Moving beyond ad hoc fiscal consolidation

Written by Santosh Tiwari | Updated: Jul 15 2014, 13:44pm hrs
The NDA finance minister Arun Jaitley has not only accepted the UPA finance minister P Chidambarams fiscal deficit target of 4.1% of the GDP, fixed in the interim budget for FY15, as a challenge, going by the ground realities, he has also embraced the jugaad fiscal management of the previous government. Unlike the fiscal consolidation achieved during FY05-FY08, led by growth in tax revenue, the current phase of fiscal consolidation is forced by the slowdown in growth with tax revenue mop-up failing to meet the target. The strategy behind the current fiscal consolidation is: squeeze expenditure and garner additional revenue from other sources such as disinvestment and the non-tax segments.

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The tax collection growth for FY15 is pegged at 19.8% over the actuals of FY14 but the important point here is, it is only 10.4% more than the budget estimate of FY14. The target for FY15 is based on a 6% GDP-growth assumption. It could be anybodys guess how credible this target is in the backdrop of a poor monsoon and sub-5% growth in the last two financial years.

In contrast, the non-tax revenue pieinterest and dividend receipts, issue of passport and visa, registration of companies, patents and license fees, royalty from offshore oil fields, profit petroleum and various receipts from telecom sectoris growing substantially. According to medium-term fiscal policy statement, in FY14, a total of R1,99,233 crore was realised on this count, recording a growth of 45% over FY13, and contributing 1.7% of GDP. It is estimated at R2,12,505 crore in FY15, a growth of 6.7% over the FY14 figure. The major components contributing to this growth are spectrum charges, unlocking of funds in the public account and increase in dividend paid by RBI. How significant the non-tax revenues have become can be gauged from the fact that they have become comparable to the three components of indirect taxesexcise duties, custom duties and service tax.

The governments eagerness in resource mobilisation for FY15 from the non-tax side is evident from the fact there is hardly any possible area which has not been tapped. An amount of R12,252 crore lying unused in various funds such as National Clean Energy Fund, Central Road Fund, Prarambhik Shiksha Kosh, Social and Infrastructure Development Fund and Guarantee Redemption Fund have been submerged into the Budget.

Then, the disinvestment target has also been raised to R63,425 crore from the already high R56,925 crore fixed in the interim budget. Over the medium-term, in FY16 and FY17, it is estimated to yield R55,000 crore annually. Though receipts from divestment in FY14 were R21,992 crore only, these figures are not unrealistic.The point, however, is these modes cant be the bedrock of fiscal consolidation. After all, only efficient expenditure management and greater mobilisation of tax revenues can create a model for enduring fiscal consolidation. The necessary steps for both are missing in the current budget. And only intent on early implementation of goods and services tax (GST) and widening of the direct tax base are not going to help unless concrete steps are taken.

The finance minister may or may not be able to keep the fiscal deficit for FY15 within 4.1% of GDP but he needs to start re-looking at the fiscal consolidation tools applied currently. He has just a few months left before the preparations for next budget starts in his ministry.

By announcing the setting up of the Expenditure Management Commission (EMC), for reviving the growth spirit in the economy, in the NDA governments maiden budget, he has touched the right chord already. The EMC recommendations will be crucial for handling the suggestions of the two other commissions7th Pay Commission and the 14th Finance Commission. The 14th Finance Commission formula will be applicable from FY16 and that of the 7th Pay Commission, from FY17.

While there is no doubt that structural changes are required in the plan spending so that states have a larger say in various schemes and containment of non-plan spending including subsidies, the Centre will also have to look at other measures to rationalise expenditure, as the awards of the Pay Commission and Finance Commission will add to the pressure. It is not hard to understand, therefore, why it has been planned that the EMC will be giving its interim report in the current financial year itself. The real fiscal consolidation challenge is in the making for Jaitley and his ultimate success or failure would depend on how he handles it in the coming years and not on whether he is able to keep FY15 fiscal deficit within 4.1% or not.