With robust transfers likely from the Reserve Bank of India thanks to demonetisation of high-value currency notes, the Centre will likely find it easier to meet the demanding fiscal deficit target of 3% of the gross domestic product (GDP) for FY18, but it could still usher in the fixed band target regime for the FY18-FY22 period.
While NK Singh committee, which is undertaking a comprehensive review of the Fiscal Responsibility and Budget Management (FRBM) Act and the FRBM road map, is likely to give its report to the government on November 20, sources said that the fiscal deficit range 3 +/- 0.3% was likely as the target from next year onwards. Given the Modi government’s focus on government spending — which can’t be reined in the election year of FY19 — it may adopt an even wider range of 3+/- 0.5%. as the fiscal deficit target, the sources added.
The Singh committee was asked to examine a range — rather than a fixed number — as the fiscal deficit target to align it with credit contraction/expansion and in view of the volatility in the global economy.
The FRBM law was adopted in 2003 and it has since seen many amendments, given the contingencies of electoral politics and the fiscal stimulus necessitated by the global economic crisis, particularly in the 2008-10 period.
The sources added that despite a likely shortfall of R32,000 crore in telecom spectrum receipts and strong spending momentum, the Centre will likely meet the fiscal deficit target of 3.5% of GDP for the current fiscal year. Strong revenue receipts and lower LPG subsidies are helping the policymakers.
The disinvestment target of Rs 56,500 crore could also be met, despite the possibility of missing strategic sales target of Rs 20,500 crore, thanks to SUUTI stakes sales and buyback of shares by PSUs. As per the extant FRBM road map, the Centre’s fiscal deficit has to be reduced to 3% in FY18 from 3.5% projected for FY17.
The Centre is meant to mobilise the resources for states’ GST compensation starting FY18, but this would be through specific cesses, and so won’t curtail its own revenue space. The planned reduction in corporate tax rate in phases– which is to come down to 25% by FY20– will be implemented from next year.
“Cutting spending would be difficult this year as total spending has reached around 54% of budget target in April-October and within that Plan expenditure at 62% of full year aim,” a senior finance ministry official told FE. In absolute terms, the Plan spending in first seven months of the year was Rs 70,000 crore more than in the year ago period, he added. While overall budget may remain largely unchanged when the revised estimate is presented along with next Budget, an official said there could be some savings from defense allocations, which could be redistributed among need departments.
Despite tight finances on account of higher wage bill for government staff among others, officials are hopeful that the clampdown on black money on November 8, would help the Centre achieve the 3% deficit target next year. They hope the fiscal bonanza could be around Rs 2 lakh crore if an equivalent or more amount of black money was prevented from coming back into the formal banking channel.
The RBI then could provide an equivalent amount –either by diluting its asset portfolio or printing new notes – as surplus from its balance sheet to the government in August next year. Analysts have even predicted a higher windfall. SBI Research in a note said it expected at least 25% of Rs 10 lakh crore (in Rs 500 and Rs 1000 notes which has been demonetised) with public or Rs 2.5 lakh crore won’t come back the to the banking system out of fear. “Since the government has inflation range now, it has to have a fiscal deficit range,” said N R Bhanumurthy, Professor at National Institute of Public Finance and Policy. He, however, preferred a revenue deficit range though as it mattered more than fiscal deficit.