he targets to garner.
At ₹ 2.46 trillion, major subsidies are budgeted only marginally higher for the current fiscal than in the previous. While food subsidy has gone up by 25% to ₹ 1.15 trillion, petroleum subsidy has been reduced by 25.8% to ₹ 63,427 crore. Fertiliser subsidy has been kept at last year’s level of ₹ 67,971 crore.
Jaitley said in his medium-term fiscal policy statement that increased allocation for food subsidy has been retained to meet the demand from implementing the National Food Security Act. The document says the government may be able to decontrol diesel price fully this year itself, if there are no international shocks in the oil sector. The budget assumes $110 per barrel as crude oil price for subsidy calculations, expenditure secretary Ratan Watal told reporters. The document also talks about the government’s intention to cap subsidised cooking gas cylinders “at a more realistic level". The finance ministry also thinks better targeting of subsidies through direct transfer of government benefits will help cap subsidies.
Standard & Poor’s Ratings Services in a statement said the budget is less ambitious in reducing the subsidy burden. “It promises better targeting of food and petroleum subsides. However, it is not yet clear how that will be achieved, or how much saving it would bring," S&P credit analyst Agost Benard said. “It is unclear how the government will offset revenue loss from tax cuts and raising the income-tax exemption threshold proposed in the budget on the expenditure side."
S&P said the budget has no immediate impact on India’s sovereign credit rating. It has assigned the lowest investment rating for India with a negative outlook. “The negative outlook on the sovereign rating on India indicates that Standard & Poor’s may lower the rating in the next year or so if the new government proves unable to reverse India’s low economic growth. Conversely, we could revise the outlook to stable if the administration can restore some of India’s lost growth potential and consolidate its fiscal accounts," it added.
Jaitley has presented a medium-term road map to bring down fiscal deficit to 3.6% of GDP by 2015-16 and 3% by 2016-17. The medium-term fiscal policy statement claims that the nature of fiscal consolidation now needs to be changed from expenditure side to greater mobilisation of resources in the coming years. The budget targets raising gross tax revenue as a percentage of GDP to 11.2% by 2016-17 from 10.2% in 2013-14. Total expenditure as a percentage of GDP during the same period is expected to fall from 14% to 12.5%.
“With improvement in the macro-economic conditions and revival of growth, it is expected that tax reforms, including implementation of Goods and Services Tax on the indirect taxes side and rationalisation of tax structure in the direct taxes, will restore the total tax revenues of the government," the document said.
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