Home / Politics / Policy /  The fiscal math looks dubious

Even though finance minister Arun Jaitley stuck to his fiscal consolidation road map by keeping the budget deficit target for 2016-17 at 3.5% of gross domestic product, his fiscal math looks dubious.

The government, for instance, has missed its direct tax collections target this year, and that is unlikely to change in the next fiscal year. The overall target for tax revenue in 2015-16 was achieved only because of higher revenue collection through indirect taxes.

After failing to achieve the corporation tax target of 4.5 trillion, the government has budgeted an increase of around 41,000 crore in 2016-17 at 4.9 trillion, despite no perceptible sign of improvement in the profitability of private companies.

A steep disinvestment target has also been set at 56,500 crore for 2016-17 including 36,000 crore from minority stake sale and an additional 20,500 crore from strategic stake sales during the year.

So far in 2015-16, the government has received around 18,500 crore through minority stake sales while the estimate in the budget puts it at 25,312 crore during the year ending 31 March.

At a press conference, Jaitley said he hopes one or two disinvestments will be carried out in March to meet this year’s target.

The fiscal policy strategy statement presented along with the budget said it is expected that with the likely recovery in the market conditions and a new policy to be unveiled soon in this regard, the government will be able to carry out the targeted disinvestments/sale of assets in 2016-17.

The government also admitted that as its share of tax revenue has come down due to implementation of the 14th Finance Commission recommendations, non-tax revenues and non-debt capital receipts have become an important source of financing for the centre.

“The share of the non-tax revenues now compares with the level of any of the three major indirect taxes," the budget documents said.

Food subsidy budget has also been slashed to 1.35 trillion for 2016-17 against 1.4 trillion in 2015-16 even though more states are expected to implement the food security act next year.

The government has also opted for a huge drawdown from its cash balance to meet the fiscal deficit target of 3.9% of GDP in 2015-16.

The government’s net cash balance now stands at a deficit of 22,084 crore in 2015-16 against a 12,041 crore surplus in 2014-15.

In his budget speech, the finance minister said he will set up a committee to review the Fiscal Responsibility and Budget Management (FRBM) Act and determine whether there should be a range for fiscal deficit targets, rather than set numbers, to provide the necessary policy space to governments.

“There is now a school of thought which believes that instead of fixed numbers as fiscal deficit targets, it may be better to have a fiscal deficit range as the target, which would give necessary policy space to the government to deal with dynamic situations. There is also a suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion respectively, in the economy," Jaitley said.

Fitch Ratings in a statement said targeted revenue growth of 14% in FY17 from 9% in FY16 is subject to substantial uncertainty related to GDP growth.

“Announcement to form a committee to review the working of the FRBM Act has the potential to cause future watering down of fiscal discipline, but it could also be an opportunity to improve the fiscal balances in the longer run," it said.

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