New Delhi: Despite an increase in the gross tax revenue-to-gross domestic product (GDP) ratio because of a widening tax base, the government’s capital expenditure allocation is set to slow marginally in the next financial year.

That’s because it has to significantly raise the outlay on food subsidies, and increase pensions and salaries due to the recommendations of the 7th Pay Commission.

In its Medium Term Expenditure Framework statement laid before Parliament under the Fiscal Responsibility and Budget Management Act, 2003, the finance ministry said any shocks to tax collections because of the introduction of the Goods and Services Tax (GST) will be absorbed in the current financial year and hence the tax-to-GDP ratio will remain at the level of 2016-17 at 11.3%.

“However, going forward in the years 2018-19 and 2019-20, the gains from expansion of the tax base due to the introduction of GST and the increased surveillance post demonetisation will ensure tax-GDP ratio will increase by 30 basis points in each of the above FYs in question," the finance ministry said in the statement. One basis point is one-hundredth of a percentage point.

Tax-to-GDP ratio is projected to be 11.6% in 2018-19 and 11.9% in 2019-20 respectively. The government has assumed nominal GDP growth of 12.3% in both the years against 11.75% assumed for 2017-18.

The finance ministry has projected that capital expenditure will expand 10.1% in 2018-19 from 10.7% in 2017-18 before it picks up to touch 14.4% in 2019-20. However, revenue expenditure is set to rise by 8.8% in 2018-19 against 5.9% in 2017-18 and 10.3% in 2019-20.

NR Bhanumurthy, professor at the National Institute of Public Finance and Policy, said the government may be trying to stick to the fiscal deficit target in line with the FRBM Act while neglecting to contain revenue expenditure.

“Also, the higher GDP growth assumption for the next two years seems to be inconsistent with the macro-economic situation," he added.

Among the major sectors, while allocations to agriculture , education, and defence will grow at a rate higher than they did this year, those for health, rural development, and transport will grow at a lower rate.

In contrast, the central government’s salary bill will jump by 11.8% to Rs1.38 trillion in 2018-19 while its pension burden will rise by 10% to Rs1.4 trillion. The salary and pension bills rose 4.8% and 2.4% respectively in 2017-18 after the recommendations of the 7th Pay Commission were partially implemented.

“During the course of the current financial year, it is expected that the increase in HRA (Housing Rent Allowance) that was recommended by the 7th Pay Commission will lead to an additional expenditure on salaries to the tune of 11,500 crore for the remaining 8 months of the financial which will be required to be provided at the revised estimates stage," the finance ministry said.

The food subsidy bill is set to jump by 20.4% in 2018-19 (to 1.75 trillion) and 14.3% in 2019-20 due to adoption of the National Food Security Act by all states.

The government’s petroleum subsidy on account of kerosene and cooking gas is set to decline in absolute terms to 18,000 crore in 2018-19 and 10,000 crore in 2019-20 from 25,000 crore in 2017-18. This is because the government has announced an increase in the price of cooking gas cylinders by 4 per month until such subsidy is eliminated by the end of March 2018.

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