New Delhi: Finance minister Arun Jaitley has set the fiscal deficit target for 2018-19 at 3.3% of the gross domestic product (GDP) to accommodate higher demand for expenditure against the earlier target of 3%.
The government also revised the deficit target for the year ending in March 2018 to 3.5% of GDP from the targeted 3.2%.
In his last full budget, Jaitley also accepted key recommendations of the N.K. Singh Committee on fiscal discipline to reduce debt-to-GDP ratio to 40% by 2024-25 from 50.1% in 2017-18 and has introduced amendments to the present Fiscal Responsibility and Budget Management Act.
The government now aims to reduce its debt-to-GDP ratio to 48.8% in 2018-19, 46.7% in 2019-20 and 44.6% in 2020-21, while fiscal deficit as a percentage of GDP is targeted to be reduced to 3.3%, 3.1% and 3%, respectively during the same period.
The government also marginally increased its borrowing programme to Rs6.06 trillion for the next fiscal from Rs6.05 trillion in the current fiscal year.
With further deferment of the 3% fiscal deficit target, Jaitley has revised the fiscal consolidation glide path for three successive years.
While the budget estimate of fiscal deficit for 2017-18 was 3.2% of GDP, the revised estimate is now 3.5%, the same as 2016-17.
The government achieved the fiscal deficit target of 3.5% of GDP after cutting down capital expenditure by Rs36,000 crore in 2017-18. A shortfall of Rs50,000 crore on account of the goods and services tax (GST) forced the government to revise its fiscal deficit target.
However, the more worrying aspect is that the government’s revenue deficit shot up to 2.6% of GDP in 2017-18 from the budget estimate of 1.9% of GDP, showing signs of the deteriorating quality of fiscal consolidation. This is also due to Rs1.1 trillion increase in revenue expenditure during the year.
Jaitley attributed the slippage to the government receiving GST revenue for 11 months in 2017-18 (a shortfall of Rs50,000 crore) and facing a shortfall in non-tax revenue due to lower receipts from spectrum auction.
Part of the shortfall was met through higher direct tax collections and disinvestment, Jaitley said. The government hopes to breach the disinvestment target in 2017-18 by collecting Rs1 trillion against the budget estimate of Rs72,500 crore. For 2018-19, the government has set a disinvestment target of Rs80,000 crore, including gains from privatization of Air India Ltd.
The government has assumed GST collections will grow by 67% to Rs7.4 trillion in 2018-19, while it has targeted a humble 4% growth in non-tax revenues to Rs2.4 trillion after it failed to achieve the target in the previous year.
Aditi Nayar, principal economist at Icra Ltd, said though the slippage in the fiscal deficit targets for FY2018 and FY2019 is largely in line with expectations, the revised estimate for the revenue deficit for FY2018 is sharply higher than the budgeted level, which is a cause for concern.
“Moreover, the capital expenditure for FY2018 has been revised downward by Rs364 billion, entailing a 4% contraction over the level for FY2017 and a concomitant worsening in the quality of expenditure and the fiscal deficit. With the net G-sec borrowing for FY2019 placed slightly higher than expectations, bond yields have hardened further," she added.
D.K. Srivastava, chief policy advisor at EY India, said the slippage in fiscal deficit of 30 basis points in 2018-19 is largely due to excess revenue expenditure in FY18, which could not be made up by an increase in disinvestment proceeds or in central net tax revenues.
“The budget reflects a healthy growth for FY19 with a nominal growth assumption of 11.5%. Implicit in this is a real growth of 7.3% and an inflation assumption of 4%. This is in line with the healthy recovery expected by international institutions such as the World Bank and the IMF," he added.
Moody’s Investor Services said India’s high debt burden remains a credit constraint for the sovereign, and is not expected to diminish quickly because of India’s low-income levels, leading to significant development spending needs and constraining the scope of tax base widening.